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In the wake of recent economic events, global business loan experts, as well as economists from various schools of thought, have put incredible pressure on large governments to provide help in the form of relief to large banking organizations to avoid what could have been a full-scale depression. This is not a terribly difficult idea to sell either; the images of the great depression bring horrible images to our minds and we certainly don’t want anything like that. But what few people realize is that the great depression of 1929 is not the depression that we have gone through (although it is the only one that received this kind of response). Nine years before Black Thursday, there was another depression that, had someone observed ignorant of the aftermath, would have been anticipated as much, much worse.

The depression of 1920, which occurred during the Wilson administration, came in the wake of World War I. Thousands of veterans were returning home from the battlefields and they needed medical care and were unable to work. The federal reserve system, which was still very new, had some great difficulties with regulating the banks, and interest rates rose sharply. What resulted was a rampant deflation, greater than anything that had been observed in American history. Unemployment reached double digits in a matter of months, and panic ensued.

The progressive Woodrow Wilson was unable to intervene on this matter due to a stroke, and the Democrat was voted out in a landslide. Warren G. Harding, a strong laissez-faire advocate, was elected, and his response to the economic turmoil, by modern standards, was astonishing. Harding decreased taxes and advocated a return to thrift, savings and shared hardships. Despite the advice of then Secretary of Commerce Herbert Hoover, and the advice of other global business loan experts, the federal government did remarkably little to intervene on the issue and the economy and people were left to their own devices.

The results were astonishing: within a year and a half, the economy had returned to equilibrium, and unemployment back down to 3-4% within two years, and the roaring twenties were underway.

By contrast, it the modern approach that we are taking is much more reminiscent of the actions of Hoover and Roosevelt in response to the depression of 1929, which involved a bevy of tariffs, taxes, regulations, new programs and other such interventions that resulted in a depression that wouldn’t end until the after World War II. We have it ingrained in our psyche that the responses of these men were useful in alleviating the damage caused by the Wall Street Crash of 1929, and yet when you compare the results of their actions with the results of the non-actions taken by the earlier postbellum Presidents, you will find these actions not to be quite as glamorous as they may have seemed.

This Economics & Policy article was written by Mark Karavan on 1/18/2010