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The Great Depression and the Great Recession

The Great Depression and the Great Recession. Thomas E. Hall Department of Economics Miami University hallte@miamioh.edu. Great Depression 1929-1941. The First Recession (1929-1933) output fell 25 % price level fell 25 % money supply fell 33 % 1929-1932: stock prices fell 80%

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The Great Depression and the Great Recession

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  1. The Great Depression and the Great Recession Thomas E. Hall Department of Economics Miami University hallte@miamioh.edu

  2. Great Depression 1929-1941 • The First Recession (1929-1933) • output fell 25 % • price level fell 25 % • money supply fell 33 % • 1929-1932: stock prices fell 80% • 1928-1933: 45 % of U.S. banks failed • unemployment rate peaked in March 1933 at 25.6%

  3. What Started the 1929-1933 Recession? • Federal Reserve’s tight policy initiated in 1928 in response to: --rising stock prices & brokers’ loans --gold outflow to France

  4. Why did the recession become the Great Depression? • stock market crash (1929) • Smoot Hawley tariff (1930) • Commodity price deflation (1930-1933) • Bank failures (1930-1933) • more Federal Reserve tightening (1931) • income tax increase (1932)

  5. The Second Recession (1937-1938) • Output declined 10.4% • Price level fell 2.8% • Stock prices dropped 55% • Unemployment rate peaked in June 1938 at 20.0 % • No widespread bank failures

  6. Major Causes of Recession • Federal Reserve doubled the required reserve ratio (1936-1937) • social security payroll tax took effect (1937) • Reductions in New Deal spending • Treasury sterilized gold inflow

  7. Jobless Recoveries • Unemployment rates, 1933-1941 (December values) • 1933….21.1% 1938….16.4% • 1934….20.4% 1939….15.2% • 1935….16.4% 1940….10.9% • 1936….12.8% 1941….3.6% • 1937….15.6%

  8. Why? New Deal Programs • Placed upward pressure on wages • Promoted industry cartels • Reduced food output and raised prices • Revenue Acts (1934, 1935, 1936) • Social Security Tax (1937)

  9. 2007-2009 Great Recession • output declined 4.0% • Price level fell 0.2% • Unemployment rate peaked in Oct. 2009 at 10.0% • stock prices declined 40 % • Major cause: $13 trillion decline in wealth focused in housing and stock markets

  10. Great Depression vs Great Recession • Different causes • Different orders of magnitude • Policy responses during the recessions were much different --In particular, the Federal Reserve passively allowed banks to fail in early 1930s, aggressively created bank reserves in 2008-2009

  11. Similarities • Demand side recessions characterized by falling output and prices • Blamed on greedy Wall Street crowd • Followed by “jobless recoveries”

  12. Similar Policy Responses During Recoveries • Regulate • e.g., 1933 Glass-Steagall, 2009 Dodd-Frank • Spend – increase size of public sector relative to private sector • New Deal direct and work relief • 2009 stimulus spending • Tax • 1930s Revenue Acts, SS tax, numerous excise taxes • 2012 Taxpayer Relief Act, cigarettes, Affordable Care Act

  13. Print Money • 1930s: left gold standard, monetized gold inflow • Modern era: quantitative easing

  14. T-bill rate, 1934-1941

  15. T-bill rate, 2006-2013

  16. “Quantitative Easing”, 1930s Version

  17. “Quantitative Easing”, 2000s Version

  18. Real GDP Growth Surged in 1941

  19. In Conclusion • 1929-1933, 1937-1937, & 2007-2009 were serious economic recessions • 1930s were far worse • Government policies during the recessions much different • Government policies during the ensuing expansions similar which helps explain the “jobless recoveries”

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