Sharpest U.S. Recession Since 1938: -1.9 Percent of GDP
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The Numbers:
Worst recorded* U.S. recessions, real-dollar GDP contraction:
1932: -13.0%
1930: -8.6%
1931: -6.4%
1938: -3.4%
1982: -1.9%
* GDP statistics were invented in the early 1930s. Data cover only years since 1929. Also note an 11 percent contraction in 1946, due to demobilizing the World War II army.
What They Mean:
An industrial downturn early in the year, a financial hurricane in the autumn. In this sense, this year's events resemble those of 1929. But those prone to quick 1930s analogies should stay cool. This year's events also resemble the crashes of October 1907 and August 1987, which left lasting marks on financial-community memory but not on American history generally. The events of 1930, 1931, and 1932 -- to this day, the three worst years ever measured for the U.S. economy -- made the Depression. Three policy errors turned once-in-a-generation financial upheaval into once-in-U.S.-history disaster:
- Domestic finance & banking: Government would not act as "lender of last resort" and provide temporary funds to healthy companies and financial institutions. Between 1930 and 1932, 9,000 banks failed (two-fifths of the banks in the United States). Given the lack of deposit insurance until 1933 (except in Massachusetts, which set up its own insurance fund), depositors lost their money.
- Spending and budget: Government did not spend and borrow to keep up demand as the private sector contracted. In fact, especially in 1931 and 1932, it did the opposite, by simultaneously cutting spending and raising taxes so as to ensure short-term budget balance.
- International: Rather than coordinate, governments in the United States, Europe, and Asia first imposed tariffs and import restrictions in 1930, then began devaluing their currencies. The result was a crash in trade when in 1929 exports were rising and providing some modest help for an economy less dependent on trade than today's.
Between 1930 and 1932, two-fifths of America's banks failed, trade fell from $9.6 billion to $2.8 billion, unemployment rose from 2.9 percent to 24.9 percent, and constant-dollar GDP shrank from $104 billion to $76 billion. None of America's postwar troubles compare; the worst recessions, those of 1974-75 and 1982, are pale shadows of the experience of any of the three years 1930, 1931, and 1932.
Overseas, the only experience comparable to the United States in 1930, 1931, or 1932 seems to be Indonesia's 13 percent contraction during the Asian financial crisis in 1998. A few other countries, suffering from civil war or extreme misgovernment, have had prolonged contractions like that of the early 1930s. Examples include Burma during the 1980s, and North Korea, Congo, and Sierra Leone in the 1990s. Zimbabwe is this decade's example, with GDP shrinking by 40 percent since 2000.
Further Reading:
Now -- Governments to date, whatever mistakes they may make, are not repeating those of 1930. Congress passed its bailout package, the Treasury Department and Federal Reserve are using it, other countries are doing the same, and governments are more often cooperating than fighting. Some perspectives from various angles --
The International Monetary Fund on the lessons of the 1930s for today:
http://www.imf.org/external/pubs/ft/survey/
so/2008/NEW101308A.htm
House Banking Committee Chairman Barney Frank on domestic finances:
http://www.house.gov/frank/economiccrisis101108.html
Federal Reserve Chairman Bernanke:
http://www.federalreserve.gov/newsevents/
speech/bernanke20081015a.htm
Senate Finance Committee Chairman Max Baucus on Asian trade policy:
http://finance.senate.gov/press/Bpress/
2008press/prb090508A.pdf
U.K. Prime Minister Gordon Brown on the crisis in Britain, and international cooperation with Europe and the United States:
http://www.number10.gov.uk/Page17163
And some looks back, at The Depression economy --
U.S. GDP -- The Bureau of Economic Analysis has GDP data back to 1930:
http://www.bea.gov/national/index.htm
Earlier data aren't official. (The mighty Simon Kuznets didn't develop our modern national income accounting -- GNI, GNP, GDP, etc. -- until the 1930s.) But Economic History.net compensates with an online service providing GDP estimates from 1790 onward. Its estimates suggest that the United States did not have an actual recession until 1874 and that the 1892, and especially 1907, recessions would rank in the top five:
http://www.measuringworth.org/usgdp/
World economy: Northwestern University preserves the League of Nations statistical yearbooks. Page 168 of the 1932-33 edition has the 1929-1933 trade collapse. (In 1929, world exports hit $33 billion; by 1932 they were below $13 billion.)
http://www.library.northwestern.edu/govinfo/
collections/league/stat.html
The markets -- The 1929 crash cut the Dow Jones industrial stock index from a peak of 381 in September 1929 to 199 in November. This 48 percent drop was comparable to the 40-percent drop since October 2007, the 46-percent drop in the crash of October 1907, and the 36 percent crash in the summer of 1987. Dow Jones graphs the 1920s market:
http://www.djindexes.com/mdsidx/
index.cfm?event=showavgDecades&decade=1920
And the remembered man -- No bad president ever gets called "another Warren Harding" or "another James Buchanan." "Another Herbert Hoover," eight decades later, remains a political rock picked up and thrown during almost every election. Why? Hoover was not a bad man like Buchanan and Richard Nixon, nor a depressive alcoholic like Franklin Pierce or Andrew Johnson, nor a bumbler like Harding. The sympathetic take is that Hoover's story is one of tragedy -- a capable, intelligent man whose ideas were wrong for the time and whose administrative talent made sure they stuck -- rather than a story of incompetence or malevolence. A sympathetic but not un-critical bio from the Hoover Library:
http://hoover.archives.gov/exhibits/Hooverstory/index.html
Hoover's personal Depression villain was Andrew Mellon, the Treasury Secretary. Hoover inherited Mellon from former president Coolidge, who in turn had gotten him from Harding. Hoover's bitter retrospective: "Mr. Mellon had only one formula: liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." (This is probably even harsher than it sounds -- the Soviet OGPU began using the word "liquidate" as a euphemism for "shoot" in 1924.) The Treasury Department's Mellon biography:
http://www.ustreas.gov/education/history/
secretaries/awmellon.shtml
On the other hand, Hoover could have fired Mellon, and his 1929 State of the Union address -- December 3, 1929, six weeks after the crash -- is striking for its indifference to crisis. The 11,000-word speech opens with a discussion of the Kellogg-Briand Pact on the prevention of war and mediation of a boundary dispute between Chile and Peru; midway through gives 514 words to the crash and its implications, assuring the public that the worst is over; then moves on to call for higher tariffs and discuss highways, post offices, and the state of the water projects at Muscle Shoals and Boulder Dam. The SOTU, 1929:
http://www.presidency.ucsb.edu/ws/index.php?pid=22021