Economics: Dr. Gittelman - St. Margaret's Episcopal School

Calvin Coolidge

Draft

Calvin Coolidge

"A wise old owl lived in an oak

The more he saw, the less he spoke

The less he spoke the more he heard

Why can’t we be like that old bird?"

The poem that hung in a prominent place in the living room of Calvin Coolidge’s house characterized the new president and the image that he liked to portray. He was a quiet, sometimes cold, person who was a master of self-control. He liked jokes and had a typical New England sense of humor but William Allen White observed, "President Coolidge never grinned after his jokes to punctuate them." President Harding had been well liked, even loved. Coolidge was businesslike and efficient but with little warmth or transparency.

Upon learning of President Harding’s death, Coolidge modestly took the oath of office in his sitting room administered by his father, a notary. No pictures were taken and thirteen minutes after he took the oath of office at 2:47 A.M., Calvin Coolidge went back to sleep. He stood for "stability, confidence and reassurance," he told reporters and he went to great lengths to assure the business community that there would be no "sudden shifts" coming out of Washington. Business could feel confident with another pro-business conservative in office.

Coolidge favored continuation of much of the Harding program. He addressed Congress in December. He favored immigration restriction, for a time legislation allowing states and municipalities to issue tax-exempt securities, continuing the Harding re-organization of government and greater efforts in enforcing prohibition. He opposed American entry into the League of Nations, the proposed bonus for veterans and suggestions that foreign debts be canceled. His main recommendation in his December speech was for a 25 % across the board tax cut. He also proposed reducing the wartime surtax rates even further than his predecessor. The maximum possible tax rate, including the surtax, in 1919 was 70%. Harding had reduced that to just under 50%. Coolidge wanted it reduced even further, hopefully to pre-war rates.

Coolidge proved almost as popular as Harding winning 56.6% of the vote in a three-way race in 1924. It was the largest plurality in history although Harding had actually received more votes and a larger percentage of the total vote.

Coolidge’s Economic Policy

Calvin Coolidge had a more clearly defined economic philosophy upon entering office than did President Harding. Like Harding, he was deeply suspicious of government’s ability to improve things. He wanted a smaller government and lower taxes. Only the private sector, businessmen, laborers and farmers generated prosperity. Any government activity that stimulated the economy would be short-lived and increase the federal debt that would have to be repaid by later generations of taxpayers. His most famous public utterance may well be that "the chief business of the American people is business."

Coolidge did believe that certain government activities were helpful to business. Providing law and order, the administration of justice, the government’s defense of the peaceful enjoyment of property were all legitimate efforts on government’s part to assist commerce. While Coolidge is mainly remembered for his pro-business attitude, he was an idealistic and deeply religious man who also criticized materialism and praised idealism in many speeches. “Prosperity is only an instrument to be used, not a deity to be worshipped,” he observed in 1928.

Historians often criticize Coolidge as an opponent of progressive ideas who abhorred government but as Governor of Massachusetts, Coolidge did support things like wage and hour legislation, child labor laws, enforced safety measures in factories and worker representation on corporate boards.

Tax Reduction

The President fought long and hard for the highlight of his program, the tax cut. He emphasized over and over the deteriorative effects he believed higher and higher tax rates on larger incomes had on production. He worried that investment dollars would tend toward tax favored but benign investments and that businessmen would be unwilling to take the risks required to established new ventures that propel economic prosperity. Coolidge truly believed that high taxes, particularly on the wealthy, harmed the economy and argued that a “scientifically” revised system of lower tax rates would actually produce more tax revenues to the government. He claimed in his original tax program, passed in 1924, that only 2 1/2% of the cuts went to taxpayers with incomes over $100,000, while 70% went to those with incomes below $10,000. Dealing with the argument advanced by the Democrats that the tax cut proposal was skewed toward millionaires; Coolidge noted that the super-high marginal tax rates had reduced millionaire tax returns from 206 in 1916 gradually to 21 in 1921. The high rates, said Coolidge, “mean we are rapidly approaching the point of getting nothing at all.” (from millionaires.) This was a powerful supply-side economic argument and a sophisticated one for his day.

