On The REAL Lessons of History - Part 1

The topic today is government intervention -- bailouts.

One person talking quite a bit about bailouts these days is President Obama. Among the things he's saying is that we ought to be learning the lessons of history.

And I couldn't agree more.

And one person who is a part of history is Warren Harding, formerly President of the United States. Now Harding was a lot of things, many of them not complimentary. At least according to Wikipedia.



For example, Harding wrote his own speeches. And critics thought he oughtn't. H.L. Mencken, for one, had this to say about Harding's writing:

"He writes the worst English that I have ever encountered. It reminds me of a string of wet sponges; it reminds me of tattered washing on the line; it reminds me of stale bean soup, of college yells, of dogs barking idiotically through endless nights. It is so bad that a sort of grandeur creeps into it. It drags itself out of the dark abysm of pish, and crawls insanely up the topmost pinnacle of posh. It is rumble and bumble. It is flap and doodle. It is balder and dash."

As an aside, I find "dark abysm of pish" to be a particularly good turn of phrase.

But one other thing about Warren Harding -- which I did not see mentioned at all in the Wikipedia entry about him -- is that he was a decent economist.

Harding was President during the depression of 1920-1921.

But he did engage in government intervention in a futile and damaging attempt to "fix" things or "stimulate" the economy. He understood that such intervention would make matters worse.

But don't take my word for it.

Have a look at this important article by Tom Woods (author of the New York Times Bestseller Meltdown on the topic.

Woods includes here words straight out of Harding's mouth -- direct quotes of a man who wrote his own speeches.

Like this one:

We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.

But I think the most important part of Tom Woods' article is this:

The very ideas of fiscal and monetary stimulus stem from a misdiagnosis of the causes of economic depressions and then apply exactly the wrong remedies. The problem is not with an inadequate level of spending, but that in the wake of a central bank-induced boom, the capital structure is out of conformity with consumer demand. The recession is the period in which this mismatch is rectified through the reallocation of capital into more appropriate channels. Fiscal and monetary stimulus only interferes with and delays this purgative process.

By the way, another brick in the wall of the lessons we ought to be learning from the Depression of 1920-1921 is the experience of Japan during that time.

According to Woods, Japan's government intervened vigorously in the depression Japan experienced during 1920-1921. With the (predictable) result that the Japanese economy was paralyzed from the early 1920s until seven years later when Japan had another terrible banking crisis.

History is there to instruct.

The U.S. experience -- a very quick and robust economic recovery after a terrible and devastating collapse -- during the 1920-1921 depression can teach us a great deal.