Recession

and
Recovery
Introduction
In economics, a recession is a (1) business cycle contraction, a general slowdown
in economic activity over a period of time. During recessions, many macroeconomic
indicators vary in a similar way. Production as measured by Gross Domestic Product
(GDP), employment, investment spending, capacity utilization, household incomes,
business profits and inflation all fall during recessions; while bankruptcies and the
unemployment rate rise.

Recessions are generally believed to be caused by a widespread drop in spending.

Governments usually respond to recessions by adopting expansionary
macroeconomic policies, such as increasing money supply, increasing government
spending and decreasing taxation.

(1) The term business cycle (or economic cycle) refers to economy-wide
fluctuations in production or economic activity over several months or years.
These fluctuations occur around a long-term growth trend, and typically involve
shifts over time between periods of relatively rapid economic growth (expansion
or boom), and periods of relative stagnation or decline (contraction or
recession).

Definition
A period of general economic decline; typically defined as a decline in GDP for two
or more consecutive quarters. A recession is typically accompanied by a drop in the
stock market, an increase in unemployment, and a decline in the housing market. A
recession is generally considered less severe than a depression, and if a recession
continues long enough it is often then classified as a depression. There is no one
obvious cause of a recession, although overall blame generally falls on the federal
leadership, often either the President himself, the head of the Federal Reserve, or
the entire administration.

In the United States, the Business Cycle Dating Committee of the National Bureau
of Economic Research (NBER) is generally seen as the authority for dating US
recessions. The NBER defines an economic recession as: "a significant decline in
[the] economic activity spread across the country, lasting more than a few months,
normally visible in real GDP growth, real personal income, employment (non-farm
payrolls), industrial production, and wholesale-retail sales."
Attributes
A recession has many attributes that can occur simultaneously and includes
declines in component measures of economic activity (GDP) such as consumption,
investment, government spending, and net export activity. These summary
measures reflect underlying drivers such as employment levels and skills,
household savings rates, corporate investment decisions, interest rates,
demographics, and government policies.

Economist Richard C. Koo wrote that under ideal conditions, a country's economy
should have the household sector as net savers and the corporate sector as net
borrowers, with the government budget nearly balanced and net exports near zero.
When these relationships become imbalanced, recession can develop within the
country or create pressure for recession in another country. Policy responses are
often designed to drive the economy back towards this ideal state of balance.

A severe (GDP down by 10%) or prolonged (three or four years) recession is

referred to as an economic depression, although some argue that their causes
and cures can be different. As an informal shorthand, economists sometimes refer
to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-
shaped recessions.

Type of recession or shape

Recessions and subsequent growth periods may have distinctive shapes when
graphed. In the US, V-shaped, or short-and-sharp contractions followed by rapid
and sustained recovery, occurred in 1954 and 1990–91; U-shaped (prolonged
slump) in 1974-75, and W-shaped, or double-dip recessions in 1949 and 1980-82.
Japan’s 1993-94 recession was U-shaped and its 8-out-of-9 quarters of contraction
in 1997-99 can be described as L-shaped. Korea, Hong Kong and South-east Asia
experienced U-shaped recessions in 1997-98, although Thailand’s eight consecutive
quarters of decline should be termed L-shaped.

Psychological aspects
Recessions have psychological and confidence aspects. For example, if the
expectation develops that economic activity will slow, firms may decide to reduce
employment levels and save money rather than invest. Such expectations can
create a self-reinforcing downward cycle, bringing about or worsening a recession.
Consumer confidence is one measure used to evaluate economic sentiment. The
term "Animal Spirits" has been used to describe the psychological factors
underlying economic activity. Economist Robert J. Shiller wrote that the term
"...refers also to the sense of trust we have in each other, our sense of fairness in
economic dealings, and our sense of the extent of corruption and bad faith. When
animal spirits are on ebb, consumers do not want to spend and businesses do not
want to make capital expenditures or hire people."

Balance sheet recession

The bursting of a real estate or financial asset price bubble can cause a recession.
For example, economist Richard Koo wrote that Japan's "Great Recession" that
began in 1990 was a "balance sheet recession." It was triggered by a collapse in
land and stock prices, which caused Japanese firms to become insolvent, meaning
their assets were worth less than their liabilities. Despite zero interest rates and
expansion of the money supply to encourage borrowing, Japanese corporations in
aggregate opted to pay down their debts from their own business earnings rather
than borrow to invest as firms typically do. Corporate investment, a key demand
component of GDP, fell enormously (22% of GDP) between 1990 and its peak
decline in 2003. Japanese firms overall became net savers after 1998, as opposed
to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and
spending by the government) that offset this decline and enabled Japan to maintain
its level of GDP. In his view, this avoided a U.S. type Great Depression, in which
U.S. GDP fell by 46%. He argued that monetary policy was ineffective because
there was limited demand for funds while firms paid down their liabilities. In a
balance sheet recession, GDP declines by the amount of debt repayment and un-
borrowed individual savings, leaving government stimulus spending as the primary
remedy.

Liquidity trap
A liquidity trap situation can develop in which interest rates reach near zero (ZIRP)
yet do not effectively stimulate the economy. In theory, near-zero interest rates
should encourage firms and consumers to borrow and spend. However, if too many
individuals or corporations focus on saving or paying down debt rather than
spending, lower interest rates have less effect on investment and consumption
behavior; the lower interest rates are like "pushing on a string."

Economist Paul Krugman described the U.S. 2009 recession and Japan's lost decade
as liquidity traps. One remedy to a liquidity trap is expanding the money supply via
quantitative easing or other techniques in which money is effectively printed to
purchase assets, thereby creating inflationary expectations that cause savers to
begin spending again.
Government stimulus spending and mercantilist policies to stimulate exports and
reduce imports are other techniques to stimulate demand. He estimated in March
2010 that developed countries representing 70% of the world's GDP were caught in
a liquidity trap.

Predictors
Although there are no completely reliable predictors, the following are regarded to
be possible predictors.

• Inverted yield curve, the model developed by economist Jonathan H. Wright,

uses yields on 10-year and three-month Treasury securities as well as the
Fed's overnight funds rate. Another model developed by Federal Reserve
Bank of New York economists uses only the 10-year/three-month spread. It
is, however, not a definite indicator;
• The three-month change in the unemployment rate and initial jobless claims.
• Index of Leading (Economic) Indicators (includes some of the above
indicators).
• Lowering of asset prices, such as homes and financial assets, or high
personal and corporate debt levels.

Government responses
Most mainstream economists believe that recessions are caused by inadequate
aggregate demand in the economy, and favor the use of expansionary
macroeconomic policy during recessions. Strategies favored for moving an
economy out of a recession vary depending on which economic school the
policymakers follow. Monetarists would favor the use of expansionary
monetary policy, while Keynesian economists may advocate increased
government spending to spark economic growth. Supply-side economists
may suggest tax cuts to promote business capital investment. When interest
rates reach the boundary of an interest rate of zero percent conventional
monetary policy can no longer be used and government must use other
measures to stimulate recovery. Keynesians argue that fiscal policy, tax cuts
or increased government spending, will work when monetary policy fails.
Spending is more effective because of its larger multiplier but tax cuts take
effect faster.
Stock market
Some recessions have been anticipated by stock market declines. In Stocks for the
Long Run, Siegel mentions that since 1948, ten recessions were preceded by a
stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while
ten stock market declines of greater than 10% in the DJIA were not followed by a
recession.

The real-estate market also usually weakens before a recession. However real-
estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegel argues that it is not possible
to take advantage of economic cycles for timing investments. Even the National
Bureau of Economic Research (NBER) takes a few months to determine if a peak or
trough has occurred in the US.

During an economic decline, high yield stocks such as fast moving consumer goods,
pharmaceuticals, and tobacco tend to hold up better. However when the economy
starts to recover and the bottom of the market has passed (sometimes identified on
charts as a MACD), growth stocks tend to recover faster. There is significant
disagreement about how health care and utilities tend to recover. Diversifying one's
portfolio into international stocks may provide some safety; however, economies
that are closely correlated with that of the U.S. may also be affected by a recession
in the U.S.

There is a view termed the halfway rule according to which investors start
discounting an economic recovery about halfway through a recession. In the 16
U.S. recessions since 1919, the average length has been 13 months, although the
recent recessions have been shorter. Thus if the 2008 recession followed the
average, the downturn in the stock market would have bottomed around November
2008. The actual US stock market bottom of the 2008 recession was in March 2009.

Politics
Generally an administration gets credit or blame for the state of economy during its
time.[ This has caused disagreements about when a recession actually started. In
an economic cycle, a downturn can be considered a consequence of an expansion
reaching an unsustainable state, and is corrected by a brief decline. Thus it is not
easy to isolate the causes of specific phases of the cycle.

The 1981 recession is thought to have been caused by the tight-money policy
adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald
Reagan took office. Reagan supported that policy. Economist Walter Heller,
chairman of the Council of Economic Advisers in the 1960s, said that "I call it a
Reagan-Volcker-Carter recession. The resulting taming of inflation did, however, set
the stage for a robust growth period during Reagan's administration.

Economists usually teach that to some degree recession is unavoidable, and its
causes are not well understood. Consequently, modern government administrations
attempt to take steps, also not agreed upon, to soften a recession.

Impacts
Unemployment

The full impact of a recession on employment may not be felt for several quarters.
Research in Britain shows that low-skilled, low-educated workers and the young are
most vulnerable to unemployment in a downturn. After recessions in Britain in the
1980s and 1990s, it took five years for unemployment to fall back to its original
levels.

Business

Productivity tends to fall in the early stages of a recession, then rises again as
weaker firms close. The variation in profitability between firms rises sharply.
Recessions have also provided opportunities for anti-competitive mergers, with a
negative impact on the wider economy: the suspension of competition policy in the
United States in the 1930s may have extended the Great Depression.

Social effects

The living standards of people dependent on wages and salaries are more affected
by recessions than those who rely on fixed incomes or welfare benefits. The loss of
a job is known to have a negative impact on the stability of families, and
individuals' health and well-being.

History
Global

There is no commonly accepted definition of a global recession, although the IMF

regards periods when global growth is less than 3% to be global recessions. The
IMF estimates that global recessions seem to occur over a cycle lasting between 8
and 10 years. During what the IMF terms the past three global recessions of the
last three decades, global per capita output growth was zero or negative.

Economists at the International Monetary Fund (IMF) state that a global recession
would take a slowdown in global growth to three percent or less. By this measure,
four periods since 1985 qualify: 1990–1993, 1998, 2001–2002 and 2008–2009.
United Kingdom

List of recessions in the United Kingdom

This is a list of (recent) recessions (and depressions) that have affected the
economy of the United Kingdom.

Name Dates Duration GDP Causes Other data

reduction
1919-21 1919- ~3 years 10.9% The end of the Deflation ~10% in
depression 1921 1919 First World 1921, and ~14%
6.0% 1920 War in 1922.
8.1% 1921
Great 1930- ~2years 0.7% 1930 US UK came off gold
Depression 1931 5.1% 1931 Depression. standard Sept
Reducing 1931. 3-5%
demand for deflation pa. UK
UK exports, much less affected
also high than US.
interest rate
defending the
gold standard.
Mid 1970s 1973- 2 years 3.9% 1973 oil crisis Took 14 quarters
recession 75 (6 out of 3.37% for GDP to recover
9 Qtr) to that at start of
recession.
Early 1980- ~2 years 5.8% Cause - Company earnings
1980s 82 (6 - 7 possibly decline 35%.
recession Qtr) monetarist Unemployment
government rises 124% from
policies to 5.3% of the
reduce working population
inflation? See in Aug 1979 to
1979-1983 11.9% in 1984.
Took 13 quarters
for GDP to recover
to that at start of
1980.
 1990- ~2 years 2.5% US savings Company earnings
92 (5 Qtr) and loan crisis decline 25%. Peak
leading to the budget deficit
Early 1990s ~8% of GDP.
recession. Unemployment
rises 55% from
Early
6.9% of the
1990s
working population
recession
in 1990 to 10.7%
in 1993. Took 13
quarters for GDP
to recover to that
at start of
recession.
Late- 2008- 6 Qtrs so 6.0% to Financial crisis Manufacturing
2000s Present far, from end Sep-09 of 2007-2010 output down 7%
recession Q2 2008 Forecasts by end 2008.
(~May) ~5-6.2%. Unemployment
2.8M at beginning
2010
CBI forecast
manufacturing
output to drop
10% in 2009.
Unemployment
forecast to rise to
3.0M (9.4%) in
2010.It has been
the longest
recession since the
war. It has
affected lots of
parts of the
country including
banks and
investment firms.
Longest recession
to hit post-war
Britain.
United States

List of recessions in the United States

In the United States the beginning and ending dates of national recessions are
determined by the National Bureau of Economic Research (NBER). The NBER
defines a recession as "a significant decline in economic activity spread across the
economy, lasting more than a few months, normally visible in real gross domestic
product (GDP), real income, employment, industrial production, and wholesale-
retail sales".

