A Republican Congress reduced the estimates submitted by the Administration almost three billion dollars. Greater economies could have been effected had it not been for the stubborn refusal of the Administration to co-operate with Congress in an economy program. The universal demand for an executive budget is a recognition of the incontrovertible fact that leadership and sincere assistance on the part of the executive departments are essential to effective economy and constructive retrenchment.
We pledge ourselves to a carefully planned readjustment on a peace time basis and to a policy of rigid economy, to the better co-ordination of departmental activities, to the elimination of unnecessary officials and employees, and to the raising of the standard of individual efficiency.
--Republican Party Platform, June 8, 1920
Presidents Warren Harding (1921-23) and Calvin Coolidge (1923-29) oversaw one of the most successful and productive economic periods in American history between 1921 and 1928. They attempted to reverse key elements of the statism introduced into the American economy between 1900 and 1920. Their policies incentivized private-sector growth and improved the circumstances of the vast majority of American citizens.
The nation's economic success during this period can be measured in several ways. Production, as measured by real gross domestic product (GDP) per capita, sharply increased. Real wages rose strongly. The unemployment rate fell, remaining below 5 percent after 1924. Income tax rates were lowered. Federal government costs were reduced. The national debt shrank.
These claims conflict with the low esteem that historians have generally expressed for Harding and Coolidge. Three prominent rankings of American presidents by "experts" over the past half-century ranked Harding dead last. Coolidge fares only slightly better, positioned in the bottom quartile of the same surveys (Denson 2001, 5-6).
Largely undone by the New Deal and then forgotten, Harding's policies merit renewed attention because they guided the country out of recession and into prosperity in a remarkably short period. Curiously, modern advocates for a smaller government and reduced taxes look to the recent Reagan administration as an example. Harding's administration was actually the first to successfully apply these general principles.
Although Coolidge's reputation has been partially retrieved in recent years through favorable biographies by Robert Sobel (1998) and Amity Shlaes (2013), Harding's reputation remains badly tarnished. His administration was scandalized by the Teapot Dome debacle and the dishonest dealings of cabinet officials Albert Fall and Harry Daugherty. The most credible biography of Harding dates back to 1968, when Francis Russell penned The Shadow of Blooming Grove, a work that did little to polish Harding's image. John Hicks declared that "the election of 1920 still stands as one of the greatest affronts to the democratic process that the American record affords" (1960, 33). Ironically, Hicks conceded that "voters gave Harding, whose unfitness for the Presidency could hardly have been more obvious, the highest percentage of the popular vote achieved by any presidential candidate since well before the Civil War" (33).
Harding's poor reputation among historians and political experts is understandable given his personal faults, the scandals that tore apart his presidency, and his inability to exhibit strong leadership skills. Did he select his cronies Fall for interior secretary and Daugherty as attorney general? Yes, Harding is guilty on that count. Did the president participate in multiple extramarital affairs? He is also likely guilty on this count. Was alcohol regularly served in the White House during Prohibition? Yes, another guilty verdict.
This evidence rightly highlights Harding's very poor judgment in appointing two unworthy friends to cabinet posts and indicts him on questionable morals and leadership. However, these shortcomings should not detract from the very successful economic policies Harding initiated after taking office.
Harding started a revolution in economic policy upon taking office in 1921. His initiatives were premised on a firm belief that the private sector was the most critical component of national prosperity and that government should take as minimal a role as possible in managing the economy. To achieve optimal results, the federal government should do its utmost to lower tax rates, cut expenditures by eliminating unnecessary costs, and reduce the national debt.
Although Harding erred grievously in allowing Fall, Daugherty, and other members of the "Ohio Gang" into the inner circles of his administration, he also deserves credit for selecting two outstanding individuals to run the administration's economic and financial affairs. Andrew Mellon was selected as treasury secretary, a post that he would hold for eleven years spanning three presidential administrations. Charles Dawes became the first director of the Bureau of the Budget and would serve in that capacity during Harding's term in office. Mellon and Dawes played integral roles in ensuring that Harding's economic views were transformed into policy, and they were joined in cabinet meetings by Vice President Calvin Coolidge. As early as summer 1920, a Wall Street Journal contributor suggested that the vice presidential candidate was "a thorough student of political economy" who might "make a good president" ("Coolidge, Quiet, Simple" 1920). Coolidge became the first vice president to regularly participate in cabinet meetings (Coolidge 1929, 155).