President Coolidge did finally ask for one tax increase that he was unable to implement despite several attempts: elimination of tax-exempt securities. Both the President and secretary of the treasury, Andrew Mellon, came to believe that allowing wealthy individuals to avoid income taxes was unfair to ordinary taxpayers. Mellon cited the estate of William Rockefeller, who died in 1922, as proof of two points in his tax plan. Rockefeller had almost his entire estate in tax-exempt bonds ($44 million.) This, according to Mellon proved that high tax rates on the rich simply forced them into “erroneous” investments that were not healthy for the economy as a whole. It also justified his point about the unfairness of tax-free investing. Unfortunately for the administration, Congress never accepted this part of the argument and tax-exempt bonds continue to be an important avenue of investing for the wealthy into the 21^st century.

Harding had reduced the top income tax rate from 77% to 56% and then to 46%. As with his predecessor, Coolidge got his tax cut with the passage of the Simmons-Longworth bill in 1924 but it was not what he had hoped for. Forced to compromise with progressive Republicans and Democrats, he settled for a top rate of 40%, far below his favored 25% rate, and he reluctantly accepted an increase in the estate tax and the imposition of a new gift tax. Disappointed, Coolidge commented as he signed the bill, “A correction of its defects may be left to the next session of Congress.”

In 1926, President Coolidge finally got a tax bill that was more to his liking. The Revenue Act of 1926 took two years to pass. It cut income taxes across the board (the maximum surtax was reduced from 40% to 20%,) repealed the newly imposed gift tax and cut the estate tax in half. About one-third of the taxpayers who paid tax in 1925 were cut from the tax rolls by the bill. Against Coolidge’s wish’s, the act did, however, increase the corporate income tax. By 1927 the President could boast, “Exemptions have been increased until 115,000,000 people make out but 2,500,000 individual tax returns.”

Tax cuts in the 1920’s, like the 1960’s, but unlike the 1980’s, did not produce budget deficits. In fact, the size of the government debt was sharply reduced as Coolidge produced large and sustaining surpluses. The debt was reduced from $24 billion to $16 billion, “a performance unequalled since the 1880’s and never repeated.”

Government Spending and Regulation

The President fervently believed that lower tax rates would stimulate the economy and benefit everyone. But he did not believe that rates should be cut without corresponding reductions in government spending. He was very suspicious about government activities in general but did support certain government efforts that appeared to assist the private sector perform more effectively. He was a practical rather than a theoretical “laissez faire” economic thinker. In the five years that Calvin Coolidge was president, total government outlays were essentially flat. In addition, they were less than ½ the expenditures of 1920, the first post war year and approximately 40% less than 1921, Harding’s first full year. Despite the expenditure cuts, it is hard to fairly characterize him as a radical budget cutter since government spending when he left office was still above the pre-war level under the more liberal Woodrow Wilson.

Coolidge did demonstrate his commitment to limiting government by vetoing two popular bills in 1924. The first would have given World War I veterans a bonus in paid up life insurance redeemable in 20 years. It was eventually passed over Coolidge’s veto and led to one of the most difficult problems of the Hoover administration when the “bonus army” marched to demand immediate payment of the promised veteran’s bonus. The second bill was a proposed salary increase for postal employees.

Coolidge, like Harding, believed that the Presidents main task was to administer the laws that Congress passed. It was not the Presidents job to propose alleviating the plight of special interest groups in society nor, in the main, was it the proper function of the Federal government. There were specific exceptions to his non-interference philosophy. In response to the great Mississippi floods of 1927, Coolidge, after initially opposing federal intervention, eventually supported a modest program of flood control with federal funding. Congress passed, over Coolidge’s objection, a much larger flood control measure that led to a major program of “river and harbor improvements that continued into the Hoover and Roosevelt administrations.” He also accepted, sometimes reluctantly, certain public works projects like the Hoover Dam.

