The Magazine

Time for Another Harding?

How a much-derided Republican president actually succeeded in cutting the budget and fixing the economy.

Oct 24, 2011, Vol. 17, No. 06 • By ALLIS RADOSH and RONALD RADOSH
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The presidential campaign was heating up, and the progressives in office were nervous about their chances of holding the White House. It was unclear at first which contender for the Republican nomination would get the nod, but when the candidate eventually was chosen they denounced him as “a confirmed and hopeless reactionary.” 

Photo of President Harding

The year was 1920, and they were talking about Warren G. Harding. The editor of the New Republic foresaw dark days: Though no fan of the Democratic candidate (James Cox), Herbert Croly expected Harding’s Republicans to concede nothing to the progressives. The United States, he wrote shortly before the election, was about to enter eight years of “reaction, prolonged and untempered.” 

And indeed, Warren G. Harding has come to be thought of as one of the worst presidents America has ever had. Yet the truth about his presidency is quite the opposite. He achieved a good deal more in the two and a half years he served before his sudden death than many presidents accomplish in a full term. A popular newspaper publisher and senator from Ohio, Harding won the presidency in a landslide, with 60 percent of the popular vote, the highest share ever recorded up until that time. The handsome, warm, gregarious, and modest Harding was a natural politician, known in the Senate for his ability to bring opposing sides together. He was as different from his predecessor—the by-then unpopular Woodrow Wilson, perceived by many as a rigid, unapproachable ideologue—as one could possibly be.

The outlook was certainly bleak for America when Harding took office in 1921. The country’s entry into World War I in 1917 had resulted in an economic bubble. Wartime demand kept employment, wages, and profits high, while the Federal Reserve inflated the money supply. Under Wilson, not only the Army and Navy but the entire federal government grew at a fast clip, and the national debt skyrocketed, from around $1 billion in 1914 to $24 billion in 1920.

When the war ended in November 1918, Wilson’s lack of planning for demobilization meant that four million soldiers were sent home under chaotic conditions with little money and few benefits. Demand fell, bringing bankruptcies, business closures, and rising unemployment. During the depression of 1920 to 1921, industries cut back production, many of them running half-time. The drastic drop in wholesale prices hit farmers hardest, causing the price of farmland to collapse. When African-American soldiers returned home after fighting abroad for democracy and couldn’t find jobs, they felt they were once again being relegated to second-class status. The result was race riots throughout the Midwest’s industrial belt.

Harding promised to heal the nation and return it to prosperity—to “normalcy,” as he called it. He would turn things around by lowering taxes from their wartime highs, reducing the debt, balancing the budget, and making the government smaller and more efficient. Taxes, he thought, had become so high they were counterproductive, preventing the revival of business. Harding had campaigned on this platform, and once in office he faithfully carried it out. 

To Harding, America was an exceptional country whose citizens enjoyed equal opportunities to develop their abilities, and whose success ultimately depended on a dynamic free market. At no time did these principles stand in such stark relief as in 1920, three years after the Bolshevik Revolution. During the campaign, Harding delivered his message to over 600,000 people who traveled to Marion, Ohio, to hear him speak from his front porch. Some of them were African Americans, a majority of whom supported the Republicans, the party of Lincoln. He told them: 

Abroad, particularly in Russia, there has grown up the idea that by some impossible magic a government can give out a bounty by the mere fact of having liberty and equality written over its door, and that citizenship need make no deposit in the bank of the common weal in order to write checks upon the bank. Here at home we have had too much encouragement given to the idea that a government is a something for nothing institution. .  .  . It is only in a country where the merit, capacity and worth of men and women are recognized and rewarded that merit, capacity and worth are developed. 

You and I, and good Americans of whatever color, blood or creed, know that the aspiration of all men is equal opportunity, and that no injustice known to man can be greater than that of the tyranny and autocracy that .  .  .  enslaves all men and all their ambitions and all their freedom.

Harding was inaugurated on March 4, 1921, and he immediately tackled the crisis. He called for a special joint session of Congress, to take place before the legislators were officially scheduled to convene. At the session, Harding laid out his agenda and priorities. His ambitious program included: tax reform, continued tariff protection, legislation to help farmers, creation of a national budget system to help get government spending under control, construction of a great merchant marine, a system of national highways for interstate commerce and the “motor car” (financed with local and state bond issues), encouragement of aviation technology for civilian and military purposes, increased federal participation in international cable and radio transmissions, a Veterans’ Bureau, and a Department of Public Welfare to help women and children. 

