The Great Depression (1920–1940)

After the end of World War I, President Woodrow Wilson, unable to convince Republicans in the Senate to ratify the Treaty of Versailles, stated emphatically that the American people should settle the issue of the League of Nations in the presidential election of 1920. Democrats and Republicans both nominated Ohioans, James Cox on the Democratic, pro-League platform and Senator Warren G. Harding on the Republican ticket. Harding hoped to attract both conservative and liberal votes by skirting the troublesome issue of the League of Nations on a platform neither for the League nor against it. Imprisoned labor leader Eugene V. Debs also ran on the Socialist Party ticket and did surprisingly well considering his imprisonment and the anticommunist sentiment of the day.

Harding's noncommittal stance paid off on Election Day, as he defeated Cox by a margin of more than 7 million popular votes and won 404 electoral votes to Cox's 127. As a result of the 1920 ratification of the Nineteenth Amendment, the election was the first time women had voted in a national election in American history.

Harding's election meant big bucks for big business. The anti-trust gains made by Wilsonian progressives went out the door as a new age dawned for fat-cat tycoons and good old boys in the Republican Party. Ironically, though, many of Harding's pro-business policies hurt the American economy in the long run. First, the sudden free-for-all in the market led to speculation and corruption. Speculators began using future earnings on the stocks they owned—money they did not even have yet—to buy new stocks, a process known as “buying on margin.” This overspeculation, along with widespread corruption and faulty international finances, eventually led to the stock market crash of 1929.

Moreover, the steep Fordney-McCumber Tariff prevented Europe from exporting goods to the United States to boost its economy after the war. Europe was deeply in debt and needed to sell goods to American consumers to pay off loans owed to the U.S. government. Harding's new tariff sparked an international tariff war that brought international trade to a virtual standstill.

Conservatism flourished under Harding as the president distributed rewards to big business and limited benefits for average American workers. In 1923, for example, the Supreme Court ruled in Adkins v. Children's Hospital that women workers did not merit special labor protection from the government, because they were now enfranchised and could theoretically protect themselves. This decision effectively reversed the previous 1908 Muller v. Oregon ruling.

Meanwhile, Congress passed the Esch-Cummins Transportation Act in 1920, which deregulated railroads, putting their control back into the hands of plutocratic owners. In 1922, Harding and Congress also passed the Fordney-McCumber Tariff, which drove taxes on foreign goods up to almost 40 percent to protect American industry. Such conservative measures, combined with the federal government's new willingness to break strikes using force, caused a drastic drop in labor union membership throughout the country.

Harding's foreign policy was likewise dominated by conservatism. Although Secretary of State Charles Evans Hughes opened negotiations for American rights to oil in the Middle East, the president focused mainly on maintaining the status quo and reducing American involvement abroad.

In 1922, the United States convinced Britain and Japan to sign the Five-Power Naval Treaty, which would reduce the number of battleships each country had in the Pacific to a ratio of 5:5:3, respectively. The United States and Britain promised not to fortify their Pacific bases but allowed Japan to fortify its bases to counter the battleship imbalance. The United States also signed the Four-Power Treaty with Britain, Japan, and France, which forbade the countries from acquiring new possessions in the Pacific, while the Nine-Power Treaty upheld John Hay's old Open Door policy in China.

During this period of American isolationism, events were unfolding around the world that would have catastrophic consequences later on. In Germany during the 1920s and during the Great Depression, a man by the name of Adolf Hitler began to gather a tremendous political following as he proposed solutions to Germany's economic problems and promised to make the Fatherland strong again. Desperate Germans clung to Hitler's rhetoric, as hyperinflation was causing the German mark to fall in value literally by the minute. This inflation in Germany became so extreme that prices of meals at restaurants would increase significantly between the time patrons started eating and the time they finished.

Japan, meanwhile, was capitalizing on the Five-Power and Four-Power treaties by strengthening its presence in East Asia. It had had its eyes on the Manchuria region of China for years and was waiting for the right moment to take it.

At home, Harding's deregulation of big business led to government scandal and corruption that tainted his presidency. The most notorious scandal during his term was the Teapot Dome scandal of 1923, which erupted after a private company bribed the secretaries of the interior and navy to overlook the illegal drilling of oil from government lands in Teapot Dome, Wyoming. Harding himself was implicated in the scandal but died later that year before anyone made any serious accusations. He was replaced by the even more conservative Vice President Calvin Coolidge.

A year later, the American people elected Coolidge president in yet another three-way election. Coolidge's opponents were Democrat John W. Davis and the recently revamped Progressive Party's nominee, Robert La Follette. La Follette campaigned for more debt relief and protection from big business and a constitutional amendment to revoke the Supreme Court's power of judicial review. Coolidge won a landslide victory, though La Follette did receive thirteen electoral votes.

With business burgeoning at home, Coolidge focused on foreign policy. At the time, Germany was suffering from extreme hyperinflation in the aftermath of World War I due to unrealistic French and British demands for war reparations. In 1924, Coolidge and Vice President Charles Dawes drafted the Dawes Plan to assist Germany by setting up a new timetable for its reparations payments.

Under the plan, U.S. banks issued long-term loans to the German government; France and Britain then used the German reparations to pay back the billions of dollars they themselves had borrowed from the United States during the war. For a time, the system worked: Germany had a little breathing room, while France and England were able to maintain their credit by paying off war debts to Washington. Meanwhile, American bankers reaped huge profits from the plan.

The U.S. stock market crash of 1929 (see The Depression Begins, p. 5), however, changed everything. Suddenly, the United States needed the money it was being paid as badly as the other countries involved in the plan, and U.S. banks refused to issue any more private loans to Germany. Germany, therefore, could not pay France and Britain, who then had to default on their loans to the United States. Neither American investors nor the U.S. government ever saw the money again, and the United States came away from the Dawes Plan looking like greedy backstabbers in the eyes of Europe.

In 1928, President Coolidge and Secretary of State Frank B. Kellogg touted the signing of the multinational Kellogg-Briand Pact, a rather naive agreement that “outlawed” war in an attempt to ensure that World War I was the “war to end all wars.” The pact specified virtually no means of enforcement and was thus effectively useless. More than anything, it was a reflection of American public sentiment during the peak of prosperity in the late 1920s: Americans began to feel that if another world war erupted, the United States should not have a part in it. Many Americans wanted a return to the neutrality and isolationism that George Washington originally advocated, leaving Europe to solve its own problems.