The President’s attitude toward the regulatory agencies advanced by the Wilson administration was less than aggressive. Coolidge was especially suspicious and not supportive of business regulation. He gave little support to the Interstate Commerce Commission and its efforts to regulate and assist the railroad industry. He moved to create a protectionist majority on the important Tariff Commission. The Federal Trade Commission was, perhaps, the most obvious example of Coolidge’s “disdain for regulation.” The FTC had been created in 1914 to prohibit “unfair methods of competition.” It was given wide powers, for the day, to proceed against unfair competition, activities that tended to lessen competition. Under Coolidge several important changes in the way the FTC administered its mandate occurred. There now had to be allegations of unfair practices before an investigation could begin. No investigations would take place without allegations. In addition, the government began to “settle” most cases rather than engage in formal legal action. This had the effect of making things much easier on businesses that were being investigated. These settlements, “stipulations,” were kept confidential instead of being published. Also, defendants could now present their arguments and defenses in confidence as well. In general, “regulation in the Coolidge era was thin to the point of invisibility.”

McNary-Haugen

One blemish in the otherwise “soaring” economy of the 1920’s was farming. All three republican presidents were plagued by it’s effects. While it has been debated just how much farmers were hurting by the mid-1920s, they wanted and demanded relief, and, they were politically powerful beyond their mere numbers.

The McNary-Haugen bill was a plan that would support farm prices by setting up a government agency that would purchase certain surplus crops from farmers and then market them abroad. The crisis of post war farming had largely subsided by 1924 but there was still surplus production in many crops. McNary-Haugen would remove these surpluses allowing domestic prices to rise and help the farmers.

The measure was controversial, even among the farm community. Midwestern farmers tended to support it while cotton farmers in the South and West tended to oppose it. The President believed strongly that increasing agricultural prices would lead farmers to just produce more crops and make the subsidies that the government would have to buy increase significantly. He opposed the bill and with his support the measure was defeated in the House in June of 1924.

The idea was far from dead however as it was again introduced in 1926. Coolidge and his Treasury Secretary, Mellon, again opposed it, but this time, after some revisions, it passed both houses. The President promptly vetoed it. Coolidge “hit hard at the idea of special relief for one segment of the population at the expense of others.” Congress was unable to muster enough votes to pass it over the President’s strong veto but they did pass another version in 1928 and once again Coolidge vetoed it objecting to the “price-fixing” and new bureaucracy it would create.

The President was vehement and articulate in his opposition to all forms of McNary-Haugen. He believed that lower taxes and reduced government spending would lead to a freer and more democratic country. McNary-Haugen, he believed, was a direct threat to everything he understood about the relationship between government and the people. Government should remain out of the economy. Coolidge stated his philosophy clearly, “When we contemplate the enormous power, autocratic and uncontrolled, which would have been created by joining the authority of government with the influence of business, we can better appreciate the wisdom of the fathers in their wise dispensation which made Washington the political center of the country and left New York to develop into its business center.”

The McNary-Haugen idea would not die easily and was introduced again during the Hoover administration but met the same fate.

Agricultural Policy

While the President did not support the various McNary-Haugen proposals, he was not blind or indifferent to the plight of agriculture. Politically, farmers were hard to ignore. He convened an agricultural conference in February of 1924 which recommended, again, higher tariffs on imported agricultural products and a plan for expansion of credit to farmers under the Federal Farm Act of 1916. This did bring somewhat lower interest rates for farmers in debt but did little to really solve the “problems” of farmers in general.

Once elected in his own right in 1924, the President, supported by Secretary of Commerce Hoover, turned to the idea of farm cooperatives. He believed that the “trouble with agriculture at the present time is in the marketing end.” If farmers could just organize themselves to offset the powerful middleman, he could “secure the results of his industry.” The proposal developed, known as the Jardine-Tincher plan, never really had much impact. The cooperatives were voluntary allowing non-members to take full advantage of the ability of a cooperative to influence prices. Why join? The cooperatives were weak, unable to discipline members and unable to control non-members. “The whole situation quickly became impossible.

Help for the farmers never came under Coolidge partly because the President didn’t believe in it. He was convinced that higher agricultural prices, the objective of almost all ideas suggested, would only lead to increases in the surpluses. In this, he was supported by most of the economists of the day.

