Coolidge’s Shrewd Economic Policies

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Posted: Nov 24, 2021 12:51 PM
Coolidge’s Shrewd Economic Policies

Source: AP Photo/FILE

President Calvin Coolidge wrote how he “knew that when taxes were laid someone had to work to earn the money to pay them. I saw that the public debt was a burden on all the people in the community.”[1] American Exceptionalism was absolutely clear to President Calvin Coolidge; he clearly understood that “the expenses of the government reach everybody.”[2]

During the Depression of 1920 what emerged was a “controlled experiment in macroeconomics” which was the exact opposite of either Keynesian or monetarist cures. As discussed above, federal spending was massively cut - 82.2 percent in three years; the top earners’ income tax was reduced by 67.5 percent – along with reduction for all levels of income. Furthermore, the Federal Reserve did not take any “expansive action during the steep 1920-21 recession and deflation”[3]  – the Federal Reserve instead raised interest rates. All of which depict the Keynesian and monetarist’s nightmare.

Thomas Woods explains that “the price deflation of the 1920-1921 depression was more severe [than the Great Depression of the 1930s]. From its peak in June of 1920 the Consumer Price Index fell 15.8 percent over the next twelve months. In contrast, the year-over-year price deflation never even reached 11 percent at any point during the Great Depression.”[4] The price crash of the 1920s was more severe than during the Great Depression as well as much more rapid.

The downturn from 1920 to 1921 was significantly worse than the downturn in 1929-1933, in fact, 1920-1921 was the largest collapse in U.S. history. “It dwarfed the fall during the Hoover years.” So if the Keynesians were correct about the Great Depression, the events of 1920 should have been drastically worse – but they were not. Certainly there was economic pain suffered in 1920 and 1921, but the recovery was very rapid. Unemployment peaked at 11.7 percent but swiftly dropped to only 2.4 percent by 1923. Then, the United States swung into the “Roaring Twenties.”

Likewise, the monetarist’s claimed that the Federal Reserve did not do enough with creating new reserves to stem the collapse to avert the Great Depression, but if that was so then the 1920 fall should have been utterly devastating – but it was not.[5] In fact, Calvin Coolidge “believed, accurately, that inflation was the twin of taxes and that it, too, was expropriation.”[6] And Coolidge, in 1924, astutely describes the phenomenon known today as the Laffer Curve:

The first objective of taxation is to secure revenue. When the taxation of large incomes is approached with this in view, the problem is to find a rate which will produce the largest returns. Experience does not show that the higher rate produces the larger revenue…But if the rates on large incomes are so high that they disappear, the small taxpayer will be left to bear the entire burden.[7]

Coolidge’s shrewd and economically sound policies “left a federal budget smaller than the one he found,” and ”Coolidge came in like a lion [when he assumed the Presidency], determined to make austerity permanent.  Coolidge met with his budget director, Gen. Herbert Lord, on his first day in office and routinely thereafter.”[8]  President Coolidge “held 14 meetings with his budget director after coming to office in late 1923, 55 meetings in 1924, 52 in 1925, 63 in 1926, and 51 in 1927.”[9] Sound federal financial discipline was an underpinning of the Coolidge administration.

Coolidge advised his father once, “It is much more important to kill bad bills than to pass good ones,” while vetoing 50 bills during his presidency.[10] This absolutely sums up Coolidge’s economic wisdom while in office; and the results were nearly a decade of the one of the most prosperous decade in American history.

