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July 2015 Brief: Volume 22, Number 21

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An Economics Lesson From President Warren G. Harding


by John Hendrickson



The United States economy struggles to recover from the Great Recession. Economic growth remains slow, unemployment continues to be stubbornly high, the middle class is in decline, and the nation is being crushed by out-of-control government spending depicted by the $18 trillion national debt. Donald Lambro, a columnist for The Washington Times, wrote that “nearly seven years into Mr. Obama’s presidency, the recession of 2008 still troubles millions of Americans who continue to struggle to find work, and to earn enough money to pay their bills and feed their family.”[1] With all the stimulus spending, massive increases in regulations, tax increases, and major policy overhauls such as the Patient Protection and Affordable Care Act, along with the quantitative easing policies of the Federal Reserve, all of which have expanded the money supply by over $4 trillion, the economy still remains in serious trouble. As Lambro describes:


This is the economy Mr. Obama has imprisoned us in, and it won’t get any better until this administration is replaced by a leader who knows how to stimulate business investment and economic growth to put us back on the road to a full-employment recovery.[2]


Solutions to many public policy problems are often found by studying our history and especially when examining past economic depressions and recessions. James Grant, the noted financial journalist and Editor of the prestigious Grant’s Interest Rate Observer, is a gifted writer and historian who wrote The Forgotten Depression, 1921: The Crash That Cured Itself. Grant was the recipient of the prestigious Hayek Prize awarded from the Manhattan Institute for Policy Research for The Forgotten Depression.


Almost always the Great Depression and President Franklin D. Roosevelt’s New Deal is cited as a historical example of what to do during an economic crisis, but James Grant offers another example — the depression of 1920-1921. This short-lived depression was vanquished by limited-government policies of President Warren G. Harding. Although the government and economy have changed since the early 20th century, we can still learn from the policies and ideas utilized in the past and apply them to today’s political and economic problems.


Grant argues that the “hero” of his story “is the price mechanism, Adam Smith’s invisible hand.”[3] In other words, it was limited-government policies that allowed market forces to render short-lived a severe economic depression. In the aftermath of World War I, the national economy fell into a severe depression as described by Grant:


Thus, the nation’s output in 1920-1921 suffered a decline of 23.9 percent in nominal terms, 8.7 percent in inflation (or deflation) adjusted terms. From cyclical peak to trough, producer prices fell by 40.8 percent, industrial production by 31.6 percent, stock prices by 46.6 percent and corporate profits by 92 percent. Maximum unemployment ranged between two million and six million persons — those were the range of estimates at the national conference on unemployment called by President Harding in September 1921 — out of a nonagricultural labor force of 31.5 million. At the high end of six million, this would imply a rate of joblessness of 19 percent.[4]


The depression of 1920-1921 is considered “by far the most important business cycle development of the first three decades of the 20th Century.”[5] During this crisis the Federal Reserve, not yet ten years old, pursued the opposite of current Fed policies of keeping low interest rates and quantitative easing. The Federal Reserve during the depression of 1920-1921 raised interest rates and promoted stability through monetary policy. As Grant wrote:


Contemporaries credited the later functionaries — new hires of the Federal Reserve — with forestalling an otherwise certain money panic. What the government did not do was socialize the risk of financial failure or attempt to steer and guide the national economy by manipulating either the rate of federal spending or the value of the dollar.[6]


From a fiscal policy perspective, President Warren G. Harding proposed a plan to reduce government spending, pay down the national debt, and reduce tax rates. This was the Harding economic program. “Harding had done nothing except cut government expenditure, the last time a major industrial power treated a recession by classic laissez-faire methods, allowing wages to fall to their natural level,” wrote historian Paul Johnson.[7] The result of these polices was not only a short-lived depression, but “the seven years from the autumn of 1922 to the autumn of 1929 were arguably the brightest period in the economic history of the United States.”[8]


James Grant’s The Forgotten Depression is a powerful reminder of how policymakers can learn from history and that constitutional principles are not outdated. The depression of 1920-1921 teaches a historical lesson that an economic crisis does not have to be long term. It can be short and usher in a magnificently robust economy. Today we desperately need to remember and reapply the economic philosophy of President Harding — a policy that consisted of cutting spending, reducing tax rates, eliminating regulations, and even using tariffs to promote the American economy. All of these policies led to a strong and vibrant economy. It would be wise for policymakers, and especially members of the Federal Reserve, to place The Forgotten Depression on their summer reading lists.


[1] Donald Lambro, “Jobs boom bust,” The Washington Times, June 11, 2015, <> accessed on June 15, 2015.
[2] Ibid.
[3] James Grant, The Forgotten Depression, 1921: The Crash That Cured Itself, Simon & Schuster, New York, 2014, p. 2.
[4] Ibid., p. 5.
[5] Richard Vedder and Lowell Gallaway, Out of Work: Unemployment and Government in Twentieth-Century America, Holmes & Meier, New York, 1993, p. 61.
[6] Grant, p. 1.
[7] Paul Johnson, Modern Times: The World from the Twenties to the Nineties, HarperPerennial, New York, 1992, p. 216.
[8] Vedder and Gallaway, p. 68.


John Hendrickson is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact him at


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