There have been as many as 47 recessions in the United States since 1790
(although economists and historians dispute certain 19th-century recessions).
These downturns are driven by changes in the government's regulatory, fiscal,
trade and monetary policies. Cycles in agriculture, consumption, and business
investment, and the health of the banking industry also contribute to these
declines. U.S. recessions have increasingly affected economies on a worldwide
scale, especially as countries' economies become more intertwined.

In the 19th century, recessions frequently coincided with financial crises.

Determining the occurrence of pre-20th-century recessions is more difficult due to
the dearth of economic statistics, so scholars rely on historical accounts of
economic activity, such as contemporary newspapers or business ledgers. Although
the NBER does not date recessions before 1857, economists customarily
extrapolate dates of U.S. recessions back to 1790 from business annals based on
various contemporary descriptions. Their work is aided by historical patterns, in
that recessions often follow external shocks to the economic system such as wars
and variations in the weather affecting agriculture, as well as banking crises.

Major modern economic statistics, such as unemployment and gross domestic

product, were not compiled on a regular and standardized basis until after World
War II. The average duration of the 11 recessions between 1945 and 2001 is 10
months, compared to 18 months for recessions between 1919 and 1945, and 22
months for recessions from 1854 to 1919. Because of the great changes in the
economy over the centuries, it is difficult to compare the severity of modern
recessions to early recessions. Recessions after World War II appear to have been
less severe than earlier recessions, but the reasons for this are unclear.
Early recessions and crises
Attempts have been made to date recessions in America beginning in 1790. These
periods of recession were not identified until the 1920s. To construct the dates,
researchers studied business annals during the period and constructed time series
of the data. The earliest recessions for which there is the most certainty are those
that coincide with major financial crises.

Beginning in 1834, an index of business activity by the Cleveland Trust Company

provides data for comparison between recessions. Beginning in 1854, the National
Bureau of Economic Research dates recession peaks and troughs to the month. But
for the earliest recessions, there are no standardized indexes, and the data are
considered unreliable. As the data get older, their reliability worsens.

In 1791, Congress chartered the First Bank of the United States to handle the
country's financial needs. The bank had some functions of a modern central bank,
although it was responsible for only 20% of the young country's currency. In 1811
the bank's charter lapsed, but it was replaced by the Second Bank of the United
States, which lasted from 1816–36.

Time since
Name Dates Duration previous Characteristics
recession
Just as a land speculation bubble was
bursting, deflation from the Bank of
England (which was facing insolvency
because of the cost of Great Britain's
involvement in the French
Revolutionary Wars) crossed to North
Panic of 1796– America and disrupted commercial and
~3 years ~6 years
1797 1799 real estate markets in the United States
and the Caribbean, and caused a major
financial panic. Prosperity continued in
the south, but economic activity was
stagnant in the north for three years.
The young United States engaged in
the Quasi-War with France.
A boom of war-time activity led to a
decline after the Peace of Amiens
ended the war between the United
1802–1804 1802–
~2 years ~3 years Kingdom and France. Commodity prices
recession 1804
fell dramatically. Trade was disrupted
by pirates, leading to the First Barbary
War.
 The Embargo Act of 1807 was passed
by the United States Congress under
President Thomas Jefferson as tensions
increased with the United Kingdom.
Along with trade restrictions imposed
by the British, shipping-related
Depression 1807– industries were hard hit. The
~3 years ~3 years
of 1807 1810 Federalists fought the embargo and
allowed smuggling to take place in New
England. Trade volumes, commodity
prices and securities prices all began to
fall. Macon's Bill Number 2 ended the
embargoes in May 1810, and a
recovery started.
The United States entered a brief
recession at the beginning of 1812. The
1812 decline was brief primarily because the
1812 ~6 months ~18 months
recession United States soon increased
production to fight the War of 1812,
which began June 18, 1812.
Shortly after the war ended on March
23, 1815, the United States entered a
period of financial panic as bank notes
rapidly depreciated because of inflation
following the war. The 1815 panic was
followed by several years of mild
depression, and then a major financial
crisis – the Panic of 1819, which
1815–21 1815–
~6 years ~3 years featured widespread foreclosures, bank
depression 1821
failures, unemployment, a collapse in
real estate prices, and a slump in
agriculture and manufacturing. The
lengthy depression, if truly
uninterrupted, was the longest in
American history, although the NBER
does not provide precise dating for this
period.
After only a mild recovery following the
lengthy 1815–21 depression,
commodity prices hit a peak in March
1822–1823 1822–
~1 year ~1 year 1822 and began to fall. Many
recession 1823
businesses failed, unemployment rose
and an increase in imports worsened
the trade balance.
1825–1826 1825– ~1 year ~2 years The Panic of 1825, a stock crash
recession 1826 following a bubble of speculative
investments in Latin America led to a
 decline in business activity in the
United States and England. The
recession coincided with a major panic,
the date of which may be more easily
determined than general cycle changes
associated with other recessions.
In 1826 England forbid the United
States to trade with English colonies
1828–1829 1828– and in 1827 the United States adopted
~1 year ~2 years
recession 1829 a counter-prohibition. Trade declined,
just as credit became tight for
manufacturers in New England.
The United States' economy declined
moderately in 1833–34. News accounts
1833–34 1833–
~1 year ~4 years of the time confirm the slowdown. The
recession 1834
subsequent expansion was driven by
land speculation.

In the 1830s, U.S. President Andrew Jackson fought to end the Second Bank of the
United States. Following the Bank War, the Second Bank lost its charter in 1836.
From 1837 to 1862 there was no national presence in banking, but still plenty of
state and even local regulation such as laws against branch banking which
prevented diversification. In 1863, in response to financing pressures of the Civil
War, Congress passed the National Banking Act, creating nationally chartered
banks. There was neither a central bank nor deposit insurance during this era, and
thus banking panics were common. Recessions often led to bank panics and
financial crises, which in turn worsened the recession.

The dating of recessions during this period is controversial. Modern economic

statistics, such as gross domestic product and unemployment, were not gathered
during this period. Victor Zarnowitz evaluated a variety of indexes to measure the
severity of these recessions. From 1834 to 1929, one measure of recessions is the
Cleveland Trust Company index, which measured business activity and, beginning
in 1882, an index of trade and industrial activity was available, which can be used
to compare recessions.

US recessions, Free Banking Era to the Great

Depression
Dates Duration Time since Business Trade &
previo activit industr
us y ial
recessi activit
on y
Characteristics
Panic of 1837
1836–1838 ~2 years ~2 years −32.8% —
A sharp downturn in the American economy was caused by bank failures and lack
of confidence in the paper currency. Speculation markets were greatly
affected when American banks stopped payment in specie (gold and silver
coinage). Over 600 banks failed in this period. In the south the cotton market
completely collapsed.
Depression of 1839–43
Late 1839– ~4 years ~1 year −34.3% —
Late 18
43
This was one of the longest and deepest depressions. It was a period of pronounced
deflation and massive default on debt. The Cleveland Trust Company Index
showed the economy spent 68 months below its trend and only 9 months
above it. The Index declined 34.3% during this depression.
1845–46 recession
1845–late 1 ~1 year ~2 years −5.9% —
846
This recession was mild enough that it may have only been a slowdown in the
 growth cycle. One theory holds that this would have been a recession, except
the United States began to gear up for the Mexican–American War which
began April 25, 1846.
1847–48 recession
Late 1847– ~1 year ~1 year −19.7% —
Late 18
48
The Cleveland Trust Company Index declined 19.7% during 1847 and 1848. It is
associated with a financial crisis in Great Britain.
1853–54 recession
1853 –Dec 1 ~1 year ~5 years −18.4% —
854
Interest rates rose in this period, contributing to a decrease in railroad investment.
Security prices fell during this period. With the exception of falling business
investment there is little evidence of contraction in this period.
Panic of 1857
June 1857– 1 year 6 2 years −23.1% —
Dec 185 months 6
8 months
Failure of the Ohio Life Insurance and Trust Company burst a European
speculative bubble in United States' railroads and caused a loss of
confidence in American banks. Over 5,000 businesses failed within the first
year of the Panic, and unemployment was accompanied by protest meetings in
urban areas. This is the earliest recession to which the NBER assigns specific
months (rather than years) for the peak and trough.
1860–61 recession
Oct 1860– 8 months 1 year −14.5% —
June 18 10
61 months
There was a recession before the American Civil War, which began April 12,
1861. Zarnowitz says the data generally show a contraction occurred in this
period, but it was quite mild. A financial panic was narrowly averted in 1860
by the first use of clearing house certificates between banks.
1865–67 recession
April 1865– 2 years 3 years −23.8% —
Dec 186 8 10
7 months months
The American Civil War ended in April 1865 and the country entered a lengthy
period of general deflation that lasted until 1896. The United States
occasionally experienced periods of recession during the Reconstruction era.
Production increased in the years following the Civil War, but the country still
had financial difficulties. The post-war period coincided with a period of some
international financial instability.
1869–70 recession
June 1869– 1 year 1 year −9.7% —
Dec 187 6 6
0 months months
A few years after the Civil War, a short recession occurred. It was unusual since it
came amid a period when railroad investment was greatly accelerating, even
producing the First Transcontinental Railroad. The railroads built in this
period opened up the interior of the country, giving birth to the Farmers'
movement. The recession may be explained partly by ongoing financial
difficulties following the war, which discouraged businesses from building up
inventories. Several months into the recession there was a major financial
panic.
Panic of 1873 and the Long Depression
Oct 1873 – 5 years 2 years −33.6% —
Mar 5 10 (−27.3
1879 months months %)
Economic problems in Europe prompted the failure of Jay Cooke & Company, the
largest bank in the United States, which burst the post-Civil War speculative
bubble. The Coinage Act of 1873 also contributed by immediately
depressing the price of silver, which hurt North American mining interests. The
deflation and wage cuts of the era led to labor turmoil, such as the Great
Railroad Strike of 1877. In 1879, the United States returned to the gold
standard with the Specie Payment Resumption Act. This is the longest
period of economic contraction recognized by the NBER. The Long
Depression is sometimes held to be the entire period from 1873–96.
1882–85 recession
Mar 1882 – 3 years 3 years −32.8% −24.6%
May 2
1885 months
Like the Long Depression that preceded it, the recession of 1882–85 was more of a
price depression than a production depression. From 1879 to 1882 there had
been a boom in railroad construction which came to an end, resulting in a
decline in both railroad construction and in related industries, particularly iron
and steel.[20] A major economic event during the recession was the Panic of
1884.
1887–88 recession
Mar 1887 – 1 year 1 year −14.6% −8.2%
April 1 month 10
1888 months
Investments in railroads and buildings weakened during this period. This slowdown
was so mild that it is not always considered a recession. Contemporary
accounts apparently indicate it was considered a slight recession.
1890–91 recession
July 1890 – 10 months 1 year 5 −22.1% −11.7%
May months
1891
Although shorter than the recession in 1887–88 and still modest, a slowdown in
1890–91 was somewhat more pronounced than the preceding recession.
International monetary disturbances are blamed for this recession, such as the
Panic of 1890 in the United Kingdom.
Panic of 1893
Jan 1893 – 1 year 1 year −37.3% −29.7%
June 5 8
1894 months months
Failure of the United States Reading Railroad and withdrawal of European
investment led to a stock market and banking collapse. This Panic was
also precipitated in part by a run on the gold supply. The Treasury had to
issue bonds to purchase enough gold. Profits, investment and income all fell,
leading to political instability, the height of the U.S. populist movement and
the Free Silver movement.
Panic of 1896
Dec 1895 – 1 year 1 year −25.2% −20.8%
June 6 6
1897 months months
The period of 1893–97 is seen as a generally depressed cycle that had a short spurt
of growth in the middle, following the Panic of 1893. Production shrank and
deflation reigned.
1899–1900 recession
June 1899 – 1 year 2 years −15.5% −8.8%
Dec 6
1900 months
This was a mild recession in the period of general growth beginning after 1897.
Evidence for a recession in this period does not show up in some annual data
series.
1902–04 recession
Sep 1902 – 1 year 1 year −16.2% −17.1%
Aug 11 9
1904 months months
Though not severe, this downturn lasted for nearly two years and saw a distinct
decline in the national product. Industrial and commercial production both
declined, albeit fairly modestly. The recession came about a year after a 1901
stock crash.
Panic of 1907
May 1907 – 1 year 2 years −29.2% −31.0%
June 1 month 9
1908 months
A run on Knickerbocker Trust Company deposits on October 22, 1907, set
events in motion that would lead to a severe monetary contraction. The fallout
from the panic led to Congress creating the Federal Reserve System.
Panic of 1910–1911
Jan 1910 – 2 years 1 year −14.7% −10.6%
Jan 7 months
1912
This was a mild but lengthy recession. The national product grew by less than 1%,
and commercial activity and industrial activity declined. The period was also
marked by deflation.
Recession of 1913–1914
Jan 1913– 1 year 1 year −25.9% −19.8%
Dec 191 11
4 months
Productions and real income declined during this period and were not offset until
the start of World War I increased demand. Incidentally, the Federal
Reserve Act was signed during this recession, creating the Federal Reserve
System, the culmination of a sequence of events following the Panic of
1907.
Post-World War I recession
Aug 1918 – 7 months 8 months −24.5% −14.1%
March 3 years
1919
Severe hyperinflation in Europe took place over production in North America. This
was a brief but very sharp recession and was caused by the end of wartime
production, along with an influx of labor from returning troops. This in turn
caused high unemployment.
Depression of 1920–21
Jan 1920 – 1 year 10 months −38.1% −32.7%
July 6
1921 months
The 1921 recession began a mere 10 months after the post-World War I recession,
as the economy continued working through the shift to a peacetime economy.
The recession was short but extremely painful. The year 1920 was the single
most deflationary year in American History; production, however, did not fall
as much as might be expected from the deflation. GNP may have declined
between 2.5 and 7 percent, even as wholesale prices declined by 36.8%. The
economy had a strong recovery following the recession.
1923–24 recession
May 1923 – 1 year 2 years −25.4% −22.7%
June 2
1924 months
From the depression of 1920–21 until the Great Depression, an era dubbed the
Roaring Twenties, the economy was generally expanding. Industrial
production declined in 1923–24, but on the whole this was a mild recession.
1926–27 recession
Oct 1926 – 1 year 2 years −12.2% −10.0%
Nov 1 month 3
 1927 months
This was an unusual and mild recession, thought to be caused largely because
Henry Ford closed production in his factories for six months to switch from
production of the Model T to the Model A. Charles P. Kindleberger says
the period from 1925 to the start of the Great Depression is best thought of as
a boom, and this minor recession just proof that the boom "was not general,
uninterrupted or extensive".

