FAQ’s about the “Great Depression” and the “Great Recession”
This post is a guest contribution by Paul Kasriel and Asha Bangalore, vice president and economist at The Northern Trust Company.
There have been frequent questions from clients and partners about the “Great Depression” and the recent recession, which is often called the “Great Recession.” Here are five important aspects that should help to put the two periods in historical perspective.
Q1 What is the duration of these two downturns in economic activity?
Q2. What is the magnitude of the decline in real GDP during these two periods?
Q3. What was the unemployment rate during the Great Depression? Has the labor market suffered a similar deterioration this time around?
The unemployment rate during the Great Depression hit a high mark of 24.9% in 1933 (Chart 3) when roughly 12.8 million people were out of jobs. This time around, the peak of the jobless rate was 10.1% in October 2009 and holding at 9.1% in July 2011. If folks who are working part-time but want full-time jobs and those marginally attached to the labor force are considered unemployed, the jobless rate peaked at 17.1% in September 2009 (see Chart 4). Based on these numbers, the labor market setback is also smaller now compared to the 1930s.
Source: Labor Force, Employment, and Unemployment 1929-39, Estimating Methods, Monthly Labor Review, July 1948.
Q4. What was the extent of deflation in the Great Depression? Did the U.S. economy experience a deflation in the Great Recession?
The Consumer Price Index (CPI) fell during 1930-33 and again in 1938-39 (see Chart 5). A deflationary experience of this nature has not been occurred in the US during the entire post-war period, with the exception of 2009 (see Chart 6). The Fed’s aggressive and innovative monetary policy measures put in place during 2007-2011 were to a large extent to prevent another deflationary episode in the US economy. The Fed has succeeded in containing deflation to a single year this time around, mainly because it drew valuable lessons from its 1930s experience.
Q5. We have written extensively about the importance of tracking Monetary Financial Institution (MFI) credit in the economy (sum of Fed credit and bank credit) to establish if self-sustained economic growth will be in place. How did Fed and bank credit perform during the Great Depression?
Loans and investments of all banks (bank credit) fell each year from 1930-1933 and once again in 1937, while Fed credit fell in 1929 and 1930 and rose slightly during 1931-33 (see Chart 7). The significant drop in bank credit is what stands out during this period (see Chart 7). Consequently, the sum of bank and Fed credit, MFI, fell during both phases of a decline in economic activity of the Great Depression (see Chart 8). Our view about MFI credit is that, historically, it explains a large part of the growth in GDP. The monthly U.S. commentaries of March 2011 (To QE or Not to QE? That is the Question) and April 2011(The Fed Terminates QE1, We Lower Our GDP Forecast) explain this relationship in detail. The main takeaway, as mentioned earlier, is that a drop in MFI is also associated with a decline in GDP during the Great Depression (see Chart 8).
Source: Data plotted in Charts 7 and 8 are from Banking and Monetary Statistics 1914-1941.
Source: Paul Kasriel and Asha Bangalore, Northern Trust – Daily Global Commentary, August 2,,2011.
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