Harding also called for a federal antilynching law, to “rid the stain of barbaric lynching from the banner of a free and orderly representative democracy.” And he proposed creation of an interracial commission to promote better relations between the races. Woodrow Wilson had introduced segregation into the federal government; Harding urged his cabinet to appoint qualified blacks to their departments, and in speeches he attacked the Ku Klux Klan. The legislation he championed, however, came to naught. When the Republican majority in the Senate was ready to pass the antilynching law Harding favored (the Dyer Bill), Southern Democrats killed it with a filibuster. The proposal for an interracial commission died in committee.

But at the top of the president’s list was setting the country’s economic house in order. During the war, he told his former colleagues, “our expenditures were so little questioned, the emergency was so impelling, appropriation was so unimpeded that we little noted millions and counted the Treasury inexhaustible. .  .  . A continuation of such a course means inevitable disaster.” A way must be found, he continued, “to restrict our national expenditures within the limits of our national income, and at the same time .  .  . lift the burdens of war taxation from the shoulders of the American people.” 

To help achieve his goals, Harding was determined to put together a stellar cabinet, and for the most part he did. To instill confidence in the business community he chose Andrew Mellon as secretary of the Treasury. He picked Herbert Hoover to be his secretary of commerce. He admired Hoover’s work as head of the American Relief Committee during the war and believed he could help the country gain access to new world markets. Charles Evans Hughes, former governor of New York, was tapped to be secretary of state and Henry C. Wallace secretary of agriculture. 

Harding had originally wanted Charles G. Dawes to be his Treasury secretary. Dawes, a banker and successful businessman, had served as President McKinley’s comptroller of the Treasury and had a reputation for efficiency and for getting results. Harding had been intrigued by a magazine article Dawes had written entitled “How a Presi-dent Can Save a Billion Dollars.” After the election, he asked Dawes to come to Marion and offered him his first cabinet appointment, secretary of the Treasury. But Dawes rejected the offer. If Harding was truly interested in balancing the budget and reducing the debt, he told him, the secretary of the Treasury was not the man to do it. It would have to be done through legislation providing for an executive budget. If such an act were passed, then Dawes wanted to head the Budget Bureau.

There was general agreement in Washington that the federal budget process was a mess. For over a hundred years each department had submitted its own budget with little coordination or control. Wilson had tried to get a bill passed dealing with the budget process, but had failed. Now Harding stepped up. The Budget and Accounting Act passed on June 10. It placed the new Budget Bureau—predecessor to today’s Office of Management and Budget—in the Department of the Treasury, but made it accountable to the president. Harding appointed Dawes its director. Dawes agreed to take the job on two conditions: that he would have the president’s complete support and that he would serve for only one year, allowing him to set up effective operating procedures so that the bureau could carry on without him. 

On June 24 a meeting was held in the auditorium of the Interior Department attended by the president, Vice President Calvin Coolidge, the cabinet, and 1,200 bureau and division chiefs. Harding began by telling his audience, “There is not a menace in the world today like that of growing public indebtedness and mounting public expenditure.” It was imperative that this trend be reversed. Dawes then explained that the purpose of the new bureau was to help all present get rid of the “fat” in their budget requests, and to reduce unnecessary expenditures. The bureau was to be nonpartisan and existed only to gather information and inform the president. He then asked those in the audience on whom he could count to please stand up. Everyone stood. 

Dawes was not in a good mood at the next meeting. While he was receiving cooperation in his campaign for economy from many quarters, it was being sabotaged in others. To make his point he held up two brooms: one an Army broom made to Army specifications, the other a Navy broom made to Navy specifications. The Army had 350,000 surplus brooms, and the Navy needed 18,000. But the Navy rejected the suggestion that they take the Army’s excess brooms because those were wrapped with twine instead of wire. In the end, the Army sold their surplus brooms at low prices to speculators who turned around and sold them at a hefty profit, and the Navy went out and bought new brooms at top prices. If such a thing had occurred in a private business, Dawes said, the person responsible would have been immediately fired. 

