How to stop a depression in it’s tracks, and how to prolong one. From George F. Smith at lewrockwell.com:
It’s been said there’s no such thing as a controlled experiment in the social sciences, including economics. But we had something close to a laboratory experiment back in 1920-1921 and 1930-1931.
In each of these periods there was a depression. Unemployment was high – for awhile — it was higher in the 1920s than in the 1930s. Prices were falling in both periods.
In the 1920-21 depression, the Federal Reserve Bank of New York crashed the monetary base, thereby reducing the money stock, and jacked interest rates to record highs.
In the 1930-1931 depression, the federal reserve gradually increased the monetary base and lowered the interest rate.
In the 1920-21 period the government slashed spending and allowed nominal wages to fall.
In the 1930-31 depression the government increased spending and deficits while pressuring industrial leaders to maintain wage rates.
Coming out of World War I the highest marginal income tax rate was 77%. First Harding, then Coolidge (following Treasury secretary Andrew Mellon’s advice) lowered tax rates steadily in the early 1920s. By 1925 the highest tax rate was around 25%. Tax receipts began to climb, as people stopped playing defense and looked for ways to grow their income. As incomes increased, so did tax revenue in spite of the lower rates.
In 1932, Hoover pushed through one of the highest peacetime tax increases in U.S. history. A person making above a million dollars in 1931 could keep 75 cents on the dollar; a year later the amount plunged to 37 cents. In the lowest bracket, rates more than doubled. Along with this were countless taxes on items that had never been taxed. From 1931 – 1933, revenue from the individual income tax dropped by more than half. By 1933, the economy was at the depth of the Depression.