Fiscal Lessons from Harding and Coolidge

By William Beach

This article appears in the Winter 2024 issue of the Coolidge Review.

Why do we study history? Though history doesn’t repeat itself, Henry Ford was wrong in saying that it is just one damn thing after another. Indeed, when you look around, you see that we’re facing many problems that have come up in the past.

Case in point: The period from 1919 to 1922 has striking parallels with our own time.

The 1919–1922 period had a significant pandemic—the influenza pandemic. The infection rate was probably even worse than what we experienced during the COVID-19 pandemic. The death rates were comparable. Between 1919 and 1922, an estimated 675,000 people died because of the flu pandemic. That represented six-tenths of a percent of the U.S. population. Between 2020 and 2023, about 1.13 million died as a result of COVID-19 and its variants. That figure represents about four-tenths of a percent of the population. Each pandemic brought significant disruptions to the labor force, to the talent pool, to supply chains, to financial networks, to international trade flows.

Both periods also brought a massive expansion of government budgets and publicly held debt. Now, a century ago, most government expenditures occurred at the state level, not at the federal level. But that period marked the beginning of significant increases in federal outlays and debt. Federal outlays grew by 2,493 percent from 1916 to 1919. Why was that? Because we were fighting the Great War, and we went from low to extremely high outlays overnight.

Yet in 1923, federal outlays were still 340 percent higher than they had been in 1916. So although the war had ended, spending did not come back down to pre-war levels. This is the ratchet effect of federal outlays: they just keep increasing.

Publicly held debt grew from $3.6 billion in 1916 to $22.3 billion in 1923, which is a 519 percent increase. Again, that does not include the outlays and the general obligation debt of state governments, which also went up.

Now look at America’s recent history. Between 2019 and 2023, outlays grew from $4.5 trillion to $6 trillion, which represented a 33 percent increase. Publicly held debt grew from $22.7 trillion to $31 trillion, an increase of 37 percent.

In addition, both periods experienced sharp, sustained inflation that affected nearly every citizen and business. The Federal Reserve Bank of Minneapolis has calculated the consumer price index (CPI) for the period from 1916 to 1920. The CPI increased 84 percent during that time. In other words, prices nearly doubled in four years. That’s a period of stunning inflation.

The United States saw significant inflation again between 2019 and 2023. The Bureau of Labor Statistics calculates that the CPI rose by 19 percent. That’s a sizeable increase in prices.

Both periods also were characterized by war, external disturbances, and regional conflicts that threatened to derail modest rates of economic expansion.

Lessons from History

Given the parallels between these two periods, it is worthwhile to look at how the United States approached issues in the 1920s. So what lessons can we learn from that earlier era?

First, great crises should yield significant changes in public policies that enhance individual well-being and prospects for economic growth. The period from 1916 to 1923 was filled with tensions and acrimonious debate on the left and the right. You had concerns about Bolshevism and socialism abroad and at home. You had concerns about immigration, about taxes, about budgets, about labor.

The political center responded to the crises back then. Sometimes the center reacted poorly, as in the restrictive immigration legislation that passed in 1924. But more often, it responded well to the problems. A notable example is the passage of the Budget and Accounting Act of 1921. This law required the president to submit to Congress an annual budget for the entire federal government. It also created the Bureau of the Budget.

The Budget and Accounting Act is far more important to U.S. history than it is given credit for. It mattered because it set up a system of classification and accounting, which allowed us to see the problem. You don’t see a problem in life unless you have a system to classify it and identify it.

Budgeting prior to World War I was primitive and slipshod. Imagine, however, what would have happened to public finance had the Harding-Coolidge administration failed to secure the Budget and Accounting Act. Without the capacity to set priorities and manage outlays, the federal government in the 1920s and 1930s would have seen truly excessive, politically driven spending. The White House would not have had the capacity to tamp it down.

But tamp it down is what President Calvin Coolidge did. Coolidge is the greatest budget president in U.S. history, largely because of the processes he established. He was able to leverage the Bureau of the Budget to balance the budget every year of his presidency. He reduced the federal debt by a third.

Compare what happened in the 1920s to what we have seen since the passage of the Congressional Budget and Impoundment Control Act of 1974. We now live in the era of the “continuing resolution,” or CR. A CR is supposed to be a stopgap measure that Congress approves to temporarily fund the federal government at current levels until a final budget can be approved. But between fiscal year 1998 and 2023, we have had more than 130 CRs. That’s more than 5 per year. In some cases, CRs have funded an entire fiscal year.

This means that we have not been making budget choices. We have not debated priorities. The budget system is badly broken.

In my view, the rapid growth in federal outlays is not as dangerous as the absence of processes to manage it. In our current debate, we get too focused on the numbers and less focused on the processes. We get 130 CRs not because of numbers but because we have processes that aren’t working.

Nothing Inevitable About Change

Another lesson comes from the sharp drop in inflation after 1920. Some economic historians regard this decline as inevitable. I doubt that. There is nothing inevitable about change. Some of the most developed countries of Europe saw sustained inflation across the 1920s. By contrast, inflation subsided in the United States after the passage of the Budget and Accounting Act. Our country experienced an exceptionally quick recovery once inflation was tamed.

The lesson here is that economic and monetary policy matters. It matters more in what it signals than in what it does.

Consider, for example, new budgetary policy that signals an improved order and predictability in public finance. Such policy can create more favorable grounds for doing long-term business with government, for commencing long-term private-­sector research and development, for growing and expanding parts of a business with long-term hurdle rates, and so forth. When the federal government signals that it is seriously controlling its own finances through new processes and new laws, it tells businesses and entrepreneurs that it is okay to take risk.

New tax policy that enhances the prospects for investment in savings can have larger-than-predicted results, solely from the serendipitous economic activity that more capital in an economy can create. When you add capital, you see growth in output and in innovation.

Finally, when government maintains orderly public finance practices, investors and businesses see it as a predictable partner. This means in part that you can price in the actions of the state. That is crucial. If government can’t be priced in, then you don’t know what your hurdle rates are or your risk ratios are. You don’t have the clear vision of the future that allows you to take risk. And serious risk needs to be taken if we’re going to change our economy in a serious way.

So my message is simple: The period after World War I, and especially the Harding-Coolidge years, offer guidance for our own confusing time. It’s a gift we should gratefully accept.

William Beach, the former head of the Bureau of Labor Statistics, is the Coffin Family Fellow at the Coolidge Foundation.