Americans are familiar with the story of the Great Depression, a deep and lasting economic slump that plagued not just workers and families but businesses and households around the world starting with the stock market crash in 1929 and running through the 1930s. Not as many are aware that a similar recessionary period struck the U.S. just eight years before the 1929 crash. The result of that earlier downturn was very different, and so were the tactics used to combat it.
After a relatively short economic correction, that earlier slump gave way to the Roaring Twenties, a memorable American era marked by explosive economic growth, rapid technological advancement, and a dramatic boost in American quality of life. The Great Depression, by contrast, resulted in a decade-long economic despair that saw a collapse of American economic output, reversing much of the growth of the 1920s and bankrupting businesses and individuals alike.
Why and how were the results so different? Two quick notes. First, the two recessions were distinct from one another, so comparing them as if they were identical twins is misleading. They can, however, serve as useful case studies in how government responds to an economic crisis. Second, a common misconception about the Great Depression is that thanks to President Franklin D. Roosevelt’s quick action, losses were curbed and lives and livelihoods were soon improved. But as Amity Shlaes writes in her modern classic, “The Forgotten Man,” the historical record doesn’t support this narrative.
Let’s look at Recession #1, in the early 1920s. Its leadership was Republican, its philosophy, less government. President Warren G. Harding, and then his successor, Calvin Coolidge, believed that the remedy to a market correction was less government involvement. This meant allowing the market to rebound naturally and cut its losses, while implementing pro-growth measures, like reducing taxes and scaling back regulations. The results, after a short period of economic stagnation, were remarkably positive.
Consider now Recession #2. Its leadership was first Republican (under Herbert Hoover, from 1929 to 1933) and then Democrat (Roosevelt, 1933 to 1945). Its philosophy was government intervention. Hoover, a Republican, responded disastrously. His instincts told him to use the mechanisms of government to soften the economic blow, and his choices, capped by the signing of the Hawley-Smoot Tariff Act, proved devastating to the American economy.
Roosevelt inherited a grim situation in 1933, but instead of realizing the error of too much government action, he ordered up even more. The resulting New Deal Era marked an era of wasteful government programs, extreme levels of bureaucracy, and an all-out war on the private sector. Big-government policies yielded a deep and lasting economic plunge, alleviated only by the eventual production boost of World War II and finally eradicated by the postwar economic boom.
Though leaders are often tempted to take strong action in economic downturns, it’s usually the wrong decision. The market is fickle, but it knows more than the government does about people, goods, and services. Two questions I frequently ask myself in my role as an elected official are: What is the function of government as defined by the Constitution? And: Is this action, bill, or initiative a necessary function of government? If it isn’t, I probably won’t support it.
We need to learn from history. The story of this forgotten recession of the early 1920s should be better known; it has much to teach us. If more Americans understood its lessons, we’d be less prone to falling for the myth that government is the answer to every problem.
