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Presentation Notes
Long Depression
Dates: 1873-79 (1873-96 in Europe)
Key Problem: Decreased money supply due to the transition from a bimetallic to a gold standard. Railroad market was also a bubble.
Stats: 18,000 business (89 railroads) went bankrupt. Unemployment rose to 14%. Was the longest recession at 65 months of contraction.
Govt Response: Protectionism, limited coinage of silver (after two presidential vetoes).
The Long Depression was a period of general contraction and deflation that lasted between 1873 and 1896. The main problem that caused the Long Depression was the Panic of 1873, which was the market reaction to the US government decreasing the money supply through transitioning to a gold standard from a bimetallic standard. This one event, along with a collapse in financing for railroads resulting, caused a panic in the US that later spread throughout Europe. 18,000 businesses went bankrupt and the economy contracted for 65 months, the longest recession in US history. The US government turned to protectionism which especially favored the robber barrons Carnegie and Rockefeller in their development of the steel and oil business. After two presidential vetoes, Congress permitted limited silver coinage, expanding the money supply. However, William Jennings Bryan’s Cross of Gold speech indicates how populists wanted to increase the money supply more dramatically to increase growth and inflation, relieving workers of low standard of life and farmers of high debt burdens.
Panic of 1907
Dates: 1907
Key Problem: Stock market fell 50%, bank runs, collapse of a railroad company
Response: Limited govt response. Most effective response came from JP Morgan who pledged his own money to add liquidity to the banking system, preventing further runs. JP Morgan’s US Steel (with permission from TR) also bought the Tennessee Coal, Iron, and Railroad Company when it was about to fail
Result: Passage of the Federal Reserve Act of 1913 so that the government did not have to rely on private citizens to save the economy
The Panic of 1907 originated when banks provided loans to companies that were trying to corner the stock on the United Copper Company. When this failed, the banks were left extremely weak, causing bank runs which caused the failure of the Knickerbocker Trust Company, a very large NY trust. JP Morgan convinced other bankers to offer their personal money to shore up the banking system, returning liquidity to the system in the absence of an effective government response. When a large company, the Tennessee Coal, Iron, and Railroad Company’s stock was about to crash, JP Morgan got anti-monopoly Roosevelt’s approval for Morgan’s US Steel to purchase the company. JP Morgan singlehandedly saved the economy from a more serious crisis. The lack of an appropriate government response led to the Federal Reserve Act of 1913
Depression of 1920-21
Dates: 1920-21
Key Problem: Adjustment from a wartime to a peacetime economy, demobilization of soldiers and decline in union power, contractionary monetary policy to fight inflation
Response: Lower income tax rates, protectionism, provided relief to the unemployed
After World War One, many of the factories producing war equipment shut down, increasing unemployment. At the same time, soldiers were demobilized, increasing the labor force dramatically, pushing down wages and displacing some workers, creating more unemployment. Unions lost much of the power they gained during the war, limiting their ability to ask for wage increases. The Fed also raised interest rate to 7% to fight inflation. The government instituted protectionism, provided relief to the unemployed, and at Treasury Secretary Andrew Mellon’s suggestion, lowered income taxes.
Great Depression
Dates: 1929-1933, 1937-1938
Key Problem in the Great Depression: Stock market bubble, bank illiquidity and failures causing a decline in investment spending, monetary contraction and deflation
Stats: Unemployment rose to 25%, MS down 35%, prices dropped by 33%
Response: Under Hoover: Hawley-Smoot Tariffs. Under Roosevelt: The New Deal which included: free trade, a bank holiday, bank regulation (Glass-Steagall), creation of the FDIC, public works programs, social welfare (Social Security Act), etc.
In 1937, Roosevelt reduced the expansionary fiscal policy, causing the Roosevelt Recession of 1937.
During the Roaring Twenties, the stock market increased in value tremendously, causing a bubble. The bubble burst in 1929. Since banks held stocks, they were put in a weak position which caused scared depositors to make bank runs. Banks failed and credit declined steeply, reducing investment spending in the economy. Employment rose to 25%. Hoover’s most significant way to deal with the crisis was through protectionism with the Hawley-Smoot tariffs, however he did propose a few public works programs. Roosevelt instituted the New Deal. For a complete summary of New Deal programs and their effectiveness, see my research paper on the subject which I will post online. The most important programs include the Bank Holiday which restored confidence to depositors, the Federal Deposit Insurance Corporation which insured deposits to reduce the threat of bank runs, public works programs through the Civilian Conversation Corps and a host of other ABC programs, and the Social Security Act of 1935.
When Roosevelt increased taxes and reduced spending in 1937, another recession called the Roosevelt Recession hit which was solved through increased government spending beginning in 1938 and then WW2.
Stagflation
Dates: 1973-1984
Key Problem: Oil supply shock following the 1973 OPEC embargo, the 1979 Iranian Revolution, and the start of the Iran-Iraq War in 1980.
Stats: Inflation reached 13.5% in 1980, the Federal Funds Rate rose to 20%, and unemployment reached 10.8%
Response: To combat stagflation, Fed Chair Paul Volcker dramatically increased the FFR, deepening the recession but reducing the inflation rate. To alleviate the recession, the Republicans cut tax rates which increased employment
Stagflation is truly a three-part crisis. First came the supply shocks resulting from increased oil prices following the 1973 OPEC embargo. These reduced AS, which, as the AD-AS model suggests caused higher prices and lower output. Inflation throughout the West soared, eventually reaching double digits. The supply shock worsened after Iran ceased oil production after its revolution in 1979 and Iraq went to war with Iran in 1980 which decreased Iraq’s oil production.
To combat the inflation, Paul Volcker raised the federal funds rate to 20%, which caused massive unemployment reaching 10.8%, the currently the highest level since the Great Depression. However, his actions successfully decreased the inflation rate.
The economic recovery was spurred in large part due to Reaganomics coming in the form of lower taxes and less regulation. By 1984, much of the recovery had concluded.
Black Monday
Disclaimer: This was not a recession—just a market crash!
Dates: 1987
Key Problem: Psychology, overvaluation, program trading
Black Monday was the single largest percent crash in the Dow Jones, which declined by 22% in one day. This crash did not result in a recession, however, but it is still a significant event that I decided to add to this list.
Asian Financial Crisis
Dates: 1997-1999
Key Problem: Currency market upheaval throughout Asia, leading to stock decreases, and reduced import revenue for Asian countries
Response: IMF conditionally offered over $100 billion in aid
The Asian Financial Crisis was not a US recession, but caused much economic upheaval in Asia. Currencies—beginning in Thailand—fell in Asian countries as much as 38%, causing stock prices to dip by up to 60%. Import revenues (tariffs) fell.
The IMF offered loans so that countries could prop up their currency values, but these loans were given conditionally. Asian countries had to have higher taxes, lower spending, and higher interest rates.
Dotcom Burst
Dates: Dot com crash in 2000, Recession in 2001, Peak Unemployment 2003
Key Problem: Dotcom burst and 9/11
Response: Fed decreased rates
I didn’t cover many of the smaller recessions, but the Dotcom Burst was the most recent of these small recessions and therefore is the most relevant to us. Tech stocks were overvalued between 1997 and 2000, so these stocks crashed in 2000. The economy then entered a slight recession in 2001, which was heightened following uncertainty after 9/11.