Depression
In economics, a depression is a sustained, long-term downturn in economic activity
in one or more economies. It is a more severe downturn than a recession, which is
seen by economists as part of a normal business cycle.

Considered a rare and extreme form of recession, a depression is characterized by

its length, and by abnormally large increases in unemployment, falls in the
availability of credit— quite often due to some kind of banking/financial crisis,
shrinking output and investment, numerous bankruptcies— including sovereign
debt defaults, significantly reduced amounts of trade and commerce— especially
international, as well as highly volatile relative currency value fluctuations— most
often due to devaluations. Price deflation, financial crises and bank failures are also
common elements of a depression.
Definition
There is no widely agreed definition for a depression, though some have been
proposed. In the United States the National Bureau of Economic Research
determines contractions and expansions in the business cycle, but does not declare
depressions. Generally, periods labeled depressions are marked by a substantial
and sustained shortfall of the ability to purchase goods relative to the amount that
could be produced using current resources and technology (potential output).
Another proposed definition of depression includes two general rules: 1) a decline in
real GDP exceeding 10%, or 2) a recession lasting 2 or more years.

Terminology
Use of the term "depression" to refer to an economic downturn dates to the 19th
century, when it was used by various American and British politicians and
economists. The term has connotations both of "a depressed (below usual) level of
economic output", and psychological depression (unhappiness). While in the
technical sense it refers to a deep or prolonged reduction in economic activity, it is
popularly used to suggest a crisis of confidence; compare malaise. Alternative
terms for extended periods of poor economic performance include "lost decade" and
L-shaped recession.

Today the term "depression" is most often associated with the Great Depression of
the 1930s, but the term had been in use long before then. Indeed, the first major
American economic crisis, the Panic of 1819, was described by then-president
James Monroe as "a depression", and the economic crisis immediately preceding
the 1930's depression, the Depression of 1920–21, was referred to as a
"depression" by president Calvin Coolidge. However, in the 19th and early 20th
centuries, financial crises were traditionally referred to as "panics", e.g., the 'major'
Panic of 1907, and the 'minor' Panic of 1910–1911, though the 1929 crisis was
more commonly called "The Crash", and the term "panic" has since fallen out of
use. At the time of the Great Depression (of the 1930s), the phrase "The Great
Depression" had already been used to refer to the period 1873–96 (in the United
Kingdom), or more narrowly 1873–79 (in the United States), which has since been
retroactively renamed the Long Depression.

Common use of the phrase "The Great Depression" for the 1930s crisis is most
frequently attributed to British economist Lionel Robbins, whose 1934 book The
Great Depression is credited with 'formalizing' the phrase, though US president
Herbert Hoover is widely credited with having 'popularized' the term/phrase,
informally referring to the downturn as a depression, with such uses as "Economic
depression cannot be cured by legislative action or executive pronouncement",
(December 1930, Message to Congress) and "I need not recount to you that the
world is passing through a great depression", (1931).
Occurrence
Due to the lack of an agreed definition, and the strong negative associations, the
characterization of any period as a "depression" is contentious. The term was
frequently used for regional crises from the early 19th century until the 1930s, and
for the more widespread crises of the 1870s and 1930s, but economic crises since
1945 have generally been referred to as "recessions", with the 1970s global crisis
referred to as "stagflation", but not a depression. The only two eras commonly
referred to at the current time as "depressions" are the 1870s and 1930s.

To some degree this is simply a stylistic change, similar to the decline in the use of
"panic" to refer to financial crises, but it does also reflect that the economic cycle –
both in the United States and in most OECD countries – though not in all – has
been more moderate since 1945.

There have been many periods of prolonged economic underperformance in

particular countries/regions since 1945, detailed below, but terming these as
"depressions" is controversial. The late-2000s recession, which is the most
significant global crisis since the Great Depression, has at times been termed a
depression, but this terminology is not widely used, with the episode instead being
referred to by other terms, such as the punning "Great Recession".

Great depressions
The Great Depression was a severe worldwide economic depression in the decade
preceding World War II. The timing of the Great Depression varied across nations,
but in most countries it started in about 1929 and lasted until the late 1930s or
early 1940s. It was the longest, most widespread, and deepest depression of the
20th century. In the 21st century, the Great Depression is commonly used as an
example of how far the world's economy can decline. The depression originated in
the U.S., starting with the stock market crash of October 29, 1929 (known as Black
Tuesday). From there, it quickly spread to almost every country in the world.

The Great Depression had devastating effects in virtually every country, rich and
poor. Personal income, tax revenue, profits and prices dropped. while international
trade plunged by ½ to ⅔. Unemployment in the U.S. rose to 25%, and in some
countries rose as high as 33%. Cities all around the world were hit hard, especially
those dependent on heavy industry. Construction was virtually halted in many
countries. Farming and rural areas suffered as crop prices fell by approximately
60%. Facing plummeting demand with few alternate sources of jobs, areas
dependent on primary sector industries such as cash cropping, mining and logging
suffered the most.
Some economies started to recover by the mid-1930s. However, in many countries
the negative effects of the Great Depression lasted until the start of World War II.

Economic indicators
Change in economic indicators 1929-32
USA Britain France Germany
Industrial production -46% -23 -24 -41
Wholesale prices -32% -33 -34 -29
World trade -70% -60 -54 -61
Unemployment +607% +129 +214 +232

Start of the Great Depression

Economic historians usually attribute the start of the Great Depression to the
sudden devastating collapse of US stock market prices on October 29, 1929, known
as Black Tuesday. However, some dispute this conclusion, and see the stock crash
as a symptom, rather than a cause of the Great Depression. Even after the Wall
Street Crash of 1929, optimism persisted for some time; John D. Rockefeller said
that "These are days when many are discouraged. In the 93 years of my life,
depressions have come and gone. Prosperity has always returned and will again.”
In fact, the stock market turned upward in early 1930, returning to early 1929
levels by April. This was still almost 30% below the peak of September 1929.
Together, government and business actually spent more in the first half of 1930
than in the corresponding period of the previous year. On the other hand,
consumers, many of whom had suffered severe losses in the stock market the
previous year, cut back their expenditures by ten percent. Likewise, beginning in
the summer of 1930, a severe drought ravaged the agricultural heartland of the
USA.

By mid-1930, interest rates had dropped to low levels. But expected deflation and
the continuing reluctance of people to borrow meant that consumer spending and
investment were depressed.[13] By May 1930, automobile sales had declined to
below the levels of 1928. Prices in general began to decline, although wages held
steady in 1930; but then a deflationary spiral started in 1931. Conditions were
worse in farming areas, where commodity prices plunged, and in mining and
logging areas, where unemployment was high and there were few other jobs. The
decline in the US economy was the factor that pulled down most other countries at
first, then internal weaknesses or strengths in each country made conditions worse
or better. Frantic attempts to shore up the economies of individual nations through
protectionist policies, such as the 1930 U.S. Smoot–Hawley Tariff Act and
retaliatory tariffs in other countries, exacerbated the collapse in global trade. By
late 1930, a steady decline in the world economy had set, which did not reach
bottom until 1933.

Causes
There were multiple causes for the first downturn in 1929. These include the
structural weaknesses and specific events that turned it into a major depression
and the manner in which the downturn spread from country to country. In relation
to the 1929 downturn, historians emphasize structural factors like massive bank
failures and the stock market crash. In contrast, economists (such as Barry
Eichengreen, Milton Friedman and Peter Temin) point to monetary factors such as
actions by the US Federal Reserve that contracted the money supply, as well as
Britain's decision to return to the Gold Standard at pre-World War I parities
(US$4.86:£1).

Recessions and business cycles are thought to be a normal part of living in a world
of inexact balances between supply and demand. What turns a normal recession or
'ordinary' business cycle into an actual depression is a subject of much debate and
concern. Scholars have not agreed on the exact causes and their relative
importance. Moreover, the search for causes is closely connected to the issue of
avoiding future depressions.

Thus, the personal political and policy viewpoints of scholars greatly colors their
analysis of historic events occurring eight decades ago. An even larger question is
whether the Great Depression was primarily a failure on the part of free markets or,
alternately, a failure of government efforts to regulate interest rates, curtail
widespread bank failures, and control the money supply. Those who believe in a
larger economic role for the state believe that it was primarily a failure of free
markets, while those who believe in a smaller role for the state believe that it was
primarily a failure of government that compounded the problem.

Current theories may be broadly classified into two main points of view and several
heterodox points of view. First, there are demand-driven theories, most importantly
Keynesian economics, but also including those who point to the breakdown of
international trade, and Institutional economists who point to underconsumption
and over-investment (causing an economic bubble), malfeasance by bankers and
industrialists, or incompetence by government officials. The consensus viewpoint is
that there was a large-scale loss of confidence that led to a sudden reduction in
consumption and investment spending. Once panic and deflation set in, many
people believed they could make more money by keeping clear of the markets as
prices dropped lower and a given amount of money bought ever more goods,
exacerbating the drop in demand.

Second, there are the monetarists, who believe that the Great Depression started
as an ordinary recession, but that significant policy mistakes by monetary
authorities (especially the Federal Reserve), caused a shrinking of the money
supply which greatly exacerbated the economic situation, causing a recession to
descend into the Great Depression. Related to this explanation are those who point
to debt deflation causing those who borrow to owe ever more in real terms.

Lastly, there are various heterodox theories that downplay or reject the
explanations of the Keynesians and monetarists. For example, some new classical
macroeconomists have argued that various labor market policies imposed at the
start caused the length and severity of the Great Depression. The Austrian school of
economics focuses on the macroeconomic effects of money supply, and how central
banking decisions can lead to over-investment (economic bubble). The Marxist
critique of political economy emphasizes the tendency of capitalism to create
unbalanced accumulations of wealth, leading to overaccumulations of capital and a
repeating cycle of devaluations through economic crises.

