The COVID-19 recession, which began in March 2020, ended the longest economic expansion in U.S. history. While recessions are an expected part of the business cycle, they can be brought on or exacerbated by specific events in political policy and investment markets. The factors that cause recessions and the steps taken to alleviate their effects help shape how our nation views investments, risk, and the role of government.
This three-part series explores the catalysts for the most influential recessions in U.S. history and how they changed the nation. If you haven’t already, read the first article in this series which discusses the earliest recessions in America. Here, in part 2, we explore the recessions that took place during the mid-20th century from the Great Depression through the Oil Embargo in the 1970’s. For Part 3 – The Modern Economy, click here.
The Great Depression 1929-38
Multiple factors combined to make the Great Depression the longest lasting and most devastating economic contraction in U.S. history. During the 1920s, there was a huge expansion of the economy brought on by rampant investing and speculation in the stock markets. By 1929, the market had hit its peak and stocks were significantly overvalued. In addition, the agriculture sector of the economy was suffering due to drought and low food prices. Further adding to the budding economic stress, wages were low and consumer debt was rising rapidly.
It all started with a mild recession in 1929 that slowed consumer spending and decreased factory production. Later, in October of that year, falling consumer sentiment and dwindling faith in the value of public companies led to a stock market crash where many investors lost the majority of their life savings. Following the crash, spending and production both continued to fall, and many workers were laid off or suffered wage cuts. This led to increased foreclosures, repossessions, and bank runs nationwide. The runs on banks continued from the fall of 1930 through 1933, and thousands of banks collapsed.
Then in 1930, the Dust Bowl began in the Southern Plains. Severe drought and high winds made huge tracts of farmland unusable. Agricultural outputs faltered and many people began looking for jobs outside of farming. The effects of the Great Depression were staggering. The unemployment rate reached 25.6% and nearly half of the banks in the U.S. collapsed.
The Hoover administration tried to steady the economy through loans to failing banks, but the strategy was unsuccessful. As the economy imploded, citizens who were forced to leave their homes set up encampments later dubbed “Hoovervilles,” as President Hoover’s policies were partially to blame for the continued collapse.
Franklin D. Roosevelt took office in 1933 and immediately began taking action to stabilize the economy. The Roosevelt administration created the Federal Deposit Insurance Corporation [FDIC] and the Securities and Exchange Commission [SEC]. Shortly afterward, in 1935, Congress passed the Social Security Act. The Roosevelt administration’s New Deal helped to stabilize the economy by providing jobs and relief to those effected by the Great Depression. The New Deal changed the American political landscape and increased the scope of the U.S. government, especially its role in the economy.
The Post WWII Recession 1945
A short-lived but serious recession took place in the United States from February to October 1945. During World War II, the U.S. economy boomed as the government infused billions of dollars into vital manufacturing and industry to meet wartime needs. When the war ended, GDP fell 11% as the U.S. economy moved from wartime manufacturing back to a peacetime economy. Despite the decline in industry, employment remained strong, with unemployment only reaching 1.9%.
The Employment Act of 1946 was passed in response to the recession. It requires the president to report on the economic condition of the country. It also established the Council of Economic Advisors [CEA] and the Joint Economic Committee. This act has shaped the relationship between the federal government and the economy that remains today. It also established that the federal government has a responsibility for maintaining stable employment and inflation.
The Post WWII Slump 1948-49
WWII brought rationing to the U.S., and the years after the war saw a post-ration spike in consumer demand. Rationing in this era was seen as a way to contribute to the war effort, unlike the rationing of the Great Depression era that came due to shortages. This increase in consumer spending lasted from 1945 to 1948.
When spending cooled, GDP contracted about 2%. As more veterans returned to claim civilian jobs, there was a spike in unemployment which reached 7.9%. This recession was considered mild and by October 1949, the economy had leveled out.
