It isn’t very well known, but America went through a Depression for 20 months beginning in January 1920. Unemployment went from 1.9% at the end of 1919 to 11.7% in August of 1921. The Dow Jones Industrial Average fell 47% in the same period. Presidential candidate and soon to be President, Warren Harding, offered and executed a financial plan that would have economist of today howling. His plan was the polar opposite of what we have done in any economic challenge since that time. The difference is, his plan worked. What was this plan? It was one of deflation and as he put It; “a strike at government borrowing which enlarges the evil.”
The likes of President Harding’s speech at the Republican Convention would never be heard again. It went as follows:
“We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy of private life. Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a re-committal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormality of war since the story of mankind was first written. Except through work and savings, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.”
President Harding paid off the war bonds from WWI and debt at the Federal Reserve disappeared. The money supply shrunk and interest rates rose. As a result, people stopped spending as much, prices fell while at the same time, savings increased. As people’s savings grew, confidence began to rise and the downward spiral leveled off. By the end of 1922, unemployment was back down to 6.7% and the DJIA recovered almost the entire previous decline. By 1923, unemployment was 2.4%!
It’s been almost four years since we went down the road of TARP bailouts and the national debt has increased over $6 Trillion. Unemployment is stuck over 8% and isn’t going to head down anytime soon. Businesses are unwilling to increase hiring with Obamacare and the possibility of higher tax rates on the short term horizon.
It doesn’t help that the Federal Reserve is purposely keeping interest rates at 0%. This is not to stimulate the economy, but to discourage you from saving. They also need to keep rates low so our national debt doesn’t rise even faster. If interest rates were at their historical norms of around 5%, the interest our government would have to pay on our debt would go through the roof! Our interest payments could literally consume 40-50% of the federal budget at today’s levels. This scenario would be devastating to our already hurting economy. So what do we do??????
We need to cut spending now! We need to give people there incomes to spend and save. This will increase employment and increase the tax base. This will decrease the deficit and allow interest rates to rise. You can’t do these things by borrowing more money from foreigners and the Federal Reserve. We need to ‘call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a re-committal to simplicity of living, to that prudent and normal plan of life’. This, along with the end of a Federal Reserve system that give politicians money created out of thin air, will end this economic predicament we are in and avert the calamity that lies ahead. We need a different course and representatives willing to draw a line in the sand and say that deficit spending needs to end. That’s NOT John Carney or Tom Kovach.