Debt deflation
Irving Fisher argued that the predominant factor leading to the Great Depression
was over-indebtedness and deflation. Fisher tied loose credit to over-indebtedness,
which fueled speculation and asset bubbles. He then outlined 9 factors interacting
with one another under conditions of debt and deflation to create the mechanics of
boom to bust. The chain of events proceeded as follows:

1. Debt liquidation and distress selling

2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.
[16]

During the Crash of 1929 preceding the Great Depression, margin requirements
were only 10%. Brokerage firms, in other words, would lend $9 for every $1 an
investor had deposited. When the market fell, brokers called in these loans, which
could not be paid back. Banks began to fail as debtors defaulted on debt and
depositors attempted to withdraw their deposits en masse, triggering multiple bank
runs. Government guarantees and Federal Reserve banking regulations to prevent
such panics were ineffective or not used. Bank failures led to the loss of billions of
dollars in assets. Outstanding debts became heavier, because prices and incomes
fell by 20–50% but the debts remained at the same dollar amount. After the panic
of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000
banks failed during the 1930s). By April 1933, around $7 billion in deposits had
been frozen in failed banks or those left unlicensed after the March Bank Holiday.
Bank failures snowballed as desperate bankers called in loans which the borrowers
did not have time or money to repay. With future profits looking poor, capital
investment and construction slowed or completely ceased. In the face of bad loans
and worsening future prospects, the surviving banks became even more
conservative in their lending. Banks built up their capital reserves and made fewer
loans, which intensified deflationary pressures. A vicious cycle developed and the
downward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices which it caused. The
mass effect of the stampede to liquidate increased the value of each dollar owed,
relative to the value of declining asset holdings. The very effort of individuals to
lessen their burden of debt effectively increased it. Paradoxically, the more the
debtors paid, the more they owed. This self-aggravating process turned a 1930
recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal
Reserve Bank, have revived the debt-deflation view of the Great Depression
originated by Fisher.

Turning point and recovery

Various countries around the world started to recover from the Great Depression at
different times. In most countries of the world, recovery from the Great Depression
began in 1933. In the U.S., recovery began in the spring of 1933. However, the
U.S. did not return to 1929 GNP for over a decade and still had an unemployment
rate of about 15% in 1940, albeit down from the high of 25% in 1933.

There is no consensus among economists regarding the motive force for the U.S.
economic expansion that continued through most of the Roosevelt years (and the
1937 recession that interrupted it).

The common view among mainstream economists is that Roosevelt's New Deal
policies either caused or accelerated the recovery, although his policies were never
aggressive enough to bring the economy completely out of recession. Some
economists have also called attention to the positive effects from expectations of
reflation and rising nominal interest rates that Roosevelt's words and actions
portended. However, opposition from the new Conservative Coalition caused a
rollback of the New Deal policies in early 1937, which caused a setback in the
recovery.[36]

According to Christina Romer, the money supply growth caused by huge

international gold inflows was a crucial source of the recovery of the United States
economy, and that the economy showed little sign of self-correction. The gold
inflows were partly due to devaluation of the U.S. dollar and partly due to
deterioration of the political situation in Europe. In their book, A Monetary History
of the United States, Milton Friedman and Anna J. Schwartz also attributed the
recovery to monetary factors, and contended that it was much slowed by poor
management of money by the Federal Reserve System. Current Chairman of the
Federal Reserve Ben Bernanke agrees that monetary factors played important roles
both in the worldwide economic decline and eventual recovery. Bernanke, also sees
a strong role for institutional factors, particularly the rebuilding and restructuring of
the financial system, and points out that the Depression needs to be examined in
international perspective. Economists Harold L. Cole and Lee E. Ohanian, believe
that the economy should have returned to normal after four years of depression
except for continued depressing influences, and point the finger to the lack of
downward flexibility in prices and wages, encouraged by Roosevelt Administration
policies such as the National Industrial Recovery Act.

Gold standard

Economic studies have indicated that just as the downturn was spread worldwide by
the rigidities of the Gold Standard, it was suspending gold convertibility (or
devaluing the currency in gold terms) that did most to make recovery possible.
What policies countries followed after casting off the gold standard, and what
results followed varied widely.

Every major currency left the gold standard during the Great Depression. Great
Britain was the first to do so. Facing speculative attacks on the pound and depleting
gold reserves, in September 1931 the Bank of England ceased exchanging pound
notes for gold and the pound was floated on foreign exchange markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931.
Other countries, such as Italy and the U.S., remained on the gold standard into
1932 or 1933, while a few countries in the so-called "gold bloc", led by France and
including Poland, Belgium and Switzerland, stayed on the standard until 1935–
1936.

According to later analysis, the earliness with which a country left the gold standard
reliably predicted its economic recovery. For example, Great Britain and
Scandinavia, which left the gold standard in 1931, recovered much earlier than
France and Belgium, which remained on gold much longer. Countries such as China,
which had a silver standard, almost avoided the depression entirely. The connection
between leaving the gold standard as a strong predictor of that country's severity of
its depression and the length of time of its recovery has been shown to be
consistent for dozens of countries, including developing countries. This partly
explains why the experience and length of the depression differed between national
economies.

World War II and recovery

The common view among economic historians is that the Great Depression ended
with the advent of World War II. Many economists believe that government
spending on the war caused or at least accelerated recovery from the Great
Depression. However, some consider that it did not play a very large role in the
recovery, although it did help in reducing unemployment. The massive rearmament
policies leading up to World War II helped stimulate the economies of Europe in
1937–39. By 1937, unemployment in Britain had fallen to 1.5 million. The
mobilization of manpower following the outbreak of war in 1939 finally ended
unemployment.

America's entry into the war in 1941 finally eliminated the last effects from the
Great Depression and brought the unemployment rate down below 10%. In the
U.S., massive war spending doubled economic growth rates, either masking the
effects of the Depression or essentially ending the Depression. Businessmen
ignored the mounting national debt and heavy new taxes, redoubling their efforts
for greater output to take advantage of generous government contracts.

Effects
The majority of countries set up relief programs, and most underwent some sort of
political upheaval, pushing them to the left or right. In some states, the
desperate citizens turned toward nationalist demagogues—the most
infamous being Adolf Hitler—setting the stage for World War II in 1939.

Great Depression in Australia

1920s: The calm before the storm...

The Great War had depleted Britain's savings and foreign investments, and wartime
inflation had upset the United Kingdom's terms of trade. A sluggish economy in
Britain naturally reduced British demand for imports from Australia throughout the
1920s and this had affected Australia's balance of payments also. Throughout the
1920s the Australian unemployment rate floated between 6% and 11%.

The Great War had also caused many necessary infrastructure projects to be
delayed or abandoned, and many of these were begun in the 1920s, including the
Sydney Harbour Bridge and Sydney's underground railway system in addition to the
Commonwealth government beginning to fund major highways. New dams and
grain elevators were built, and the rural railway network was expanded in nearly
every state. Large sums of government money were made available to provide
returned First World War servicemen with farmland and agricultural equipment
under soldier settlement schemes. All these publicly funded projects were paid for
by loans raised by both state and federal governments. Most of these loans were
raised on capital markets in the City of London at an average of £30 million per
annum.

1929: The storm erupts

In 1925 the British government decided to put the pound sterling back onto the
Gold Standard at pre-1913 parity. This had the immediate effect of making British
exports far less competitive in international markets. Because Australia pegged the
Australian pound to the pound sterling, this also affected Australian terms of trade.

Falling export demand and commodity prices placed massive downward pressures
on wages, particularly in industries such as coal mining. Due to falling prices,
bosses were unable to pay the wages that workers wanted. The result was a series
of crippling strikes in many sectors of the economy in the late 1920s. Coal miners'
strikes in the winter of 1929 brought much of the economy to its knees. A riot at a
picket line in the Hunter Valley mining town of Rothbury saw police shoot one
teenage coal miner dead.

The conservative Prime Minister of Australia, Stanley Bruce, wished to dismantle

the conciliation and arbitration system of judicially-supervised collective bargaining
which had been the cornerstone of Australia's industrial relations system since the
1900s. Arbitration made it difficult for employers to adjust wages in response to
market conditions.

The opposition Australian Labor Party, led by James Scullin, successfully depicted
Stanley Bruce as wanting to destroy Australia's high wages and working conditions
in the 1929 federal election. Scullin was elected Prime Minister in a landslide which
saw Stanley Bruce voted out as the Member for Flinders, the only time prior to the
2007 federal election that a sitting Prime Minister lost his seat.

1929-1935: Scullin and Lang

Seventeen days after James Scullin was sworn in as Prime Minister, the Wall Street
Crash of 1929 occurred, marking what is now perceived to be the beginning of the
Great Depression.

Throughout Scullin's term, commodity prices continued to fall, unemployment rose,

and Australia's big cities were depopulated as thousands of unemployed men took
to the countryside in search of menial agricultural work.

The stagnant economy had reduced economic activity and therefore tax revenues.
However, the debt commitments of both state and federal governments remained
the same. Australia became severely at risk of defaulting on its foreign debt which
had been accumulated during the relative prosperity and infrastructure-building
frenzy of the 1920s.

Prime Minister Scullin and his Treasurer Ted Theodore found themselves unable to
make ameliorating measures by the conservative majority in the Senate.

The Bank of England was concerned by the possibility of default and in 1930 sent
an envoy, Sir Otto Niemeyer, to lecture Australian governments on the virtues of
austerity and belt-tightening. At a conference in Melbourne in that year, all state
and federal governments agreed to slash government spending, cancel public
works, cut public service salaries and decrease welfare benefits. This became
known as the "Melbourne Agreement", or the "Premiers' Plan".

Jack Lang, the Labor Party Leader of the Opposition in New South Wales and a fiery
left-wing populist, campaigned vigorously against the provisions of the Melbourne
Agreement. He was elected in a landslide in the NSW state election of 1930.

In 1931 at an economic crisis conference in Canberra, Jack Lang issued his own
programme for economic recovery. The "Lang Plan" advocated the repudiation of
interest payments to overseas creditors until domestic conditions improved, the
abolition of the Gold Standard to be replaced by a "Goods Standard" where the
amount of money in circulation was linked to the amount of goods produced, and
the immediate injection of £18 million of new money into the economy in the form
of Commonwealth Bank of Australia credit. The Prime Minister and all other state
Premiers refused.

The Labor Party soon split into three separate factions. Jack Lang and his
supporters, mainly in New South Wales, were expelled from the party and formed a
left-wing splinter party officially known as the "New South Wales Labor Party,"
popularly known as "Lang Labor". The Minister for Public Works and Railways,
Joseph Lyons, led a conservative faction, which believed in classical economic policy
and loyalty to the British Empire in all circumstances. It merged with the opposition
Nationalist Party to form the United Australia Party. A moderate faction led by
Scullin and Theodore remained in government until the United Australia Party and
Lang Labor combined at the end of 1931 in a parliamentary vote of no confidence,
which resulted in a federal election. Joseph Lyons and the UAP won this election in
a landslide that was nearly the mirror opposite of the 1929 election.

Before being voted out of office, the Scullin government had introduced a law, the
Financial Agreement Enforcement Act 1931 to force New South Wales to adhere to
its debt commitments in line with the Melbourne Agreement. The federal
government had paid NSW's bond installments and intended to recoup this money
from the NSW Government. Premier Lang still refused to comply, and the Financial
Agreement Enforcement Act 1931 was upheld by the High Court of Australia in
1932. Premier Lang still refused to hand over the money, which led the Governor of
New South Wales, Sir Philip Game, to dismiss the Premier in May 1932 and call
fresh elections. Jack Lang lost the election and was never to become Premier again.
He later entered Federal Parliament.
Unemployed Australians
For Australians the decade of the 1930s began with problems of huge
unemployment, because the fall of the stock markets on Wall Street reduced
confidence throughout the world. Most governments reacted to the crisis with
similar policies, aimed at slashing back government spending and paying back
loans. The Australian government could do little to change the effects of the slump
and the tough economic times ahead. This affected the country in many ways.

Because of the economic downturn, people’s lives changed drastically. Australia had
supplied huge amounts of wool for uniforms during World War 1, and many exports
helped Australia achieve a high standard of living in the 1920s. The majority of the
people of Australia lived very well prior to the fall, so they felt the effects of the
depression strongly. Because of the severe economic contraction, the reduction of
purchasing goods, employers couldn’t afford to keep excessive workers. A five year
unemployment average for 1930-34 was 23.4%, with a peak of 28% of the nation
being unemployed in 1932. This was one of the most severe unemployment rates in
the industrialized world, exceeded only by Germany.

