Harding the Last American President to Deal Honestly With a Major Financial Crisis

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“He who goes a-borrowing, goes a-sorrowing.”

The quote comes from Ben Franklin. But it was recalled to us neither by America’s president, nor Britain’s Prime Minister. Instead, the Telegraph in London reported it from the mouth of Cheng Siwei, a “top member of the Communist hierarchy.”

What goes around comes around. The Anglo-Saxons have forgotten what makes a successful economy. The Chinese have remembered.

Just look up Warren Harding on Wikipedia. The first entry you will find is not the 29th president of the United States of America, but a rock climber with the same name. But what do you expect? History is nothing but a long list of disasters in chronological order. Historians love calamity. And they reserve their highest accolades for those who cause them. The same is true in financial history. Those who make it big are those who make it worse.

It is safe to assume that no one working at the Federal Reserve or at the White House has a picture of Warren Gamaliel Harding over his desk. Yet, if American presidents were ranked on the basis of how well they faced up to financial disaster, Warren G. Harding might be somebody. His handsome face would be carved on Rushmore. His likeness would grace the $100 bill. Harding was the last American president to deal honestly with a major financial crisis. Every president since has tried to scam his way out of it.

By the time Harding took office in ’21 the Panic of 1920 was taking the unemployment rate from 4% to nearly 12%. GDP fell 17%. Then, as now, the president’s subordinates urged him to intervene. Secretary of Commerce Herbert Hoover wanted to meddle – as he would 10 years later. But Harding resisted. No bailouts. No stimulus. No monetary policy. No fiscal policy. Harding had a better approach; he cut government spending and went out to play poker:

“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity…it will be an example to stimulate thrift and economy in private life.

“Let us call…for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic.”

Within a decade, Harding’s views were collectibles. But in 1921, he still saw the economic world as a moral world ordered not by man, but by God. This was not the result of long study or deep reflection on his part. He was probably the dummy everybody said he was. As Keynes pointed out, politicians are always in thrall of some dead economist. At least Harding was in thrall to the good ones.

“No statute enacted by man can repeal the inexorable laws of nature,” he announced. “Our most dangerous tendency is to expect too much of government…”

Harding was not the first to see the economy as a ‘natural’ order…one that you disturbed at your peril. A Taoist named Zhuangzi, who lived about the same time as Alexander, observed: “Good order results spontaneously when things are let alone.”

Later, economists of the Scottish enlightenment, notably Adam Smith and Adam Ferguson elaborated. Smith, like Harding, saw the economy ordered by the invisible hand of God. Ferguson saw markets as a ‘spontaneous order,’ which were the “result of human action, but not the execution of any human design”.

The same basic insight led Irving Fisher – the greatest economist of the 1920s – to come up with his debt-deflation theory of depressions. After people had borrowed, they needed to pay back. Busts followed booms; there was no getting around it.

Warren Harding may never have been the brightest bulb on the White House porch, but intuitively he understood that proper macro-economic policies were more the product of virtue than of genius. Debt led to trouble; that’s all he needed to know.

Keynes came along a few years later. Keynes was a genius; everybody said so. And he had an answer for everything. Nature? Government could do better. Debt? Don’t worry about it, he said. Why not just let capitalism sort itself out? Without government intervention, it will only get worse, said Keynes.

But Harding had already proved him wrong. Harding did the very opposite of what Keynes recommended. Instead of increasing government spending, he reduced it. He cut the budget almost in half. He slashed taxes too…and cut the national debt by a third.

Japan at the time struggled with the same downturn. But it had no Harding at the helm. Instead, its masters prefigured Keynes, trying to stay the correction using price controls and other interventions. The result was a long-drawn-out affair that lasted until 1927 and ended in a bank crisis. In America, meanwhile, by 1922 unemployment was back down to 6.7%. By 1923 it was down further – to 2.4%.

