Coolidge and 1920s Prosperity: Some Cautions
Amity Shlaes in today’s Wall Street Journal provides “The Coolidge Lesson on Taxes and Spending” makes the argument that those, as has been done at Mises Daily here, and here who want to “make government smaller” and “to lower taxes” as a means to “yield prosperity” should look not to Ronald Reagan but to “Silent Cal” Coolidge.
“The 30th president cut the top income-tax rate to 25% (lower than the 28% of the historic Reagan cut of 1986). Coolidge reduced the national debt and balanced the budget. When he departed the White House for his home in Northampton, Mass., he left a federal budget smaller than the one he found.
Shales points out Coolidge had a governing philosophy, “It is much more important to kill bad bills than to pass good ones,” which would be an ideal counter to today’s knee jerk “urge to action,” the overactive animal spirits of the political class. He had a strategy on budget cuts that would be appropriate today; he “understood that ambitious budget cuts would be accepted if he could ‘align’ them with ambitious tax cuts.”
More on why Coolidge should be on the better (not necessairy good) list of presidents comes from a speech I heard years ago at Metro State by Robert Novak. Novak argued Coolidge was his favorite president because by his (Coolidge’s) own admission Coolidge slept 12 plus hours a day. Novak added he knows of no president who had harmed the U. S. while sleeping.
Rothbard’s America’s Great Depression is a good place to get additional insight into Silent Cal, the good, the bad, and perhaps even the ugly. A quick word search for Coolidge of the pdf yields some gems worth considering.
Some good: Paul Johnson from the introduction to the 5th edition (xvi) on Hoover and Coolidge:
Hoover’s was the only department of the U.S. federal government which had expanded steadily in numbers and power during the 1920s, and he had constantly urged Presidents Harding and Coolidge to take a more active role in managing the economy. Coolidge, a genuine minimalist in government [emphasis added]“For six years that man has given me unsolicited advice—all of it bad.”
Some bad and ugly all per Rothbard:
Coolidge and low discount rate and inflationary policy (121):
An inflationary, low-discount-rate policy was a prominent and important feature of the Harding and Coolidge administrations. Even before taking office, President Harding had urged reduction of interest rates, and he repeatedly announced his intention of reducing discount rates after he became President. And President Coolidge, in a famous pre-election speech on October 22, 1924, declared that “It has been the policy of this administration to reduce discount rates,” and promised to keep them low. Both Presidents appointed FRB members who favored this policy.
As a cheerleader for the stock market boom (125):
Another important means of encouraging the stock market boom was a rash of cheering public statements, designed to spur on the boom whenever it showed signs of flagging. President Coolidge and Secretary of Treasury Mellon in this way acted as the leading “capeadores of Wall Street.
The boom again began to weaken in the latter part of March, whereupon Mellon once more promised continued low rediscount rates and pictured a primrose path of easy money. He said, “There is an abundant supply of easy money which should take care of any contingencies that might arise.” Stocks continued upward again, but slumped slightly during June. This time President Coolidge came to the rescue, urging optimism upon one and all. Again the market rallied strongly, only to react badly in August when Coolidge announced he did not choose to run again. After a further rally and subsequent recession in October, Coolidge once more stepped into the breach with a highly optimistic statement. Further optimistic statements by Mellon and Coolidge trumpeting the “new era” of permanent prosperity repeatedly injected tonics into the market.
As an advocate of a polically induced business cycle (153):
The motives for the American inflation of 1924, then, were to aid Great Britain, the farmers, and, in passing, the investment bankers, and finally, to help reelect the Administration in the 1924 elections. President Coolidge’s famous assurance to the country about low discount rates typified the political end in view. And certainly the inflation was spurred by the existence of a mild recession in 1923–1924, during which time the economy was trying to adjust to the previous inflation of 1922. At first, the 1924 expansion accomplished what it had intended—gold inflow into the United States was replaced by a gold drain, American prices rose, foreign lending was stimulated, interest rates were lowered, and President Coolidge was triumphantly reelected.
Steadfast inflationist (163):
The proper monetary policy, even after a depression is underway, is to deflate or at the least to refrain from further inflation. Since the stock market continued to boom until October, the proper moderating policy would have been positive deflation. But President Coolidge ontinued to perform his “capeadore” role until the very end. A few days before leaving office in March he called American prosperity “absolutely sound” and stocks “cheap at current prices.”
As an advocate of pubic works to combat recession (197):
In January, 1925, Hoover had the satisfaction of seeing President Coolidge adopt his position. Addressing the Associated General Contractors of America (a group that stood to gain by a government building program), Coolidge called for public works planning to stabilize depressions.
Agricultural socialism (226):
Coolidge firmly believed that government “must encourage orderly and centralized marketing” in agriculture
The prosperity of the 1920s appears much like prosperity of the “Great Moderation” where a supply-side focused fiscal policy enhanced productivity was combined with a loose monetary policy guided by an emphasis on price level stability provideda toxic mx leading to a significant boom-bust cycle. Should be a cautionary tale for those enamored by the promise of nominal gnp targeting.