Many hundreds of thousands of Australians suddenly faced the humiliation of

poverty and unemployment. This was still the era of traditional social family
structure, where the man was expected to be the sole bread winner. Soup kitchens
and charity groups made brave attempts to feed the many starving and destitute.
The suicide rates increased dramatically and it became clear that Australia had
limits to the resources for dealing with the crisis. The depression's sudden and wide
spread unemployment hit the soldiers who had just returned from war the hardest
as they were in their mid thirties and still suffering the trauma of their wartime
experiences. At night many slept covered in newspapers at Sydney’s Domain or at
Salvation Army refugees.

The limited jobs that did arise were viciously fought for. The job vacancies were
advertised in the daily newspaper, which formed massive queues to search for any
job available. This then caused the race to arrive first at the place of employment
(the first person to turn up was usually hired.) This is depicted in the Australian
movie Caddie.

1932-1939: A slow recovery

Unlike the United States, where Franklin Roosevelt's New Deal stimulated the
American economy, New Zealand where Michael Savage's pioneering welfare state
rapidly reduced hardship, or the United Kingdom where rearmament (from 1936)
reduced unemployment, there was no significant mechanism for economic recovery
in Australia.

Federation in 1901 had granted only limited power to the federal government. For
example, income taxes were collected by the State governments. High tariffs
worked to hurt the economy, but powerful interest groups permitted no change in
this aspect of policy. There was no significant banking reform or nationalisation of
private businesses.

The devaluation of the Australian pound, abandonment of the Gold Standard,

recovery of major trading partners like the United Kingdom and public works
projects instituted by State and local governments led to a slow recovery.
Unemployment, which peaked at 29% in 1932, was 11% at the start of the Second
World War.

Legacy of the Great Depression in Australia

During the Second World War, the Australian Labor Party formed a government in
the House of Representatives, led by two socialist prime ministers: John Curtin
(1941–1945) and Ben Chifley (1945–1949). Curtin and Chifley, who often used the
spectre of another depression in his campaign rhetoric, used emergency wartime
powers to introduce a command economy in Australia based on Keynesian
principles. Unemployment was virtually eliminated in this period, being reduced
below 2 percent. In 1942 income tax became federally controlled with the states
conceding that the war effort needed a centrally controlled financial basis.

Chifley also attempted to nationalise the banking sector, claiming that public control
over the finance industry would assist in preventing further depressions. These
plans saw bitter and protracted opposition from the media, conservative parties and
the banks themselves, and the High Court of Australia ruled that the proposed
nationalisation of banks was unconstitutional.

In 1944 Curtin announced the plan for a white paper on full employment. This white
paper served a variety of roles; to establish the priority of full employment; to
ensure the depression would not recur; and to propose ways to make these
objectives possible. Dr H C 'Nugget' Coombs as director-general of the
Reconstruction Ministry had major input into this policy. The economic theories
proposed by J M Keynes in 1936 were a major influence on the white paper.

Chifley's government was soundly defeated by the Liberal-Country Party Coalition

led by Robert Menzies in 1949. Though Menzies was a conservative, his sixteen
subsequent years in power saw the government continue the use of Keynesian
methods in economic policy as well as further expansion of the welfare state and
public services such as higher education, research and development and public
housing. Public support for these may have been a legacy of mass experiences of
poverty during the Great Depression.

Great Depression in Canada

Canada was hit hard by the Great Depression. Between 1929 and 1939, the
gross national product dropped 40% (compared to 37% in the US). Unemployment
reached 28% at the depth of the Depression in 1933. Many businesses closed, as
corporate profits of $396 million in 1929 turned into losses of $98 million in 1933.
Canadian exports shrank by 50% from 1929 to 1933. Worst hit were areas
dependent on primary industries such as farming, mining and logging, as prices fell
and there were few alternative jobs. Families saw most or all of their assets
disappear and their debts became heavier as prices fell.

Pre-Depression
In the years between 1919 and 1929, Canada had the world's fastest growing
economy, with only a sharp but brief recession during the First World War. The
1920s had been an especially successful period of growth, with living standards
improving remarkably. Then suddenly, in the 1930s the economy took a severe and
devastating turn for the worse.

Causes
Over-production and Over-Expansion - Canadian companies expanded their
industries so they could generate more profits, but economic activity shrank, and
companies were left exposed with heavier debt and a lack of cash flow.

Dependence on Few Primary Products - The decreased demand for natural

resources created a significant drop in Canadian sales, leading to an economic
depression.

Dependence on the United States - Due to the dependency Canada had on the
U.S., when an economic depression hit the States, Canada was thrust into one as
well.

High Tariffs - Canada's efforts to get out of a recession by raising export tariffs
only backfired due to competition from other countries and Canada's lack of variety
in its exports.

Too Much Credit - Canadians bought too much on lease and credit, including
stocks. Therefore when the stock market crashed (partly due to the credit buying),
Canadians were in debt and faced a trying time as they attempted to sell their
personal belongings, which in many cases led to repossessions of partly paid-for
purchases.

The Drought and Dust Bowl Years - The Prairies were hit extremely hard by
several years of drought. Dust storms swept across the prairies, making it
impossible for farmers to grow the copious quantities of wheat they needed to
provide for the markets. The wheat that survived the dust storms could not grow
tall and healthy due to a lack of rain. Thus, since the farmers had frequently bought
their seed and machinery by using credit, when they couldn't pay off their debts,
the farmers were often bankrupted.
Economic results
By 1933, 30% of the labour force was out of work, and one fifth of the population
became dependent on government assistance. Wages fell, as did prices. Gross
National Expenditure had declined 42% from the 1929 levels. In some areas, the
decline was far worse. In the rural areas of the prairies, two thirds of the population
were on relief.

Further damage was the reduction of investment: both large companies and
individuals were unwilling and unable to invest in new ventures.

In 1932, industrial production was only at 58% of the 1929 level, the second lowest
level in the world after the United States, and well behind nations such as Britain,
which only saw it fall to 83% of the 1929 level. Total national income fell to 55% of
the 1929 level, again worse than any nation other than the United States.

Impact
Canada's economy at the time was just starting to shift from primary industry
(farming, fishing, mining and logging) to manufacturing. Exports of raw materials
plunged, and employment, prices and profits fell in every sector. Canada was the
worst-hit (after the United States) because of its economic position. It was further
affected as its main trading partners were Britain and the U.S., both of which were
badly affected by the worldwide depression.

Ontario
The hardest-hit cities were in the heavy industry centers of Southern Ontario where
much of Canada's productive farmland and manufacturing centers were located.
They included Hamilton, Ontario (Canada's largest steel center), Toronto, Tilbury,
Ontario, and Windsor, Ontario, an automotive manufacturing center, a satellite
linked to its larger neighbour, Detroit. Windsor also took a devastating blow, being
a general manufacturing center, and home to auto manufacturers, much like its
larger neighbour, Detroit, Michigan. In Ontario, unemployment skyrocketed to
roughly 45%. Much like in the United States, the Government of Ontario decided to
start numerous Public Works projects (such as highways, dams, bridges, and
tunnels) in order to employ construction workers and pump money into the
economy.

By 1937, the province's unemployment levels began to recede towards their pre-
crash levels. It was during this time that the Queen Elizabeth Way, Highway 2A
(which would later become Highway 401), and the routes of today's 400-Series
Highways were set. During this time, Highway 7 was also paved by hand and man-
power from Peterborough, Ontario to Ottawa, Ontario, through some of Southern
Ontario's roughest terrain. The Province of Ontario used manpower whenever
possible, to employ as many people as it could. In Kingston, Ontario an
unemployment relief camp on Barriefield lower common was set up under the
command of the Commandant of the Royal Military College of Canada.

Prairie Provinces
The Prairie Provinces and Western Canada were the hardest-hit; they fully
recovered after 1939. The fall of wheat prices drove many farmers to the towns and
cities, such as Calgary, Alberta, Regina, Saskatchewan, and Brandon, Manitoba

During the depression, there was a rise of working class militancy. Organized labour
largely retreated in response to the ravages of the depression at the same time that
significant portions of the working class, including the unemployed, clamoured for
collective action. Filling this leadership void was the Communist Party's Workers'
Unity League, which sought to building a revolutionary trade union movement
under a policy of dual unionism. Numerous strikes and protests were led by the
Communists, many of which culminated in violent clashes with the police. Some
notable ones include a coal miners strike that resulted in the Estevan Riot in
Estevan, Saskatchewan that left three strikers dead by RCMP bullets in 1931, a
waterfront strike in Vancouver that culminated with the "Battle of Ballantyne Pier"
in 1935, and numerous unemployed demonstrations up to and including the On-to-
Ottawa Trek that left one Regina police constable and one protester dead in the
"Regina Riot." Although the actual number of Communist Party militants remained
small, their impact was far disproportionate to their numbers, in large part because
of the anticommunist reaction of the government, especially the policies of R. B.
Bennett who vowed to crush Communism in Canada with an "iron heel of
ruthlessness." These conflicts diminished after 1935, when the Communist Party
shifted strategies and Bennett's Conservatives were defeated. Agitation and unrest
nonetheless persisted throughout the depression, marked by periodic clashes, such
as a sit-down strike in Vancouver that ended with "Bloody Sunday." These
developments had far-reaching consequences in shaping the postwar environment,
including the domestic cold war climate, the rise of the welfare state, and the
implementation of an institutional framework for industrial relations.

World trade
The Stock Market crash in New York led people to hoard their money; as
consumption fell, the American economy steadily contracted, 1929-32. Given the
close economic links between the two countries, the collapse quickly affected
Canada. Added to the woes of the prairies were those of Ontario and Quebec,
whose manufacturing industries were now victims of overproduction. Massive lay-
offs occurred and other companies collapsed into bankruptcy. This collapse was not
as sharp as that in the United States, but was the second sharpest collapse in the
world.
Canada did have some advantages over other countries, especially its extremely
stable banking system that had no failures during the entire depression, compared
to over 9,000 small banks that collapsed in the United States.

Canada was hurt badly because of its reliance on wheat and other commodities,
whose prices fell by over 50%, and because of the importance of international
trade. In the 1920s about 25% of the Canadian Gross National Product was derived
from exports. The first reaction of the U.S. was to raise tariffs via the Smoot-
Hawley Tariff Act, passed into law June 17, 1930. This hurt the Canadian economy
more than most other countries in the world, and Canada retaliated by raising its
own rates on American imports and by switching business to the Empire.

In an angry response to Smoot–Hawley, Canada welcomed the British introduction

of trade protectionism and a system of Commonwealth preference during the winter
of 1931-32. It helped Canada avoid external default on their public debt during the
Great Depression. Canada had a high degree of exposure to the international
economy - for example, in the 1920s about 25% of the Canadian GDP came from
exports - had left Canada susceptible to any international economic downturn. The
onset of the depression created critical balance of payment deficits, and it was
largely the extension of imperial protection by Britain that gave Canada the
opportunity to increase their exports to the British market. By 1938 Britain was
importing more than twice the 1929 volume of products from Australia, while the
value of products shipped from Canada more than doubled, despite the dramatic
drop in prices. Thus, the British market played a vital role in helping Canada and
Australia stabilize their balance of payments in the immensely difficult economic
conditions of the 1930s.

Recovery
The Canadian recovery from the Great Depression proceeded slowly. Economists
Pedro Amaral and James MacGee find that the Canadian recovery has important
differences with the United States[14]. In the U.S. productivity recovered quickly
while the labor force remained depressed throughout the decade. In Canada
employment quickly recovered but productivity remained well below trend. Amaral
and MacGee suggest that this decline is due to the sustained reduction in
international trade during the 1930s.

In the midst of the Great Depression, the Crown-in-Council attempted to uplift the
people, and created two national corporations: the Canadian Radio Broadcasting
Commission (CRBC), and the Bank of Canada. The former, established in 1932, was
seen as a means to keep the country unified and uplifted in these harsh economic
times. Many poor citizens found radio as an escape and used it to restore their own
faiths in a brighter future. Broadcasting coast to coast in both French and English,
the CRBC played a vital role in keeping the morale up for Canadians everywhere.
The latter was used to regulate currency and credit which had been horribly
managed amongst Canadian citizens in the prior years. It was also set up to serve
as a private banker’s bank and to assist and advise the Canadian government on its
own debts and financial matters. The bank played an important role to help steer
government spending in the right direction. The bank's effort took place through
the tough years off the depression and on to the prosperity that followed into and
after the Second World War.