Both Harding and Coolidge aimed to reduce government's role in the nation's economy even as the country modernized after World War I. Both men clearly expressed their goals and objectives in speeches. They translated their vision into reality through a number of clear legislative initiatives. The national economic results from 1921 to 1928 demonstrate that their efforts succeeded, particularly in comparisons with the economy immediately before and after their terms.
The United States in 1920
In 1920, Warren Harding was elected president, drubbing Democrat opponent James Cox in the Electoral College 404 to 127 and in the popular vote 16.2 to 9.1 million. The 26.2 percent winning margin in the popular vote is the largest in American presidential history. Republicans also retained control of the Sixty-Seventh Congress, capturing the House by 301 to 131 seats and the Senate by 59 to 37, while picking up 61 House and 10 Senate seats in the landslide victory (Carter et al. 2006, 5:174, 201).
The United States was in the midst of profound and defining change. Domestically, national politics had been deeply impacted since 1900 by the progressivism of the Roosevelt and Wilson presidencies. Internationally, American participation in the Great War vaulted the United States into the upper echelon of world powers, a role the Wilson administration handled awkwardly during the Paris Peace Conference in 1919.
Subtle changes were altering the demographics and daily living patterns of ordinary American citizens. The 1920 census marked the first time that more people inhabited urban rather than rural communities. New technologies and innovations improved standards of living. The automobile industry was the most visible manifestation of change as annual production increased from 2.3 million to 3.8 million units, and total registrations rose from 12.3 to 24.7 million vehicles between 1922 and 1928 (Carter et al. 2006, 1:104, 3:116-18, 4:830). Concurrently, commercial applications in the fields of radio, movies, and air travel slowly integrated into the nation's cultural and economic mainstream. Even established industries, such as retailing, benefitted from practical innovations such as the first self-serve grocery store, introduced by Piggly Wiggly in 1916 (Strasser 1989, 248).
Two major pieces of progressive legislation in 1913 greatly changed the federal government's ability to actively participate in and influence the national economy. Passage of the Sixteenth Amendment established a national income tax, greatly enhancing the federal government's ability to raise revenues and conduct fiscal policy initiatives. That same year Congress ratified the Federal Reserve Act, creating a central bank and a conduit through which government could impact the economy through monetary policy.
World War I necessitated yet another change, a massive federal government buildup to field the American military. Between 1901 and 1916, federal expenditures increased only from $0.5 billion to $0.7 billion. Direct entry into the war caused federal expenditures in 1917, 1918, and 1919 to explode to $1.1 billion, $12.7 billion, and $18.5 billion, respectively--a twenty-six fold increase in just three years (Carter et al. 2006, 5:80).
The Great War's costs required funding mechanisms. The new income tax provided one source. In 1918, the top marginal personal income tax rate was increased to 70.3 percent, but "internal revenues" covered only 22 percent of that year's increase in federal operating costs. Instead, the war's buildup was financed primarily through borrowing. The national debt, only $1.2 billion in 1916, increased to a staggering $25.5 billion by 1919 (Carter et al. 2006, 5:114).
As the 1920 elections unfolded, it became obvious that the national economic boom, fueled by international war, was facing postbellum dislocation. GDP had peaked to all-time-high levels of $77 billion and $87 billion in 1919 and 1920, respectively, but began to fall thereafter (Carter et al. 2006, 3:25). Manufacturers started switching back to peacetime production and military personnel came home. Two million servicemen returned stateside during 1919, swelling the labor pool. American agriculture was hit particularly hard as food prices, artificially stimulated by war, plunged by almost two-thirds between the summers of 1920 and...