This lesson was entirely lost on the world’s economists. When the next crisis hit a decade later, they turned to Keynes. Of course, it turned out to be a moral world after all. They got what they deserved.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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12 Comments on "Harding the Last American President to Deal Honestly With a Major Financial Crisis"

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Scott Clink
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Thank you for the compare and contrast but other than an informative History lesson I don’t see any new ideas. The U.S. is in a terrible predicament and countries that followed her lead are in as bad a shape, if not worse. It sounds as if your pushing Hardy’s beliefs, but that idea is a day late and a dollar short. Bush jr. and all of his cronies advocated the idea that putting more borrowed money into the system would fix things. The problem is that has been the mantra since Reagan–Borrow, Borrow, and Borrow. Sadly, Americans have followed another… Read more »
Ross
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Scott, I agree that we shouldn’t go easy on those Republicans but that doesn’t mean that the Democrats haven’t been worse and chief among them the Clinton-Rubin/Summers cronies. From Burns onwards the Fed was central in preparing the ground for anarchy and their doctrine is socialism and the provision of material support for racketeering. Now that it is too late it is too late. Got that? You have had a great nation of enterprise with some great people but it is lost. You have grown up in a land of subversive narrative every bit as compromised as that of the… Read more »
Dan
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Ross: “Speaking the Truth in times of universal deceit is a revolutionary act.” (Orwell) – perhaps that’s all that is left to be done now.

Lachlan Scanlan
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We had a communist(the real deal) living next door once Ross. He told my father that socialism was a necessary, transitionary vehicle for establishing communism. So I always view socialism as a transitory state. Personally my position not to save the world….anyhow Mongolia looking good if you dont mind getting back to basics ;) Using that DXY chart that you linked for me (tanx mate…I got live charts but no USDX available and free charts good) shows the USD breaking out through the top of its trading channel, or near enough to as far as I can tell from the… Read more »
Lachlan Scanlan
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Hmmm. Transitory means fleeting..would describe most forms government.

Pete
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“He told my father that socialism was a necessary, transitionary vehicle for establishing communism.” Sounds right to me Lachlan. Because socialism doesn’t work (we all know that). It leads to problems…that are ‘solved’ by adopting a new form of Government. Usually something nasty like Communism or Facism. Interestingly, sometimes I feel that Government is a bit of a cycle. Eg, Democracy gets out of control, leads to socialism, leads to facism (leads to war ?), which leads to communism, which leads to democracy. Just a thought anyway. The basis of my thought is just that people want freedom (democracy), which… Read more »
Lachlan Scanlan
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Yes Pete. Isms, left and right (politics) all seem superfluous, generally the constant is increasing size and power of government…until collapse.

Pete
Guest

“Feel free to rip that one apart, it’s a particularly educated guess.”

Erm, I meant ‘not’ an educated guess. Haha, typos making me sound really arrogant.

Dan
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Pete, Communism can only lead to democracy if the ruling elite is wiped out or leaves – and then it’s a tenuous struggle to prevent the bankers from shoving their men in first (as occurred in Russia during its revolution … possibly elsewhere). Oligarchs and entrenched beaurocrats don’t abdicate, predictably enough. The removal of the old guard hasn’t occurred in Russia (which is no accident), and so there really isn’t a democracy there. Similarly, the US ruling class is ready for social upheaval and won’t be removed at all easily. What little democracy we have now is the democracy we… Read more »
Dan
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To correct myself, the Russian Revolution was of course a Communist one (whereby multi-party democracy in Russia was killed at birth). The Tsarist intelligence and police were no match for Lenin and co, who was funded by international bankers (as per recent biographies). Still, the new government was not a complete overhaul as was made out to be the case. Aspects of the old tsarist regime did, in a way, live on – but that’s just historical stuff and not really the point. The second revolution (as I call it) with the fall of Communism did not lead to democracy… Read more »
Ross
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Lachlan, we went hard seat into mongolia in the early 80’s and I didn’t win my wrestling match on a gravel ring up in the hills away from the ac-ac guns (those awaiting the soviets and as mounted on the top of the city buildings). I rode their horses and as a result, together with the wrestling gravel rash on my behind, I didn’t appreciate that hard seat on the train a few days later. Alighting in beautiful downtown Datung on the next call in the journey brought the extreme polarities of lifestyle into focus. Back then a few texan… Read more »
Lachlan Scanlan
Guest

Re: Mongolia..I have an agrarian bent anyhow Ross. Nice story about the place too.
Saw a better chart USDX today that shows it trading right on resistance @76.5. Market very oversold. Anyone for shopping?

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