Both of these corporations were seen as positive moves by the Canadian

government to help get the economy back on track. 1937 was an important year in
the recovery from the Great Depression. The Bank of Canada was nationalized in
that year, and the Canadian Radio Broadcasting Commission (CRBC) became the
Canadian Broadcasting Company (CBC) in that same year. Both corporations were
successful aids in the cultural and financial recovery of the Canadian economy
during the Great depression.

It took the outbreak of World War II to pull Canada out of the depression. From
1939, an increased demand in Europe for materials, and increased spending by the
Canadian government created a strong boost for the economy. Unemployed men
enlisted in the military. By 1939, Canada was in the first prosperity period in the
business cycle in a decade. This coincided with the recovery in the American
economy, which created a better market for exports and a new inflow of much
needed capital.

Great Depression in Central Europe

Germany

The Great Depression severely affected central Europe. The unemployment

rate in Germany, Austria and Poland rose to 20% while output fell by 40%. By
November 1932 every European country had increased tariffs or introduced import
quotas.

Under the Dawes Plan the German economy boomed in the 1920s, paying
reparations and increasing domestic production. Germany's economy retracted in
1929 when Congress discontinued the Dawes Plan loans. This was not just a
problem for Germany. Europe received almost $8 billion USD in American credit
between 1924 and 1930 in addition to other war time loans.

Germany's Weimar Republic was hit hard by the depression as American loans to
help rebuild the German economy now stopped. Unemployment soared, especially
in larger cities. Adolf Hitler's Nazi Party came to power in Germany in January 1933.
Repayment of the war reparations due by Germany were suspended in 1932
following the Lausanne Conference of 1932. By that time Germany had repaid 1/8th
of the reparations.

Falling prices and demand induced by the crisis created an additional problem in the
central European banking system, where the financial system had particularly close
relationships with business. In 1931 the Creditanstalt bank in Vienna collapsed,
causing a financial panic across Europe.

Great Depression in France

The Great Depression affected France from about 1931 through the
remainder of the decade. The depression had drastic effects on the
local economy, which can partly explain the 6 February 1934 crisis and
even more the formation of the Popular Front, led by SFIO socialist
leader Léon Blum, who won the election of 1936.

Economic crisis of the 1920s

Like the United Kingdom, France had initially struggled to recover from the
devastation of World War I, trying without much success to recover war reparations
from Germany. Unlike Britain, though, France had a more self-sufficient economy.
In 1929, France seemed an island of prosperity, for three reasons. First, it was a
country traditionally wary of trusts and big companies. The economy of France was
above all founded in small and medium-sized businesses not financed by shares.
Unlike the Anglosphere and particularly Americans, the French invested little on the
stock exchange and put their confidence into gold, which in the crisis of 1929 was a
currency of refuge. Gold had played the same role in the first world war, which
explained French attachment to it. Finally, France had had a positive balance of
payments for some years thanks mainly to invisible exports such as tourism. French
investments abroad were numerous.

The German reparations decided by the Treaty of Versailles in 1919 brought in

large amounts of money which served principally to repay war loans to the United
States. Reparations payments ended in 1923. In January of that year, Germany
defaulted on its payments and the French president, Raymond Poincaré, invoked a
clause of the Versailles Treaty and sent troops to occupy the Ruhr valley in the
hope of enforcing payment. Germany responded by flooding the area with inflated
money, ruining its currency and denying France any hope of full reparations.
Poincaré accepted an agreement mediated by the United States in which it received
smaller payments, but Poincaré's government fell soon afterward.

While the United States experienced a sharp rise in unemployment, France had
almost none. Much of that was due to a simple lack of manpower; at the end of the
war, France had 1,322,000 dead and three million wounded. One in four of the
dead was younger than 24. That in turn lowered the birth rate, so that by 1938
France still had only half the number of 19-to-21 year-olds it would have had had
the war not happened.[3] But whatever the causes of full employment, confidence in
the government was high. The French economy was stronger than those of its
neighbours, notably because of the solidarity of the franc. The introduction of the
American economic model, inspired particularly by Ford, ended suddenly and, with
it, the modernisation of French businesses. Everything seemed to favour the
French; production didn't weaken before 1930, particularly in primary materials,
and the country was the world's leading producer of iron in 1930. France felt
confident in its systems and proud of its vertu budgétaire, in other words the
balancing of the budget, which France had managed more or less for nearly a
decade.

In 1927, France gained from the world crisis in becoming the world's largest holder
of gold, its reserves growing from 18 billion francs in 1927 to 80 billion in 1930.

Le Figaro said: "For our part let us rejoice in our timid yet prosperous economy as
opposed to the presumptuousness and decadent economy of the Anglo-Saxon
races.".

An undeveloped economy
France became uncompetitive with other industrialised countries during the 1920s.
The reason was its archaic economic model. There was practically no concentration
of capital and agriculture, the country's strength for centuries, was totally
unmechanised. Three-quarters of French farms in the 1930s were of less than 10
hectares. And while a start was made on modernisation in the 1920s because of
revenue linked to the war, farmers using the money to buy land (medium-scale
farms making up 22 per cent of cultivated land and large farms less than three per
cent) and machinery.

The crisis of 1929 impoverished all the countries of the world and even if France
could hold out for a while thanks to its invisible exports, it could not do so for long.
Exports of goods dropped sharply, and tourism, one of the country's largest sources
of income, also declined, as fewer tourists could afford to travel. The end of
German reparations was a further blow.

France appeared to go into the crisis with an advantage over its neighbours. The
crisis took hold, however, and France was the last country to come out of it
because the country's economic policies hindered recovery. Although it had
appeared competitive at the beginning of the decade, the devaluation of most
currencies and especially of sterling took away this advantage. Successive
governments refused to devalue the franc and unsettle the balance of the economy,
which prolonged France's problems.

The consequences of French policy were multiple but in the first half of the 1930s
they showed in interrelated ways.

The economic situation already established grew worse. While in Germany and
America the crisis brought greater concentration of capital and therefore, in the
medium term, the modernisation of the country, the absence of large companies
made this impossible in France. In addition, the crisis slowed activity in small and
medium-sized businesses. In strongly industrialised countries, the economy could
be relaunched by merging companies into still more productive ones; in France,
workers could do no more than reduce their working hours. The less time
companies were active, the less they produced, and the less they bought. France
consequently did not become attractive for foreign investment, which could have
stimulated the economy.

From depression to war

The distress of the population had political consequences. A riot on 6 February 1934
led to the fall of the government and a nation which had traditionally leaned to the
right elected the socialist Popular Front government in 1936.

The Popular Front, an alliance of Socialists and Radicals with support outside the
government of the Communists, was led by Léon Blum. The Popular Front
introduced many measures such as the 40-hour working week and holidays with
pay, but Blum felt handicapped in introducing more than limited changes to the
economy because of his dependence on the more right-wing Radicals. This did little
to placate a population anxious for change and a wave of strikes broke involving
two million workers [9] Factories were occupied and membership of the Communist
party rose to 300,000 in 1937.

In the night of 7–8 June 1936, employers and unions signed the Matignon
agreement by which they raised wages by seven to 15 per cent to increase workers'
buying power, to stimulate the economy and to bring an end to the strikes. Blum
brought in measures to control cereal prices, to insist that the Banque de France
place the national interest above that of the shareholders, and nationalised the
armaments industry. That upset the Left, which saw too much legislation, and did
nothing to please the Right, which believed that state involvement in a capitalist
economy would bring about disaster.

The Radicals would not accept currency controls and the result of the unrest was
that capital fled abroad. That weakened the economy and employers tried to
minimise the results of the Matignon agreement, which created more social tension
and in turn a further flight of capital.

Devaluation of the franc by 30 per cent became inevitable, despite government

assurances that it would not happen. In January 1937, Blum went further and
announced "a pause" to social reforms. The Senate refused to give him emergency
powers to cope with the recession and he resigned on 20 June 1937 and the first
Popular Front began to fall apart. A second had even less success.

The President, Lebrun, called on the Radical leader Édouard Daladier to form a new
government without the Socialists. Daladier relied on liberal economics to rescue,
or at any rate keep afloat the economy on a worldwide sea of financial difficulties.
Employers and police acted harshly against strikers and determined to root out
"troublemakers". In 1938 the Senate gave Daladier the emergency powers that
Blum had been denied and the government favoured employers over workers in
industrial disputes, particularly in companies which had come close to coming under
the control of their workers.

Under Daladier, economic conditions slightly improved, to a backdrop of growing,

increasingly vocal communist and fascist movements. This gains, however, were
due as much as anything to the growth of the armaments industry. In September
1939, France declared war on Germany.

Great Depression in Japan

The Great Depression did not strongly affect Japan. The Japanese economy shrank
by 8% during 1929–31. However, Japan's Finance Minister Takahashi Korekiyo was
the first to implement what have come to be identified as Keynesian economic
policies: first, by large fiscal stimulus involving deficit spending; and second, by
devaluing the currency. Takahashi used the Bank of Japan to sterilize the deficit
spending and minimize resulting inflationary pressures. Econometric studies have
identified the fiscal stimulus as especially effective.

The devaluation of the currency had an immediate effect. Japanese textiles began
to displace British textiles in export markets. The deficit spending, however proved
to be most profound. The deficit spending went into the purchase of munitions for
the armed forces. By 1933, Japan was already out of the depression. By 1934,
Takahashi realized that the economy was in danger of overheating, and to avoid
inflation, moved to reduce the deficit spending that went towards armaments and
munitions. This resulted in a strong and swift negative reaction from nationalists,
especially those in the Army, culminating in his assassination in the course of the
February 26 Incident. This had a chilling effect on all civilian bureaucrats in the
Japanese government. From 1934, the military's dominance of the government
continued to grow. Instead of reducing deficit spending, the government introduced
price controls and rationing schemes that reduced, but did not eliminate inflation,
which would remain a problem until the end of World War II.

The deficit spending had a transformative effect on Japan. Japan's industrial

production doubled during the 1930s. Further, in 1929 the list of the largest firms
in Japan was dominated by light industries, especially textile companies (many of
Japan's automakers, like Toyota, have their roots in the textile industry). By 1940
light industry had been displaced by heavy industry as the largest firms inside the
Japanese economy.

Great Depression in the United Kingdom

The Great Depression in the United Kingdom, also known as the Great Slump,
was a period of national economic downturn in the 1930s, which had its origins in
the global Great Depression. It was the largest and most profound economic
depression of the 20th century for the United Kingdom.

Background

The Great Depression of 1929-32 broke out at a time when the United Kingdom of
Great Britain and Ireland was still far from having recovered from the effects of the
First World War. Economist Lee Ohanain showed that economic output fell by 25%
between 1918 and 1921 and did not recover until the end of the Great Depression,
arguing that the United Kingdom suffered a twenty-year great depression beginning
in 1918. Relative to the rest of the world, economic output declined mildly in the UK
between 1929 and 1933.

A major cause of financial instability, which preceded and accompanied the Great
Depression, was the debt that many European countries had accumulated to pay
for their involvement in the First World War. This debt destabilised many European
economies as they tried to rebuild during the 1920s.

Britain had largely avoided this trap by financing their war effort largely through
sales of foreign assets. Britain had a net loss of £300 million of foreign investments,
less than two years' investment on a pre-1914 average. The largest material loss
during the war was in the British Merchant Navy, which lost 40 percent of its
merchant fleet to the U-boat attacks (but this was replaced soon after the war).[3]
Along with loss of assets through enemy action, such divestiture reduced British
investments abroad by around 20% by 1918.

The resulting loss of foreign exchange earnings left the British economy more
dependent upon exports, and more vulnerable to any downturn in world markets.
But the war had permanently eroded Britain's trading position in world markets
through disruptions to trade and losses of shipping. Overseas customers for British
produce had been lost, especially for traditional exports such as textiles, steel and
coal.

The 1920s saw the development of new industries such as the motor industry and
the electrical goods industry, but British products in these fields were not usually
sufficiently advanced to compete in world markets against foreign competitors
possessing more up-to-date plants, and so British products largely served the
domestic market.

Heavy industries which formed the bedrock of Britain's export trade (such as
coalmining, shipbuilding and steel) were heavily concentrated in certain areas of
Britain, such as northern England, South Wales and central Scotland, while the
newer industries were heavily concentrated in southern and central England.

British industrial output during the 1920s ran at about 80-100%, and exports at
about 80% of their pre-war levels, so there was little chance of Britain being able to
amass enough capital to restore her overseas investment position.