The Post-Korean War Recession 1953
The Korean War lasted from 1950 to 1953 and during that time government spending bolstered the economy. After the war, when government spending decreased, the economy struggled to adapt. GDP dropped 2.2% and unemployment reached 6%.
A period of inflation was expected after the war and the Federal Reserve tightened monetary policy in anticipation, including increasing interest rates. The expected inflation did not occur and the spike in interest rates decreased demand, so the Fed eased its policies in 1954. The recession resulting from decreased demand and economic pessimism was short lived and relatively mild.
The Recessions of 1957 and 1960
In an effort to curb inflation, the Federal Reserve tightened monetary policy during the mid-1950s. Consumer prices continued to rise and led to decreased consumer spending. A global recession and the Asian flu pandemic led to a sharp decline in exports in 1957 which exacerbated the economic stress in the U.S. GDP fell by 3.7% and unemployment reached 7.4% during the 1957-58 recession.
The Eisenhower Administration sought to combat the recession by increasing government spending on construction. The administration increased investment in the interstate system which began with the Federal Aid Highway Act in 1956.
After the 1957-58 recession, the Federal Reserve once again began raising interest rates which led to another, short recession from April 1960 – February 1961. During this time, GDP dropped by 2% and unemployment reached 6.9%. The Kennedy administration passed stimulus spending in 1961 which eased the country out of the economic contraction.
The Recession of 1970
Despite the short-lived recession in 1960-61, the 60s were a prosperous time in US history. The economic expansion of the 1960s led to increased inflation towards the end of the decade. In response, the Federal Reserve tightened policy and raised interest rates. The Nixon Administration also cut government spending around this time.
A mild recession ensued from December 1969 to November 1970. GDP dropped less than 1% and unemployment reached 6%. In 1970, the Fed eased monetary policy and the recession lifted.
The Oil Embargo Recession 1973-75
In 1973, the Organization of the Petroleum Exporting Countries [OPEC] imposed an embargo on oil imports against several countries including the U.S. because of the United States’ support of Israel during the Arab-Israeli War. Oil prices quadrupled as a result of the embargo. At the pump American’s saw gas prices rise to 55 cents a gallon, up from an average of 38.5 cents per gallon prior. As peace talks progressed, the embargo was lifted in March 1974, but the high inflation that had been exacerbated by oil prices continued.
There were several factors at play before this recession that were major contributors to its severity. Both unemployment and inflation steadily increased throughout the 1960s. So in an effort to reduce inflation without raising unemployment, the Nixon administration imposed a temporary freeze on prices and wages in 1971. The administration also ended the convertibility of U.S. currency into gold, which was the last tie between world currencies and the gold standard.
The Smithsonian Agreement in December 1971 tied the value of other industrialized nations’ currencies to the dollar. The agreement raised the price of gold and, in turn, devalued the dollar by almost 8%. The change in global currency valuations and the rapidly rising oil prices contributed to a global bear-market. In the U.S., the Dow Jones Industrial Average [DOW] fell over 45%. GDP also sharply fell, and inflation jumped to over 12% in 1974.
Tax cuts in 1975 helped to stimulate spending and contributed to the recovery effort. In addition, a decrease in interest rates helped to facilitate large purchases such as homes and automobiles and encourage economic recovery.
Common Factors in the Recessions of the Mid-20th Century
Except for the Great Depression, the majority of recessions during this time period were shorter and less severe than in previous periods. This was mostly due to the growth in tools used by the government for economic intervention. The birth of the Federal Reserve in 1913 allowed the federal government to effect change in monetary policy to combat the effects of economic contractions and inflation. The expanded role of the federal government during the Great Depression added another tool for lessening the effects of recessions through the introduction of stimulus spending.
These monetary and fiscal policy tools are still used today. The advent of new technology and the expansion of globalization created new opportunities and challenges in the later part of the 20th century and into the 21st century. See how these factors impacted the U.S. economy in Part 3 of this series which explores the most recent periods of economic turmoil.
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