History of Economic Turmoil in the U.S. Part 2 of 3 – Mid-20th Century

While recessions are an expected part of the business cycle, they can be brought on or exacerbated by political policy and changing investment markets. Consequently, the factors that cause these periods of economic turmoil – 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-20^th century from the Great Depression through the Oil Embargo in the 1970s. Finally, the third article in this series explores economic turmoil in the modern era.

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. The first of these was a huge expansion of the economy in the 1920s, driven by rampant investment 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 this budding economic stress, wages were low, and consumer debt was rising rapidly.

The turmoil began with a mild recession in 1929 that slowed consumer spending and decreased factory production. Then, factors like falling consumer sentiment and dwindling faith in the value of public companies led to an October stock market crash. Many investors lost the majority of their life savings on what would later be dubbed “Black Tuesday.”

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, leading thousands of banks to collapse.

Then in 1930, the Dust Bowl began in the Southern Plains. This crisis was caused by severe drought and high winds which made huge tracts of farmland unusable. During this time, agricultural outputs faltered, and many people began looking for jobs outside of farming.

The effects of the Great Depression were staggering in both employment and financial markets. The unemployment rate reached 25.6% at the peak of this turmoil, 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 that would later be called “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 through his New Deal. It included the founding of the Federal Deposit Insurance Corporation [FDIC] and the Securities and Exchange Commission [SEC]. Congress then passed the Social Security Act in 1935.

The New Deal helped to stabilize the economy by providing jobs and relief to those affected by the Great Depression. It also changed the American political landscape and increased the role of the U.S. government in the economy.

The Post WWII Recession 1945

From February to October of 1945, the U.S. experienced a short-lived, but serious recession. World War II had just ended, so the U.S. government was no longer infusing cash into the industrial and manufacturing sectors.

Without the significant wartime government spending, GDP fell 11%. However, the job market remained strong – with unemployment only reaching 2.9% at its peak.

In response to the recession, the Employment Act of 1946 was passed, and it is still in effect today. 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.

The actions taken to mitigate this period of turmoil have shaped the relationship between the federal government and the economy that remains today. It also established the federal government’s responsibility to maintain stable employment and inflation.

The Post WWII Slump 1948-49

WWII brought rationing to the U.S. as a way to contribute to the war effort. The years after the war saw a post-ration spike in consumer demand which 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 a troubling 7.9%. This recession was considered mild, and by October 1949, the economy had fully recovered.

The Post-Korean War Recession 1953

The Korean War lasted from 1950 to 1953, and during that time, government spending bolstered the economy. Inflation expectations were high during the early years of the war and the Federal Reserve raised interest rates in anticipation.

The expected inflation did not materialize and the spike in interest rates decreased demand. A decline in federal spending following the war further reduced demand and a short-lived, relatively mild recession occurred.

During this recession, GDP dropped by 2.2% and unemployment reached 6%. The recession showed that interest rates were too high, and the Fed eased policy in 1954. This policy shift helped to spur demand, and the recession ended quickly.

The Recession of 1957

Following the Post-Korean War Recession, inflation picked up and the Federal Reserve tightened monetary policy. However, consumer prices continued to rise, and this led to decreased consumer spending.

Then, a global recession and the Asian flu pandemic led to a sharp decline in exports in 1957. Lower exports and consumer spending exacerbated the economic stress in the U.S. and led to the 1957-58 recession. During this period, GDP fell by 3.7% and unemployment reached 7.4%.

The Eisenhower Administration sought to combat the economic turmoil by increasing government spending on construction – including  the Federal Aid Highway Act in 1956. This spurred job creation served to combat the recession, and the resulting highway system helped to develop more efficient trade throughout the country.

The Recession of 1960

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 rest of the 1960s were a prosperous time in U.S. history.

The Recession of 1970

A short recession occurred from December 1969 to November 1970. There were two factors credited with causing this contraction. The first of these was higher interest rates due to increased inflation. The second was the Nixon Administration’s government spending cut.

The recession was mild with GDP dropping less than 1% and unemployment reaching 5.9%. It ended in 1970 when the Fed eased monetary policy.

The Oil Embargo Recession 1973-75

There were several factors at play before this recession that were major contributors to its severity. First, both unemployment and inflation steadily increased throughout the 1960s. Then, 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.

In 1971, the value of industrialized nations’ currencies became tied to the dollar through the Smithsonian Agreement. It 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 and recession which caused the Dow Jones Industrial Average [DOW] to fall over 45%.

Further complicating geopolitics, the Organization of the Petroleum Exporting Countries [OPEC] imposed an embargo on oil imports against several countries including the U.S. This 1973 action was a response to the United States’ support of Israel during the Arab-Israeli War.

Oil prices quadrupled as a result of the embargo, and gas prices rose to 53 cents a gallon. This represented an increase of more than 35% from the prior average of 39 cents per gallon, and a strong blow to the U.S. economy.

In March 1974, peace talks progressed, and the embargo was lifted. However, the high inflation that had been exacerbated by oil prices continued. GDP also sharply fell, and inflation jumped to over 12% in 1974.

In 1975, tax cuts helped to stimulate spending and contributed to the recovery effort. In addition, an interest rate reduction helped to facilitate large purchases such as homes and automobiles – which encouraged economic recovery.

Common Factors in the Recessions of the Mid-20^th Century

Many of the recessions in the mid-20^th century were caused by drastic shifts in demand at the end of a period of substantial government spending. The economic policies of the time also exacerbated some of these issues.

Except for the Great Depression, the majority of recessions in this era were shorter and less severe than in previous periods. This was mostly due to the new tools that were made available to the government for economic intervention.

History of Economic Turmoil in the U.S. Part 3 – The Modern Economy

The advent of new technology and the expansion of globalization has created new opportunities and challenges in the modern U.S. economy. Explore how these factors affected the further development of the financial system in the final volume of our series: History of Economic Turmoil in the U.S. Part 3 – The Modern Economy.

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