Economic Crisis and the Labour government

1929-1931
In May 1929, a minority Labour government headed by Ramsay MacDonald came to
office with Liberal support. This was only the second time a Labour government had
been in office (they had briefly been in office in 1924), and few of the government's
members had any deep knowledge of economics or experience of running the
economy. MacDonald's Labour Party was not radical in economic thinking, and was
wedded to the orthodoxy of Victorian classical economics with its emphasis on
maintaining a balanced budget at any cost.

In October 1929, the Stock Market Crash in New York heralded the Great
Depression. The ensuing American economic collapse shook the world: World trade
contracted, prices fell and governments faced financial crisis as the supply of
American credit dried up. Many countries adopted an emergency response to the
crisis by erecting trade barriers and tariffs, which worsened the crisis by further
hindering global trade.

The effects on the industrial areas of Britain were immediate and devastating, as
demand for British products collapsed. By the end of 1930, unemployment had
more than doubled from 1 million to 2.5 million (20% of the insured workforce),
and exports had fallen in value by 50%. Government revenues contracted as
national income fell, while the cost of assisting the jobless rose. The industrial areas
were hardest hit, along with the coal mining districts. London and the south-east of
England were hurt less. In 1933, 30% of Glaswegians were unemployed due to the
severe decline in heavy industry.

Under pressure from its Liberal allies as well as the Conservative opposition, the
Labour government appointed a committee to review the state of public finances.
The May Report of July 1931 urged public sector wage cuts and large cuts in public
spending (notably in benefit payments to the unemployed) to avoid incurring a
budget deficit. This proposal proved deeply unpopular within the Labour Party and
among its main supporters, the trade unions, which along with several government
ministers refused to support any such measures. The Chancellor of the Exchequer,
Philip Snowden, insisted that the Report's recommendations be adopted to avoid
incurring a budget deficit. In a memorandum in January 1930, one junior
government minister, Oswald Mosley, proposed that the government should take
control of banking and exports, as well as increase pensions to boost purchasing power.
When his ideas were turned down, he resigned. He soon left Labour to form the New Party, and
later the British Union of Fascists.

Emergency measures
In an effort to balance the budget and restore confidence in the pound, on the 10
September 1931 with Phillip Snowden still as Chancellor, the new national
government issued an emergency budget, which immediately instituted a round of
draconian cuts in public spending and wages. Public sector wages and
unemployment pay were cut by 10%, and income tax was raised from 4s 6d to 5s
in the pound (from 22.5% to 25%). The pay cuts did not go down well however and
resulted in a Mutiny in the Royal Navy.

These measures were deflationary and merely reduced purchasing power in the
economy, worsening the situation, and by the end of 1931 unemployment had
reached nearly 3 million. The measures were also unsuccessful at defending the
gold standard, which the National Government had ostensibly been created to
defend.

Because of the gold standard there was nothing to stop a flight of gold. At first the
government tried to stop the flight by introducing punitive interest rates. However
panic among international investors following the Mutiny, put renewed pressure on
the pound, and on 21 September 1931 the government was finally forced to
abandon the gold standard, and immediately the exchange rate of the pound fell by
25%, from $4.86 to $3.40. This eased the pressure on exporters, and laid the
ground for a gradual economic recovery.

Also, in 1932 following the Ottawa Agreement Neville Chamberlain who had become
Chancellor after the 1931 election, introduced tariffs on imports at a rate of 10% on
all imports except those from the countries of the British Empire. The introduction
of tariffs caused a a split in the Liberal Party, some of whom, along with Phillip
Snowden withdrew support for the National Government.

Recovery
Following Britain's withdrawal from the gold standard and the devaluation of the
pound, interest rates were reduced from 6% to 1%. As a result, British exports
became more competitive on world markets than those of countries that remained
on the gold standard. This led to a modest economic recovery, and a fall in
unemployment from 1933 onwards. Although exports were still a fraction of their
pre-depression levels, they recovered slightly.

Unemployment began a modest fall in 1934 and fell further in 1935 and 1936, but
the rise in employment levels occurred mostly in the south, where lower interest
rates had spurred the house building boom, which in turn spurred a recovery in
domestic industry. The North and Wales remained severely depressed for most of
the decade. In severely depressed parts of the country, the government enacted a
number of policies to stimulate growth and reduce unemployment, including road
building, loans to shipyards, and tariffs on steel imports. These policies helped but
were not, however, on a sufficiently large scale to make a huge impact on the
unemployment levels.

Consequences of the Great Depression

Following the end the Second World War, the majority of the British people, and
particularly the working class and returning servicemen and women, did not want a
return to pre-war Conservative economic policies, which they blamed for the
hardship of the 1930s, and there was a mood for widespread social change. At the
1945 general election, to the surprise of many observers, Winston Churchill was
defeated by the Labour Party headed by Clement Attlee.

The Labour government built up from pre-war foundations what was to become a
comprehensive 'cradle-to-grave' welfare state, and established a tax funded
National Health Service, which gave treatment according to need rather than ability
to pay as the previous tax funded system had been. The Labour government also
enacted Keynesian economic policies, to create artificial economic demand leading
to full employment. These policies became known as the "post-war consensus", and
were accepted by all major political parties at different times. There were noted
disagreements about the involvement of the state with the steel industry. With one
government, it was state owned, to then be sold off with the following conservative
administration only to be then re-nationalised by the following labour government.
For the most part, the post-war consensus lasted until the late 1970s. Throughout
the 1970s, it was becoming clear from all sides that radical change was needed as a
result of such economic crises as the 1973 oil shock,industrial unrest and sterling
devaluation, but 1970s governments lacked in totality the political will and
leadership, the house of commons majority, and the intellectual basis from which to
change the system until the Conservatives led by Margaret Thatcher in 1979.

Great Depression in the United States

The Great Depression began with the Wall Street Crash of October, 1929 and
rapidly spread worldwide. The market crash marked the beginning of a decade of
high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost
opportunities for economic growth and personal advancement. Although its causes
are still uncertain and controversial, the net effect was a sudden and general loss of
confidence in the economic future. The usual explanations include numerous
factors, especially high consumer debt, ill-regulated markets that permitted
overoptimistic loans by banks and investors, the lack of high-growth new industries,
and growing wealth inequality, all interacting to create a downward economic spiral
of reduced spending, falling confidence, and lowered production.

Industries that suffered the most included construction, agriculture, shipping,

mining, and logging as well as durable goods like automobiles and appliances that
could be postponed. The economy reached bottom in the winter of 1932-33; then
came four years of very rapid growth until 1937, when the Recession of 1937
brought back 1934 levels of unemployment. The depression caused major political
changes in America. Three years into the depression, Herbert Hoover lost the 1932
presidential election to Franklin Delano Roosevelt in a sweeping landslide.
Roosevelt's economic recovery plan, the New Deal, instituted unprecedented
programs for relief, recovery and reform, and brought about a major realignment of
American politics.

Recession of 1937
By 1936, all the main economic indicators had regained the levels of the late 1920s,
except for unemployment, which remained high. In 1937, the American economy
unexpectedly fell, lasting through most of 1938. Production declined sharply, as did
profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in
1938.

The Roosevelt Administration reacted by launching a rhetorical campaign against

monopoly power, which was cast as the cause of the depression, and appointing
Thurman Arnold to act; Arnold was not effective, and the campaign ended once
World War II began and corporate energies had to be directed to winning the war.
By 1939, the effects of the 1937 recession had disappeared. Employment in private
sector factories recovered to the level of the late 1920s by 1937, but did not grow
much bigger until the war came and manufacturing employment leaped from 11
million in 1940 to 18 million in 1943.
Another response to the 1937 deepening of the Great Depression had more tangible
results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an
antidote to the depression, reluctantly abandoning his efforts to balance the budget
and launching a $5 billion spending program in the spring of 1938, in an effort to
increase mass purchasing power. Business-oriented observers explained the
recession and recovery in very different terms from the Keynesians. They argued
the New Deal had been very hostile to business expansion in 1935–37, had
encouraged massive strikes which had a negative impact on major industries such
as automobiles, and had threatened massive anti-trust legal attacks on big
corporations. All those threats diminished sharply after 1938. For example, the
antitrust efforts fizzled out without major cases. The CIO and AFL unions started
battling each other more than corporations, and tax policy became more favorable
to long-term growth.

On the other hand, according to economist Robert Higgs, when looking only at the
supply of consumer goods, significant GDP growth only resumed in 1946. (Higgs
does not estimate the value to consumers of collective goods like victory in war). To
Keynesians, the war economy showed just how large the fiscal stimulus required to
end the downturn of the Depression was, and it led, at the time, to fears that as
soon as America demobilized, it would return to Depression conditions and
industrial output would fall to its pre-war levels. The incorrect prediction by Alvin
Hansen and other Keynesians that a new depression would start after the war failed
to take account of pent-up consumer demand as a result of the Depression and
World War.

Facts and figures

Effects of depression in the U.S.:

• 13 million people became unemployed. In 1932, 34 million people belonged

to families with no regular full-time wage earner.
• Industrial production fell by nearly 45% between 1929 and 1932.
• Homebuilding dropped by 80% between the years 1929 and 1932.
• In the 1920s, the banking system in the U.S. was about $50 billion, which
was about 50% of GDP.
• From 1929 to 1932, about 5,000 banks went out of business.
• By 1933, 11,000 of the US' 25,000 banks had failed.
• Between 1929 and 1933, U.S. GDP fell around 30%, the stock market lost
almost 90% of its value.
• In 1929, the unemployment rate averaged 3%.
• In 1933, 25% of all workers and 37% of all nonfarm workers were
unemployed.
• In Cleveland, the unemployment rate was 50%; in Toledo, Ohio, 80%.
• One Soviet trading corporation in New York averaged 350 applications a day
from Americans seeking jobs in the Soviet Union.
• Over one million families lost their farms between 1930 and 1934.
• Corporate profits had dropped from $10 billion in 1929 to $1 billion in 1932.
 • Between 1929 and 1932, the income of the average American family was
reduced by 40%.
• Nine million savings accounts had been wiped out between 1930 and 1933.
• 273,000 families had been evicted from their homes in 1932.
• There were two million homeless people migrating around the country.
• Over 60% of Americans were categorized as poor by the federal government
in 1933.
• In the last prosperous year (1929), there were 279,678 immigrants
recorded, but in 1933 only 23,068 came to the U.S.
• In the early 1930s, more people emigrated from the United States than
immigrated to it.
• The U.S. government sponsored a Mexican Repatriation program which was
intended to encourage people to voluntarily move to Mexico, but thousands,
including some U.S. citizens, were deported against their will. Altogether
about 400,000 Mexicans were repatriated.
• New York social workers reported that 25% of all schoolchildren were
malnourished. In the mining counties of West Virginia, Illinois, Kentucky, and
Pennsylvania, the proportion of malnourished children was perhaps as high
as 90%.
• Many people became ill with diseases such as tuberculosis (TB).
• The 1930 U.S. Census determined the U.S. population to be 122,775,046.
About 40% of the population was under 20 years.

Economic stagnation
Economic stagnation or economic immobilism, often called simply stagnation
or immobilism, is a prolonged period of slow economic growth (traditionally
measured in terms of the GDP growth). Under some definitions, "slow" means
significantly slower than potential growth as estimated by experts in
macroeconomics. Under other definitions, growth less than 2-3% per year is a sign
of stagnation.

The term bears negative connotations, but slow economic growth is not always the
fault of economic policymakers. For example, potential growth may be slowed down
by catastrophic or demographic reasons.

Economic stagnation theories originated during the Great Depression and came to
be associated with early Keynesian economics and Harvard University economics
professor Alvin Hansen.

Economic Stagflation
In economics, the term stagflation refers to the situation when both the inflation
rate and the unemployment rate are high. It is a difficult economic condition for a
country, as both inflation and economic stagnation occur simultaneously and no
macroeconomic policy can address both of these problems at the same time.

The portmanteau stagflation is generally attributed to British politician Iain Macleod,

who coined the term in a speech to Parliament in 1965. The concept is notable
partly because, in postwar macroeconomic theory, inflation and recession were
regarded as mutually exclusive, and also because stagflation has generally proven
to be difficult and, in human terms as well as budget deficits, very costly to
eradicate once it gets started. In the political arena a simple measure of Stagflation
termed the Misery Index (derived by the simple addition of the inflation rate to the
unemployment rate) was used to swing Presidential elections in the United States in
1976 and 1980.

