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When Warren Harding ran for President in 1920, he promised a "return to normalcy". Harding believed that under his predecessor, government spending was unchecked and rampant with abuse, and it was an area that Harding was determined to address.



Early on in his presidency, Harding signed the Budget and Accounting Act of 1921. Though Harding is sometimes maligned by historians, many of his achievements are overlooked, and this considered one of Harding's greatest domestic achievements. Harding worked with Congress to bring about the nation's first formal budgeting process. The new law established of the Bureau of the Budget and created the office of the presidential budget director. The budget director was directly responsible to the President rather than to the Secretary of Treasury. The law required the President to submit a budget annually to Congress. The act also created the General Accounting Office. Its purpose was to assure oversight in federal budget expenditures.

As the first budget director, Harding appointed Charles Dawes to the job. Dawes, a future Vice-President, was known for being an effective financier. Dawes lived up to his reputation by reducing government spending by $1.5 billion in his first year as director. This was quite significant. It represented a 25% reduction in government spending. Expenditures were cut by another 25% reduction the following year. The Government budget was cut by almost half in just two years.

Harding believed the federal government should be fiscally managed in the same way as private sector businesses. He had campaigned on the slogan, "Less government in business and more business in government." Harding followed through on his promise. Federal spending declined from $6.3 billion in 1920 to $5 billion in 1921 and $3.3 billion in 1922. Tax rates were slashed—for every income group, and over the course of the 1920s, the national debt was reduced by one third.

This didn't mean that Harding gutted services. On August 9, 1921, Harding signed legislation known as the Sweet Bill, which established the Veterans Bureau as a new agency. Following World War I, there were 300,000 wounded veterans who were in need of hospitalization, medical care, and job training. The new Veterans Bureau incorporated a number of pre-existing programs into a more efficient agency. Unfortunately for Harding, he appointed Colonel Charles R. Forbes as the first director of the Veterans's Bureau. Although he was a decorated war veteran, Forbes would be involved in one of the many scandals that the Harding Administration became famous for.

What is remarkable is that Harding achieved all of this while having to deal with a postwar economic decline, known as the Depression of 1920–21. The election of a new government seemed to restore confidence in the economy because by summer of his first year in office, an economic recovery began. But Harding did not remain inactive. He convened the Conference of Unemployment in 1921, headed by Secretary of Commerce Herbert Hoover. The conference made recommendations implemented by Harding which proactively advocated stimulated the economy with local public work projects and encouraged businesses to apply shared work programs.

Harding's Treasury Secretary, Andrew Mellon, ordered a study that concluded that, as income tax rates were increased, money was driven underground or abroad. Mellon concluded that lower tax rates would actually increase tax revenues. Based on this advice, Harding cut taxes, starting in 1922. The top marginal rate was reduced annually in four stages from 73% in 1921 to 25% in 1925. Taxes were cut for lower incomes starting in 1923.

Many historians attribute the the tax cuts to ending the depression. Harding's tax and economic policies resulted in an increase of manufacturing and innovation. Others argue that the recession had already ended three months into Harding's first term (before taxes were cut). They credit the creation of the Federal Reserve under the previous administration. Even with the passage of time, debate continues over how much credit Harding deserves for ending the recession. Whichever theory is correct, wages, profits, and productivity all made substantial gains during the 1920s.

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On September 21, 1922, Harding signed the Fordney–McCumber Tariff Act, protectionist legislation that increased the tariff rates to the highest level in the nation's history. Harding became concerned when the agriculture business suffered economic hardship from the high tariffs and he began to realize that the long-term effects of tariffs could be detrimental to national economy, despite the short-term benefits.Harding's successors Calvin Coolidge and Herbert Hoover also advocated tariff legislation. The tariffs set in the 1920s have been viewed by some economists as a contributing cause of the Wall Street Crash of 1929

Recovery was followed by another setback. Another economic contraction began near the end of Harding's presidency in 1923, while tax cuts were still underway. Harding died in August of 1923, and the problem was passed on to Harding's successor, another fiscal conservative named Calvin Coolidge.

When Congress reconvened in December of 1923 following Harding's death, Coolidge promised to continue many of the policies of his predecessor. The new president signed the Revenue Act of 1924, which reduced the top marginal personal income tax rate from 58% to 46%, decreased personal income tax rates across the board, increased the estate tax and created a gift tax designed to restrict tax evasion.

Coolidge's taxation policy was in accord with his Secretary of the Treasury, Andrew Mellon. Like Harding and Mellon, Coolidge believed that at a certain level, lower taxes actually increase rather than decrease government revenue. Congress also agreed, and the taxes were reduced in Coolidge's term. Coolidge proposed further reductions in federal spending and retiring some of the federal debt. This had the support of the Republicans in Congress, and in 1924 Congress passed the Revenue Act of 1924, which reduced income tax rates and eliminated all income taxation for some two million people. Over the rest of Coolidge's term, taxes were reduced again by the Revenue Acts of 1926 and 1928. All the while Coolidge continued to keep spending down so as to reduce the overall federal debt. By 1927, only the richest 2% of taxpayers paid any federal income tax. During Coolidge's administration, one-fourth of the federal debt was retired, while state and local governments saw considerable growth.



Coolidge's small government philosophy was in contradiction to that of later Presidents like FDR. Coolidge offered little in the way of aid to farmers. He said "Farmers never have made much money, I do not believe we can do much about it." When the Great Mississippi Flood of 1927 struck, Coolidge viewed flood relief as a state and local issue.

Historians continue to debate whether or not Coolidge's strong fiscal conservatism was good for the nation or if it led to the great depression that would come. President Ronald Reagan regarded Coolidge as his favorite 20th century President because of Coolidge's belief in a limited federal government. In more recent times, historian Amity Schlaes has made the case, in her 2013 biography entitled Coolidge that Coolidge's economic approach is one to be admired. She wrote (at page 12):

" It is hard for modern students of economics to know what to make of a government that treated economic weakness by raising interest rates 300 basis points, cutting tax rates, and halving the federal government; so much at odds is that prescription with the antidotes to recession our own experts tend to recommend. It is harder still for modern economists to concede that that recipe, the policy for the early 1920s advocated by Coolidge and Harding, yielded growth on a scale to which we can aspire today. As early at the 1930s, Coolidge's reputation and way of thinking began their decline. Collectives and not individuals became fashionable. Sensing such shifts, Coolidge at the end of his life spoke anxiously about the "importance of the obvious." Perseverance, property rights, contracts, civility to one's opponents, silence, smaller government, trust, certainty, restraint, respect for faith, federalism, economy and thrift: these Coolidge ideals intrigue us today as well. After all, many citizens today do feel cursed by debt, their own or their government's. Knowing the details of his life may well help Americans now turn a curse to a blessing or, at the very least, find the heart to continue their own persevering."

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