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Austerity Successes in Previous Downturns

Posted By David Weinberger On November 9, 2011 @ 12:30 pm In Featured | Comments Disabled

The left continues [1] to resist [2] any suggestion of spending cuts right now. In their view, a depressed economy is no time to slash spending; that would only further weaken demand. The successful austerity policies adopted in response to the downturn of 1920, however, offer a clear rebuttal to this notion [3]. And this is not an isolated instance in the heap of economic history. Similar government restraint and cutbacks marshaled strong recoveries from the depressions of 1837 and 1893.

In 1837, financial panic swept the country. According to economist Jim Powell [4], the money supply fell by more than one-third for the next four years, prices fell by 40 percent, and investment fell, too. Nevertheless, output actually increased between 6 percent and 16 percent.

President Martin Van Buren was determined to get government out of the way. He met the depression head on by slashing spending and taxes. Powell points out that “Federal spending was cut from $37.2 million in 1837 to $24.3 million in 1840, and taxes (mainly tariff revenue) went down, too.”

The result? Despite the absence of a central bank (Andrew Jackson had killed it in 1836), the economy came roaring back to prosperity a few years later, from what some consider a depression worse than any other up until the Great Depression [5]. John Steele Gordon adds [6] that federal revenues more than tripled one year into the recovery. Revenues “had been a miserable $8.3 million in 1843, the lowest in decades,” he writes. “But the following year they jumped to $29 million.”

Another instance of successful government restraint was in dealing with the depression of 1893. President Grover Cleveland believed that government should impose as little cost on taxpayers as possible. Consequently, once financial panic hit in 1893, Cleveland refused to spend federal money. He vetoed a $10,000 spending measure to help farmers in Texas. His veto read [7]: “federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character.” He vetoed 299 other spending bills [7].

David Whitten of Auburn University observes [8] that “real GNP fell about 4% from 1892 to 1893 and another 6% from 1893 to 1894. By 1895 the economy had grown past its earlier peak …” Though another short contraction followed and full recovery didn’t happen until a few years later, the worst of the depression had ended.

The examples of government restraint in 1837, 1893, and 1920 demonstrate how dynamic and flexible the free market can be if left to its own devices. Though unfashionable to assert these days, the economy recovers best when government spends and taxes least.


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[1] continues: http://www.telegraph.co.uk/finance/economics/7987704/Austerity-cutbacks-are-an-economic-disaster-Nobel-Prize-winner-Joseph-Stiglitz-warns.html

[2] to resist: http://www.nytimes.com/2011/05/23/opinion/23krugman.html

[3] The successful austerity policies adopted in response to the downturn of 1920, however, offer a clear rebuttal to this notion: http://blog.heritage.org/2011/10/27/does-austerity-work/

[4] According to economist Jim Powell: http://books.google.com/books?id=HDLgbQ38v_wC&pg=PA268&lpg=PA268&dq=jim+powell+van+buren+%22to+make+government+cheaper%22&source=bl&ots=slgea9aU07&sig=JA-JJ5sfJGi0wYRd0TVO7k2Vbus&hl=en&ei=C_OuTvvQNIStgwe2nJHsDQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0C

[5] some consider a depression worse than any other up until the Great Depression: http://www.theglobalist.com/storyid.aspx?StoryId=7524

[6] adds: http://www.amazon.com/Empire-Wealth-History-American-Economic/dp/0060093625

[7] His veto read: http://books.google.com/books?id=ee3g-To2w28C&pg=PA268&dq=jim+powell+%22frugal+grover+cleveland%22&hl=en&ei=gf-uTs3qEYnVgQeltYH0Dw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC4Q6AEwAA#v=onepage&q&f=false

[8] observes: http://eh.net/encyclopedia/article/whitten.panic.1893

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