Steve Forbes offers Forbes magazine readers a history lesson that could help guide economic policy after the COVID-19 pandemic.

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.

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