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In the Presidential election of 1920, Harding received 60.2 percent of the popular vote, the highest percentage since the evolution of the two-party system, and 404 electoral votes. His Democratic opponent, fellow Ohioan Governor James Cox, received 34 percent of the national vote and 127 electoral votes. Republicans greatly increased their majority in each house of Congress. In the House of Representatives they held a majority of 302 to 131 and in the Senate their majority was 60 to 36.
In his inaugural address, Harding proclaimed "Our most dangerous tendency is to expect too much from the government and at the same time do too little for it." A former newspaperman himself, Harding cultivated a good relationship with the media. Reporters admired his candor, and his humility when it came to knowing his limitations. Harding took the press behind the scenes and even spoke candidly with them about his fondness for the female sex. In November 1921, Harding also implemented a policy of taking written questions from reporters during his press conferences.
When Harding assumed office, the economy was not working in his favor. The nation was in the middle of a postwar economic decline known as the Depression of 1920–21. Consistent with what he had said in his inaugural address, Harding opposed proposals to provide for federal unemployment benefits. He believed that the best way to restore economic prosperity was to raise tariff rates and keep the government out of economic activities. His administration's economic policy was devised by Treasury Secretary Andrew Mellon, who called for cuts to the excess profits tax and the corporate tax. Mellon proposed a progressive income tax that only affected high-income earners. Mellon favored the wealthy holding as much capital as possible. He considered them to be the main drivers of economic growth. With the support of the Republican majority in Congress, tax cuts and tariff rates became the key legislative focus during Harding's first year in office. Harding called a special session of the Congress to address these issues, and Congress met in April 1921. Congress passed the Revenue Act of 1921 in November, and Harding signed the bill into law later that month. The act greatly reduced taxes for the wealthiest Americans, though the cuts were not as deep as Mellon had wanted. The act reduced the top marginal income tax rate from 73 percent to 58 percent, it lowered the corporate tax from 65 percent to 50 percent, and provided for the eventual elimination of the excess profits tax.
Government revenues dropped as a result at first, but wages, profits, and productivity all made substantial gains during the 1920s. Many economists believe that the Revenue Act of 1921 played a major role in the strong period of economic growth after the Depression of 1920–21.
In September 1922, Harding signed the Fordney–McCumber Tariff Act, legislation he and every congressional Republican strongly supported. The act increased the tariff rates to the highest level in the nation's history. Agriculture suffered as a result of the high tariffs and Harding realized that the long-term effects of high tariffs would be detrimental to national economy.
Many World War I veterans were unemployed and in tough financial straits when Harding took office. To aid these veterans, the Senate considered passing a law that gave veterans a $1 bonus for each day they had served in the war. But Harding opposed payment of a bonus to veterans, claiming that the bill would "break down our Treasury." The Senate sent the bonus bill back to committee. A bill providing a bonus, without a means of funding it, was passed by both houses in September 1922. Harding vetoed it, and the veto was narrowly sustained.
Union membership had grown during World War I, and by 1920 approximately 20% of the labor force were members of a union. Many employers reduced wages after the war, and some business leaders hoped to destroy the power of organized labor. This led to a large number of strikes in 1922. In April, 500,000 coal miners, led by John L. Lewis, struck over wage cuts. Harding convinced the miners union return to work while a congressional commission looked into their grievances. He also called out the National Guard and 2,200 deputy U.S. marshals to keep order. On July 1, 1922, 400,000 railroad workers went on strike. When Harding's efforts to bring about a settlement were rejected by management, Attorney General Daugherty obtained an injunction to break up the strike. The injunction succeeded in ending the strike; however, tensions remained high between railroad workers and management for years to come.
Entering the 1922 midterm election campaign, Harding and the Republicans had followed through on many of their campaign promises. But many of these, like cutting taxes for the wealthy, did not appeal to the electorate. The economy had not yet returned to a healthy position. Unemployment stood at 11 percent, and organized labor was angry over the outcome of a number of strikes.
In the 1922 mid-term elections voters were still feeling the effects of the economic downturn of the previous two years. Voters used the mid-terms as an opportunity to express their impression that Congress had failed to address the troubled economy. In many states voters returned Democrats to the House of Representatives in seats that Republicans won from them two years earlier, giving Democrats a stronger base in many major cities. Republicans Party lost a net of 77 seats in the House, of which 76 were won by Democrats. Voters were unimpressed by tax cuts for the wealthy and for corporations, and higher tariffs. The latter had pleased those in manufacturing but had also raised consumer prices. Republicans held on to a small majority in the House of 225 to 207, but the midterms had humbled them.
Republicans lost seven seats in the senate, six of which went to Democrats and the other to the Farm-Labor party. Republican control of the senate was reduced from 60 to 36, to 53 to 42.
Democrats showed their greatest gains in support in the industrial cities. Those of Irish and German ancestry and who had voted Republican because of Woodrow Wilson's persecution of anti-war sentiments, now returned to the Democratic party. Many families who now had a veteran among them also turned against the government, wanting to see a bonus paid to veterans. There was also an anti-government sentiment because of the federal prohibition on beer and wine, and the closing of saloons.
The recovery recovered for a time, but another economic contraction began near the end of Harding's presidency in 1923, while tax cuts were still underway. The elections also empowered the progressive wing of the party led by Wisconsin Senator Robert La Follette. He who began investigations into Harding administration which would later uncover a number of scandals and corruption that would go on to tarnish Harding's legacy.