Stimulating History

To be able to critically analyze economic probabilities, one needs to know the history of previous similar situations. For the first 125 years of our county we had no Federal Reserve Bank, no permanent personal income tax and no massive government stimulus spending. We also had virtually no inflation and the average economic downturn lasted only 10 months.

In late 1913 the Federal Reserve Bank (FED) was created. It made it possible for the government to create money out of thin air. Also a permanent income tax was passed.

From 1915 to 1920 inflation was over 75%. Since 1915 inflation has been over 340% according to the Bureau of Labor Statistics.

By 1920-21 the USA experienced the greatest economic downturn and depression in our history. Our economy contracted by 21% in one year putting millions out of work.

What caused this? Among other things, the Federal Reserve Bank became the vehicle used to borrow and create money to fund WW I along with a Federal income tax and many new regulations on businesses by the progressive Wilson administration.

What did President Harding’s administration do to get out of this depression left by President Wilson? Government spending in 1922 alone was slashed by 34%. They reduced taxes on businesses and individuals from 73% to 24%. They also repealed a lot of the costly government bureaucratic regulations on businesses. The result was a huge increase in tax revenues and prosperity, as has always happened when government intervention in the economy is reduced.

We had the roaring twenties, the time of the greatest economic and technical improvement in the standard of living of the American people in our history. Also there were government budget surpluses every year and much of the WWI debt was paid off.

To keep the growth going in the late 1920’s, the FED kept interest rates artificially low thus contributing to over speculation in the stock markets. Also in 1929, Congress announced its intention to pass punitive tariffs to protect U.S. manufacturers and unions from foreign competition.

Although several thousand economists warned the Congress that the passage of such legislation would result in punitive reciprocal tariffs against U.S. exports and cause a depression, the Congress passed the tariff bill anyway. This resulted in U.S. exports decreasing by 66% and worldwide unemployment reached 25%.

President Hoover came into office in 1929. He was not a free market President. After the stock market crash in 1929 he and the Congress started a massive 42% increase in government stimulus projects in his first two years of office, raised taxes on individuals and corporations and urged corporations NOT to lower union wages. The result was that a number of corporations could not be competitive and went out of business. Unemployment soared.

Also the increase in taxes reduced personal saving and investment that would normally have gone to create new jobs in the productive private sector. Do you see any parallels with what’s going on right now?

President Roosevelt and the Congress elected in 1932 adopted Hoover’s policies, expanded them and called it the ‘New Deal.’ They added a dizzying increase in new government agencies and temporary public works jobs. The result was that the Depression continued with unemployment never going under 14% for another 8 years. At the same time Canada had virtually no new government programs and its economy recovered. What does that tell you?

U.S. private sector production remained below 1929 levels until much of the New Deal legislation was repealed after WWII. Actually there was a second Depression in 1938 as FDR’s new government programs gave the appearance of unemployment going down temporarily but in the end further strangled the creation of new permanent productive jobs. Unemployment went up to 19%. That is why most of Obama administration “Stimulus” funds will hit the street before the coming elections – to make it appear that unemployment is going down.

When John F. Kennedy’s administration lowered taxes, reduced regulations and took on the unions in the early 1960’s, the economy surged.

When Ronald Reagan cut the top marginal tax rate in the early 1980’s from 70% down to 28%, government tax revenues almost doubled during the next 10 years. 22.4 million new jobs were created. His supply side economics has worked every time it has been tried. Unfortunately Congress tripled spending, causing a deficit.

Economic historical evidence is overwhelming that the lowering of taxes, cutting back government spending, cutting tariffs and deregulating control over private businesses has virtually always resulted in the creation of new jobs. And raising taxes and tariffs, increased government spending and control has usually hurt lasting new job growth.

Those that have not learned the lessons of the past are bound to have them repeated.

James F. Davis is the President of Accuracy in Academia.