Labor

As Governor of Massachusetts, Calvin Coolidge had supported wage and hour legislation, safety measures in factories, worker representation on corporate boards and had opposed child labor. Some historians argue that Coolidge, as President, was indifferent to the workingman’s concerns. Why did he not support such measures as President? The answer is simple; he considered these matters the responsibility of the state and local governments. Coolidge warned against the idea of a “strong” presidency and believed deeply in the founding fathers division of responsibility between the federal and local governments. Franklin Roosevelt, four years later, legitimized the idea of an “Imperial President.” It was a philosophical distinction not indifference that characterized Coolidge’s seeming inaction toward labor. He was clearly not anti-labor.

Figure 1

It is also true that the labor movement was not flourishing in the 1920’s. Union membership declined from 5.1 million in 1920 to 3.4 million in 1929. Most of the decrease occurred before 1923 and was not attributable to President Coolidge directly. Workers were doing better (the percentage of national income that went to salaries and wages had increased from 52% in 1913 to 56% in 1925) generally and unions seemed unwilling to organize unskilled workers in basic industries. Steel, electrical equipment, rubber, cement, textiles, chemicals and food remained without unions. Union leadership tended to be more conservative than militant, John L. Lewis, head of the United Mine Workers, was a republican and voted for Herbert Hoover and probably for Coolidge. Strikes diminished by the mid 20’s. Workers came to accept and live with domination by big business.

Figure 2

The President accepted the conditions of labor as they were. He had little interest in getting involved. Labor relations were so good that the President stated in his 1927 message to congress that… “Industrial relations have never been more peaceful.” He did make many speeches that honored work and workers as the backbone of America. Coolidge was not anti-labor, as his record as Governor of Massachusetts indicates, and in 1926 he signed the Watson-Parker Act that endorsed collective bargaining and instituted the first cooling-off procedures in labor history.

The Booming Coolidge Economy

Taken as a whole, the five year Coolidge “Boom” was not as spectacular as it seemed to many at the time. The gross national product (GNP) grew at an average rate of 2.83%, good but not fabulous. Adjusted for inflation the “real” GNP actually averaged a 3.07% per year growth rate. The inflation rate was essentially flat, the consumer price index (CPI) actually declined slightly. Wage rates increased an unspectacular .7% per year and union membership was essentially flat (the large decrease in union membership had actually occurred under Harding.) One area in which Coolidge clearly could and did claim great success was in federal finances. Despite his sizeable tax reductions, the government ran a substantial surplus each and every year of his administration. Receipts to the federal government actually exceeded expenditures by $4.4 billion during Coolidge’s years in office. Even more impressive, government expenditures totaled only 77% of receipts. Calvin Coolidge actually ran an average of a 23% surplus over 5 years. This was the equivalent of eliminating the entire Defense Department plus the entire Department of Health and Human Services today. It was quite a feat for a President that cut tax rates as much as any other president in U.S. history.

Figure 3

Coolidge, himself, was fairly modest in his claims about the prosperity of the mid 1920’s. In one press conference he itemized his administrations accomplishments by bragging in his understated manner that “It hasn’t (his tenure in office) had any marked commercial or financial depression…. Wages have been slightly increasing. There has been no time that there has been any marked lack of employment.” When he turned to federal finances, Coolidge was less modest. “There have been great accomplishments in the finances of the national government, a large reduction in the national debt, considerable reduction in taxes.”

Calvin Coolidge was a fiscal and prudent person. He ran the federal government in that vein. He reduced the national debt, incurred largely during wartime, by $5.4 billion, roughly 24%. In total, his tax cuts are the largest, in percentage terms, in modern American history. The economy performed well but what labeled the period, as a boom era was the controversial performance of the stock market. Stock prices, as measured by the Dow Jones Averages, increased an average of 25% per year during the Coolidge era. The increase in 1928 alone (Coolidge’s last year in office) was 50%. This was the best performance over a comparable period in U.S. history.

Figure 4

Despite these impressive accomplishments, historians have not generally been kind to President Coolidge. Within a year of his leaving office (he chose not to run again,) the great depression began and history’s judgment on Coolidge’s performance has, understandably, been largely colored by what transpired after he left office. Many have speculated that he should or could have done something to prevent the catastrophe that befell the American people after his term. Others felt that his major failure was in not understanding the dangers that lurked in the economic waters.