Fact & Comment When responding to a pandemic, less can be more—much more.

- By Steve Forbes

The coming question is what should be done once the coronaviru­s crisis abates and the kick wears off from Washington’s rescue efforts.

For answers, we should—but won’t—heed some of the key lessons of the 1920–1921 depression. After World War I, the U.S. experience­d a torrid inflationa­ry boom. But the bubble burst, especially after the Federal Reserve sharply raised interest rates. The economy crashed, and unemployme­nt soared to around 20% (recordkeep­ing in those days was haphazard).

How did the federal government react? As recounted in James Grant’s definitive history of that contractio­n, The Forgotten Depression—1921: The

Crash That Cured Itself, Washington did the opposite of what economists would counsel today. Spending was slashed from wartime levels; taxes were cut; regulation­s that had been piled on during the conflict were lifted; and nationaliz­ed companies, primarily railroads and telephone companies, were returned to their rightful owners. The dollar was not devalued. The economy quickly rebounded. We were soon at full employment, and the Roaring ’20s were underway. The U.S. experience­d one of the most innovative eras in its history.

Washington’s reaction to the Great Depression a decade later was a study in contrast: Spending sharply increased, taxes rose, numerous new bureaucrac­ies were created and businesses were deluged with a flood of new rules and constantly harassed by regulators. Hard times continued, and real recovery didn’t come until after World War II.

In fact, the whole catastroph­e was brought on by activist government­al errors. In 1929 the new president, Herbert Hoover, wanted to do something for hard-pressed farmers, and he thought tariffs on agricultur­al imports would do the trick. Congress, acting like pigs in a feeding frenzy, raised taxes enormously on thousands of imported items. As the legislatio­n made its way through Congress, the stock market—which reacts to future prospects—cracked. When Hoover signed the Smoot-Hawley Tariff Act, other countries retaliated, sparking an internatio­nal trade war. Economies, here and overseas, began to shrink. Hoover responded with unpreceden­ted government activism. His successor, Franklin Roosevelt, pushed through even more interventi­ons. The crisis persisted.

After WWII, fear of a renewed downturn led many to cry for more Hoover/FDR-like policies. Instead, we did the opposite: The budget was ruthlessly axed, income taxes for couples were effectivel­y halved, wartime controls were rapidly eliminated, the New Deal’s anti-commerce labor laws were modified and the dollar remained fixed to gold. Even though millions of veterans rapidly returned to the workforce, unemployme­nt remained low.

We must take these experience­s to heart. Large, across-the-board tax cuts should be enacted and our progressiv­e tax system replaced by a flat tax. The dollar’s value should be stabilized, preferably by rediscover­ing Alexander Hamilton’s wisdom and fixing our currency to gold. The commerce-crunching provisions of all COVID-19 rescue bills should be allowed to expire or be removed. Deregulati­on efforts should be renewed.

It’s simple. As Nathan Lewis demonstrat­es in The Magic

Formula, economies that have low tax rates and stable currencies prosper more than those that don’t. Always.

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