On August 11, 1924, on the lawn of the White House, after being re-elected, President Coolidge also pronounced that:

I want the people of America to be able to work less for the government and more for themselves. I want them to have the rewards of their own industry. That is the chief meaning of freedom. Until we can re-establish a condition under which the earnings of the people can be kept by the people, we are bound to suffer a very distinct curtailment of our liberty.[11]

Another stunning example of the impact of what Ludwig von Mises called “Human Action” was the number of Americans who reported one million dollars or more was 206 in 1916. As a result of President Wilson’s tyrannical rise in income tax rates, the number those reporting of one million dollars of more plummeted to only 21 in 1921. But as Presidents Harding and Coolidge dramatically reduced the income tax rate the number of people reporting one million dollars or more of taxable income jumped back up to 207 by 1925.[12]

[1] Calvin Coolidge, 2004 (originally published in 1929), The Autobiography of Calvin Coolidge,” (Honolulu, HI: University Press of the Pacific), p. 26.

[2] Calvin Coolidge, 1924, “The First Presidential Film,” video referenced in Dan Mitchell, October 15, 2010, “Can You Name the Greatest President of the Past 100 Years?” International Liberty, [http://danieljmitchell.wordpress.com/2010/10/15/can-you-name-the-greatest-president-of-the-past-100-years/].

[3] Allan H. Metzler, March 17, 2000, “Lessons from the Early History of the Federal Reserve,” (Munich, Germany: Presidential Address to International Atlantic economic Society, American Enterprise Institute), p. 4.  The inaction of the Federal Reserve is also cited in Thomas E. Woods, Jr., October 8, 2009, “Warren Harding and the Forgotten Depression of 1920,” The Intercollegiate Review, Fall 2009 Issue, p. 23.  “The Federal Reserve’s activity, moreover, was hardly noticeable.”

[4] Robert P. Murphy, December 2009, “The Depression You’ve Never Heard Of: 1920-1921,” The Freeman Online Vol. 59, Issue 10, [http://www.thefreemanonline.org/featured/the-depression-youve-never-heard-of-1920-1921/].

[5] Robert P. Murphy, December 2009, “The Depression You’ve Never Heard Of: 1920-1921,” The Freeman Online Vol. 59, Issue 10, [http://www.thefreemanonline.org/featured/the-depression-youve-never-heard-of-1920-1921/].

[6] Amity Shlaes, August 30, 2010, “The Great Refrainer,” Forbes, forbes.com, [http://www.forbes.com/forbes/2010/0830/opinions-amity-shlaes-current-events-great-refresher.html].

[7] Thomas Sowell, 2012, “’Trickle Down’ Theory and ‘Tax Cuts for the Rich’,” (Stanford University, Stanford, CA:   Hoover Institute Press), Publication No. 635, [http://www.tsowell.com/images/Hoover%20Proof.pdf], p. 9.  Calvin Coolidge is quoted in the Washington Post, February 13, 1924, p. 4.

[8] Amity Shlaes, February 18, 2013, “The Coolidge Lesson on Taxes and Spending,” The Wall Street Journal, p. A13.

[9] Amity Shlaes, February 2013, “Calvin Coolidge and the Moral Case for Economy,” Imprimis, Vol. 42, No. 2, (Hillsdale College, Hillsdale, MI), p. 4.

[10] Amity Shlaes, February 2013, “Calvin Coolidge and the Moral Case for Economy,” Imprimis, Vol. 42, No. 2, (Hillsdale College, Hillsdale, MI), p. 3.

[11] Calvin Coolidge, 1924, “The First Presidential Film,” video referenced in Dan Mitchell, October 15, 2010, “Can You Name the Greatest President of the Past 100 Years?” International Liberty, [http://danieljmitchell.wordpress.com/2010/10/15/can-you-name-the-greatest-president-of-the-past-100-years/].

[12] Thomas Sowell, 2012, “’Trickle Down’ Theory and ‘Tax Cuts for the Rich’,” (Stanford University, Stanford, CA:   Hoover Institute Press), Publication No. 635, [http://www.tsowell.com/images/Hoover%20Proof.pdf], p. 3.  The actual data comes from Treasury Department, United States Internal Revenue, 1927, “Statistics of Income from Returns of Net Income for 1925,” (Washington, D.C.: United States Government Printing Office), p. 21, Number of individual returns, calendar years 1914-1925, by income class.