By the time Dawes’s year was up in June 1922, the federal budget had been balanced, revenues exceeded expenditures, and the public debt had been reduced. Dawes had exceeded his promise to help the president save a billion dollars: Federal spending had dropped from $6.3 billion in 1920 to
$5 billion in 1921 and then $3.3 billion in 1922. When Dawes left, he took two brooms home with him as mementoes. 

While Harding had presented Congress with the nation’s first coordinated federal budget, he had also approved passage of the Revenue Act of 1921, which eliminated the World War I excess-profits tax, settled on a corporate tax rate of 12.5 percent, brought the top marginal income tax rate down from 73 percent to 58 percent, decreased surtaxes on incomes above $5,000, and provided increased exemptions for families. 

Harding was consistent in his dedication to fiscal responsibility, even when he knew it would be unpopular and go against his own instincts. Such was the case with the bonus voted by Congress for World War I veterans. Harding’s pledge to cut taxes conflicted with the desire of Congress and the public to grant the veterans a generous bonus, paid for with deficit spending. Harding felt so strongly about the issue he appeared before a special joint session of Congress to make his case. While he sympathized with the impulse to grant the bonus, the country needed tax relief to get back on its feet and could not afford to do both. If Congress wanted the bonus, it would have to find the revenues to pay for it. 

Congress was shocked that the president would oppose the bonus, and many Republicans were furious with him, since they would shortly face an election. But Harding vetoed the bill, as he had said he would, writing that while the nation owed much gratitude to those who had served, the burden of high taxes affected every American citizen. “To add one-sixth of the total sum of our public debt for a distribution among less than 5,000,000 out of 110,000,000, whether inspired by grateful sentiment or political expediency, would undermine the confidence on which our credit is [built] and establish the precedent of distributing public funds whenever the proposal and numbers affected make it seem politically appealing to do so.” 

Harding died of a heart attack on August 2, 1923, having fulfilled his goal of restoring prosperity. The night of his death, his wife Florence had been reading an article to him from the Saturday Evening Post entitled “A Calm Review of a Calm Man” by Samuel G. Blythe. “There is nothing so political as the Presidency,” Blythe observed, “and the better a politician a President is the better President he will be.” Blythe reminded his readers that things had been in a bad way when Harding came into office, but now America was “the only legitimately prosperous country in the world.” Prosperity, he continued, “extends from coast to coast, from the Canadian border to Mexico. Labor is universally employed at high wages. Money is plentiful. All lines of business are flourishing. And there is no other country in the world of which this can be said.” 

Blythe’s account was accurate. Harding’s policies, put into practice by men like Charles G. Dawes, succeeded in turning the country around. This was not easy with a fractious Republican party at odds over regional and economic issues. Nevertheless, Harding cut income tax rates for Americans at every income level. According to economist Benjamin Anderson, employment and businesses rallied as a result of “a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise.” 

It had been Harding’s hope that inequality of income would decrease as foreign markets expanded, creating more economic opportunities; he worked hard with Herbert Hoover and Charles Evans Hughes to achieve this. Harding also modified his position on the tariff, coming to favor a degree of flexibility. He entered the White House having won an overwhelming mandate. He succeeded in healing a divided country by combining fiscal conservatism with some socially progressive attitudes. His efforts to end lynching and his belief in racial equality showed him to be more enlightened than many of his countrymen. They entitle him to be regarded as one of the first modern civil-rights presidents.

The policies of Harding and his successor Calvin Coolidge were undone in the 1930s, when President Hoover adopted the statist measures that laid the foundations for what would become the New Deal. With the election of Franklin D. Roosevelt, a new kind of welfare state was created, and progressivism began once again to flourish. Surveying the situation in 1940 after the economy’s downturn and what people were beginning to call a new Roosevelt depression, Dawes penned a warning:

Some day, a President, if he is to save the country from bankruptcy and its people from ruin, must make the old fight over again, and this time the battle will be waged against desperate disadvantages. Against him will be arrayed the largest, strongest, and most formidably entrenched army of interested government spenders, wasters, and patronage-dispensing politicians the world has yet known.

Dawes was prescient. As the old fight is once again being waged, we can only hope that the president Americans elect in 2012 will be as much of a “reactionary” as Warren G. Harding—and as much of a success.

Ronald Radosh is an adjunct fellow at the Hudson Institute and a writer for Pajamas Media. Allis Radosh is a historian. They are coauthors of A Safe Haven: Harry S. Truman and the Founding of Israel and are writing a book on the presidency of Warren G. Harding.

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