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short essays and reports on the economic issues of the day
2009 ■ Number 19

Recession or Depression? Part II
Kevin L. Kliesen, Economist
n an earlier essay, I argued that recent data and forecasts published by the Blue Chip Consensus and the
Survey of Professional Forecasters suggested that it is
highly likely that the recession that began in December
2007 would be both the longest and the deepest recession
in the post-World War II period. Although the current contraction in economic activity is projected to be dramatically
less severe than that seen during the 1930s (it remains to
be seen when the current recession will end), a casual reading of the popular press still suggests that many commentators believe that the current recession bears many similarities with the Great Depression. The purpose of this follow-up essay is to look at other indicators, including monetary and fiscal policy actions, to see whether the parallels
between today’s recession and the 1930s Depression are
real or more imagined.
As the accompanying table shows, the economic performance during the current recession is sharply different
from the 1929-33 episode in most key respects, but not in
all respects. As reported in Part I, the actual and projected
decline in real GDP (–2.8 percent) and the rise in the unemployment rate (4.6 percentage points) in the current recession is significantly smaller than that seen in 1929-33 (–26.5
percent and 24.6 percentage points, respectively). Nevertheless, given the collapse in the housing market, the subsequent
disruption in financial markets, and the difficulties experienced by the banking system, there has been considerable
economic distress. These conditions, as with the general
global nature of the recession, also occurred in the 1929-33
episode. Unlike today, though, larger banks during the
1930s were in better financial shape than smaller banks.
Accordingly, the banking crises of the 1930s reflected runs
on deposits of small banks, which caused massive failure
without deposit insurance.
The upper part of the table provides comparisons of
several key economic indicators not examined in Part I,
while the lower part compares and contrasts the responses
from monetary and fiscal policymakers. The upper half of
the table shows that the major price indices and measures
of nominal wages and compensation posted double-digit


declines during the 1929-33 period. By contrast, in the
current recession, prices and wages have increased, albeit at
fairly modest rates. One similarity between the two periods
is the sharp decline in nominal house prices—about 25
percent according to measures produced by Yale Professor
Robert Shiller. Other comparisons between the two episodes
are less exact. It has been estimated that as many as half of
all residential mortgages as of January 1, 1934, were seriously
delinquent. Today, as of December 2008, only 3 percent of
residential fixed-rate mortgages were seriously delinquent
(90 days or more past due). Admittedly, today delinquency
rates on subprime mortgages are much higher than on
conventional mortgages.1

“The economic performance during
the current recession is sharply
different from the 1929-33 episode
in most key respects, but not in all...”
Many economists have argued that economic conditions
during the Great Depression were worsened immensely by
the Tariff Act of 1930, otherwise known as Smoot-Hawley.
This Act sharply raised tariffs on over 20,000 goods imported
into the United States and helped contribute to a nearly 50
percent decline in U.S. exports and a roughly 66 percent
decline in global trade. While Congress and the Administration have not repeated this policy mistake, recent opinion
polls show that public support for free trade has nonetheless waned. Accordingly, policymakers have adopted initiatives that have raised concerns among numerous foreign
economic policymakers. These include the “Buy American”
provision in the American Recovery and Reinvestment
Act of 2009 (the “Economic Stimulus”) and the decision to
cancel a pilot program that allows Mexican-owned trucks
to operate in the United States. Mexico imposed tariffs on
certain U.S. products in retaliation. Although the World
Trade Organization forecasts a decline in global trade in
2009 for the first time since World War II, they attributed

Economic SYNOPSES

Federal Reserve Bank of St. Louis

this mostly to a collapse in global demand rather than to
rising protectionism.
Financial and banking conditions were dire during the
1930s, as more than 9,700 banks failed or suspended activities from 1929 to 1933.2 These failures and their associated
bank runs led to a national banking holiday, followed by a
significantly more intrusive regulatory oversight of the
banking system. Perhaps because of these reforms—importantly, deposit insurance—and the policy lessons learned
during this period, there have been fewer than 50 bank
failures since the beginning of 2008. Finally, although the
stock market (S&P 500) declined by more than 56 percent
between October 9, 2007, and March 5, 2009, the stock
market decline was much larger during the Depression:
Stock prices fell by 85 percent from September 1929 to
June 1932 (monthly averages).
Interestingly, there are two more similarities between
the 2007-09 and the 1929-33 episodes: the responses by
monetary and fiscal policymakers. In 1932, section 13(3)
was added to the Federal Reserve Act, which allowed the
Fed to engage in (what is now called) unconventional policy. However, actions taken during the current recession
have been much more aggressive than those implemented
during the 1930s. In the current episode, the Federal Reserve
has used section 13(3) to enact several special lending
programs. These programs have greatly enlarged the Fed’s
balance sheet and led to a dramatic escalation in the St. Louis
adjusted monetary base to more than $1.6 trillion as of
March 2009. In March 2009, the FOMC announced several
new initiatives that could conceivably more than double
the monetary base. These actions include the first widescale,
non-sterilized purchases of Treasury securities in several
decades.3 Admittedly, today’s policy appears heartening
when one considers that monetary policymakers pursued
a mostly contractionary policy in the early 1930s: From
August 1929 to October 1930, the FOMC actually allowed
the monetary base to fall by 4.5 percent; and from October
1929 to March 1933, it failed to prevent the M1 measure
of the money supply from falling by about one-third.
Fiscal policy has also been more expansionary in the
current recession than during the early 1930s. According to
Council of Economic Advisers Chairman Christina Romer,


the largest fiscal expansion of the New Deal occurred in
1934, when the fiscal stimulus totaled 1.5 percent of GDP.4
In February 2009, Congress passed and the Administration
signed a $787 billion fiscal stimulus legislation. According
to the Congressional Budget Office (CBO), 91 percent of
the net impact on the unified budget will occur over fiscal
years 2009-11, which amounts to a projected average of 1.6
percent of GDP over this three-year period.5 The Administration also plans dramatic increases in government spending beyond the fiscal stimulus. According to CBO estimates,
the budget deficit will total nearly $1.9 trillion in 2009
and another $1.4 trillion in fiscal year 2010. Together
these deficits amount to an average of slightly more than
11 percent of GDP—easily the largest budget deficits since
World War II.
On balance, then, the monetary and fiscal response
during the current recession has been more aggressive than
that seen during the Great Depression, even though, by
most economic indicators, the current recession pales in
comparison with the Great Depression. ■
Further Reading
Brown, E. Cary. “Fiscal Policy in the Thirties: A Reappraisal.” American
Economic Review, December 1956, 46(5), pp. 857-79.
Fettig, David. “The History of a Powerful Paragraph.” Federal Reserve Bank of
Minneapolis The Region, June 2008.
Parker, Randall E., ed. The Economics of the Great Depression. Northhampton,
MA: Edward Elgar, 2007.
Wheelock, David C. The Strategy and Consistency of Federal Reserve Monetary
Policy 1924-1933. Cambridge: Cambridge University Press, 1991.
1 In December 2008, 32 percent of variable-rate subprime mortgages were seriously
delinquent, while 13 percent of fixed-rate subprime mortgages were seriously

Some of these suspended banks eventually failed, or they later re-opened or
were merged with other, healthier banks.



4 See

This view perhaps glosses over how to measure the influence of fiscal policy on
aggregate demand and whether fiscal policy was effective in boosting aggregate
demand in the 1930s. See Brown (1956).
5 The fiscal stimulus is 1.3 percent of GDP in 2009, 2.7 percent in 2010, and 0.9
percent in 2011.

Posted on April 14, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.