Economists offer two principal explanations for why stagflation occurs. First,
stagflation can result when the productive capacity of an economy is reduced by an
unfavorable supply shock, such as an increase in the price of oil for an oil importing
country. Such an unfavorable supply shock tends to raise prices at the same time
that it slows the economy by making production more costly and less profitable.
This type of stagflation presents a policy dilemma because actions that are meant
to assist with fighting inflation might worsen economic stagnation and vice versa.

Second, both stagnation and inflation can result from inappropriate macroeconomic
policies. For example, central banks can cause inflation by permitting excessive
growth of the money supply, and the government can cause stagnation by
excessive regulation of goods markets and labor markets, Either of these factors
can cause stagflation. Excessive growth of the money supply taken to such an
extreme that it must be reversed abruptly can clearly be a cause. Both types of
explanations are offered in analyses of the global stagflation of the 1970s: it began
with a huge rise in oil prices, but then continued as central banks used excessively
stimulative monetary policy to counteract the resulting recession, causing a
runaway wage-price spiral.
Great Depression onwards
Following the end of World War II and the large adjustment as the economy
adjusted from wartime to peacetime in 1945, the collection of many economic
indicators, such as unemployment and GDP became standardized. Recessions after
World War II may be compared to each other much more easily than previous
recessions because of this available data. The listed dates and durations are from
the official chronology of the National Bureau of Economic Research. GDP data is
from the Bureau of Economic Analysis, unemployment from the Bureau of Labor
Statistics (after 1948). Note that the unemployment rate often reaches a peak
associated with a recession after the recession has officially ended.
Annualized GDP change from 1923 to 2009. Data is annual from 1923 to 1946 and
quarterly from 1947 to the second quarter of 2009.

No recession of the post-World War II era has come anywhere near the depth of
the Great Depression. In the Great Depression GDP fell by 27% (the deepest after
demobilization is the recession beginning in December 2007, during which GDP has
fallen 3.9% as of the second quarter of 2009) and unemployment reached 25%
(the highest since was the 10.8% rate reached during the 1981–82 recession).

The National Bureau of Economic Research dates recessions on a monthly basis

back to 1854; according to their chronology, from 1854 to 1919, there were 16
cycles. The average recession lasted 22 months, and the average expansion 27.
From 1919 to 1945, there were 6 cycles; recessions lasted an average 18 months
and expansions for 35. From 1945 to 2001, and 10 cycles, recessions lasted an
average 10 months and expansions an average of 57 months.[5] This has prompted
some economists to declare that the business cycle has become less severe.[30]
Factors that may have contributed to this moderation include the creation of a
central bank and lender of last resort, like the Federal Reserve System in 1913, the
establishment of deposit insurance in the form of the Federal Deposit Insurance
Corporation in 1933, increased regulation of the banking sector, the adoption of
interventionist Keynesian economics, and the increase in automatic stabilizers in
the form of government programs (unemployment insurance, social security, and
later Medicare and Medicaid). See Post-World War II economic expansion for
further discussion.

Name Dates Duration Time since Peak GDP

(mont previo unempl decli
hs) us oy- ne
recess ment (pea
ion k to
(mont trou
hs) gh)
Great Aug 3 years 1 year 35.3% −26.7%
Depressio 192 7 9 (1933)
n 9– month month
Mar s s
193
3
Characteristics Stock markets crashed worldwide. A banking collapse took place
in the United States. Extensive new tariffs and other factors
contributed to an extremely deep depression. Although
sometimes dated as lasting until World War II, the U.S.
economy was growing again by 1933, and technically the
United States was not in recession from 1933 to 1937

Name Dates Duration Time since Peak GDP

(mon previo unem decl
ths) us ploy- ine
recess ment (pe
ion ak
(mont to
hs) trou
gh)
Recession of 1937 May 1 year 4 years 26.4% −3.4%
1 1 2 (1938)
9 mont months
 3 h
7
–
Ju
n
e
1
9
3
8
Characteristics The Recession of 1937 is only considered minor when
compared to the Great Depression, but is otherwise
among the worst recessions of the 20th century. Three
explanations are offered for the recession: that tight
fiscal policy from an attempt to balance the budget after
the expansion of the New Deal caused recession, that
tight monetary policy from the Federal Reserve caused
the recession, or that declining profits for businesses led
to a reduction in investment.
Recession of 1945 Feb– 8 months 6 years 5.2% −12.7%
O 8 (1946)
ct months
1
9
4
5
Characteristics The decline in government spending at the end of World War
II led to an enormous drop in gross domestic product
making this technically a recession. This was the result
of demobilization and the shift from wartime to
peacetime economy. The post-war years were unusual
in a number of ways (unemployment was never high)
and this era may be considered a "sui generis” end-of-
the-war recession".
Recession of 1949 Nov 11 months 3 years 7.9% −1.7%
1 1 (Oct
9 month 1949)
4
8
–
O
ct
1
9
4
9
Characteristics The 1948 recession was a brief economic downturn;
forecasters of the time expected much worse, perhaps
 influenced by the poor economy in their recent lifetime.
The recession began shortly after President Truman's
"Fair Deal" economic reforms. The recession also
followed a period of monetary tightening.
Recession of 1953 July 10 months 3 years 6.1% −2.6%
1 9 (Sep
9 months 1954)
5
3
–
M
ay
1
9
5
4
Characteristics After a post-Korean War inflationary period, more funds were
transferred to national security. In 1951, the Federal
Reserve reasserted its independence from the U.S.
Treasury and in 1952, the Federal Reserve changed
monetary policy to be more restrictive because of fears
of further inflation or of a bubble forming.

Name Dates Duration Time Peak GDP

(mon since unem decli
ths) previ ploy- ne
ous ment (pea
reces k to
sion troug
(mon h)
ths)
Recession of Aug 8 months 3 years 7.5% −3.1%
1958 1957 3 (July
– mont 1958)
April hs
1958
Characteristics Monetary policy was tightened during the two years preceding
1957, followed by an easing of policy at the end of 1957.
The budget balance resulted in a change in budget surplus
of 0.8% of GDP in 1957 to a budget deficit of 0.6% of GDP
in 1958, and then to 2.6% of GDP in 1959.
Recession of Apr 10 2 years 7.1% −1.6%
1960–61 1960 mont (May
– hs 1961)
Feb
1961
Characteristics Another primarily monetary recession occurred after the Federal
Reserve began raising interest rates in 1959. The
government switched from deficit (or 2.6% in 1959) to
surplus (of 0.1% in 1960). When the economy emerged
from this short recession it began the second longest period
of growth in NBER history.
Recession of Dec 11 8 years 6.1% −0.6%
1969–70 1969 mont 10 (Dec
– hs mont 1970)
Nov hs
1970
Characteristics The relatively mild 1969 recession followed a lengthy expansion.
At the end of the expansion inflation was rising, possibly a
result of increased deficits. This relatively mild recession
coincided with an attempt to start closing the budget
deficits of the Vietnam War (fiscal tightening) and the
Federal Reserve raising interest rates (monetary
tightening).
1973–75 Nov 1 year 3 years 9.0% −3.2%
recession 1973 4 (May
– mont 1975)
Mar hs
1975
Characteristics A quadrupling of oil prices by OPEC coupled with high
government spending because of the Vietnam War led to
stagflation in the United States. The period was also
marked by the 1973 oil crisis and the 1973–1974 stock
market crash. The period is remarkable for rising
unemployment coinciding with rising inflation.
1980 Jan–July 6 months 10 months 7.8% −2.2%
recession 1980 4 (July
years 1980)
Characteristics The NBER considers a short recession to have occurred in 1980,
followed by a short period of growth and then a deep
recession. Unemployment remained relatively elevated in
between recessions. The recession began as the Federal
Reserve, under Paul Volcker raised interest rates
dramatically to fight the inflation of the 1970s. The early
'80s are sometimes referred to as a "double-dip" or "W-
shaped" recession.
Early 1980s July 1 year 1 year 10.8% −2.7%
recession 1981 4 (Nov
– mont 1982)
Nov hs
1982
Characteristics The Iranian Revolution sharply increased the price of oil
around the world in 1979, causing the 1979 energy crisis.
 This was caused by the new regime in power in Iran, which
exported oil at inconsistent intervals and at a lower volume,
forcing prices up. Tight monetary policy in the United
States to control inflation led to another recession. The
changes were made largely because of inflation carried over
from the previous decade because of the 1973 oil crisis
and the 1979 energy crisis.
Early 1990s July 8 months 7 years 7.8% −1.4%
recession 1990 8 (June
– mont 1992)
Mar hs
1991
Characteristics After the lengthy peacetime expansion of the 1980s, inflation
began to increase and the Federal Reserve responded by
raising interest rates from 1986 to 1989. This weakened but
did not stop growth, but some combination of the
subsequent 1990 oil price shock, the debt accumulation
of the 1980s, new banking regulations following the S&L
Crisis and growing consumer pessimism combined with the
weakened economy to produce a brief recession.
Early 2000s Mar–Nov 8 months 10 years 6.3% −0.3%
recession 2001 (June
2003)
Characteristics The 1990s were the longest period of growth in American history.
The collapse of the speculative dot-com bubble, a fall in
business outlays and investments, and the September
11th attacks, brought the decade of growth to an end.
Despite these major shocks, the recession was brief and
shallow. Without the September 11th attacks, the economy
may have avoided recession altogether.
Great Dec 2 years 6 years 10.2% −4.1%
Recession 2007 7 1 (July
- mont mont 2010)
Curr hs h
ent U6 17.4%
(Octo
ber
2009)
Characteristics The subprime mortgage crisis led to the collapse of the
United States housing bubble. Falling housing-related
assets contributed to a global financial crisis, even as oil
and food prices soared. The crisis led to the failure or
collapse of many of the United States' largest financial
institutions: Bear Stearns, Fannie Mae, Freddie Mac,
Lehman Brothers and AIG, as well as a crisis in the
automobile industry. The government responded with an
unprecedented $700 billion bank bailout and $787
billion fiscal stimulus package. By July 2009, some
 economists believed that the recession may have ended,
but many Americans think otherwise and insist that the
recession is not over, with rising unemployment and
skyrocketing debt and deficits. Fears of a double-dip
recession linger, even with four consecutive quarters of
growth: a 2.2%, 5.6%, 3.7% and 2.4% rise in GDP from 3Q
09 to 2Q 10 respectively. A persistently weak housing
market adds to fears of a double-dip recession. But as is
often the case at the end of a recession, unemployment is
still rising.

Impact of Recession
1) Savings

In a recession, private sector savings tend to rise. This is because people become
more nervous to spend. The spectre of unemployment encourages people to save
more and spend less. However, the rise in private sector saving may be offset by a
fall in public sector saving (i.e. government borrowing increases to try and
stimulate the economy)

2) Consumption

Consumption will tend to fall because people are worse off.

3)Investment

Investment will fall. Usually investment is highly cyclical. Therefore, a recession

causes a bigger % fall in investment than consumption. Confidence is very
important to investment so in a recession, investment tends to dry up.

4) Goverment spending

Automatic fiscal stabilisers will cause government spending to rise. e.g. in

recession, government have to spend more on unemployment benefits. Also the
government may pursue expansionary fiscal policy to try and increase aggregate
demand e.g. spending on infrastructure projects.

5) Aggregate demand
Aggregate demand is falling in a recession

There is a lot of talk about recession at the moment. There is a general

understanding recessions are bad, but what does it actually mean to be in a
recession and how does this affect the average consumer?

The definition of a recession is negative economic growth for two consecutive

quarters. This means a fall in Real GDP, - lower National income and lower National
Output. However, it is worth noting some people talk of a recession, even when
growth is very low.

A recession is characterised by:

• Rising unemployment (often unemployment is a delayed factor) i.e. it
takes time for unemployment to rise, but, even when the economy is
recovering, it takes time for unemployment to fall.

• Rising Government Borrowing. A recession is bad news for the

government budget. A recession leads to lower tax revenues (lower income
tax and corporation tax revenues) and higher government spending on
unemployment benefits. The UK is forecast to borrow £60 billion, a recession
could make this borrowing even worse in 2009. This borrowing means higher
taxes and higher interest payments in the future.

• Falling Share Prices. Generally a recession leads to lower profitability and

lower dividends. Therefore, shares are less attractive. Note share prices often
fall in anticipation of a recession. e.g. the recent falls in share prices are
largely because the market expects a recession soon. During the actual
recession, share prices often increase in anticipation of the economy
recovering. Note also, falling share prices don't always mean a recession,
falling share prices can occur for many other reasons.

• Lower Inflation. Typically a recession reduces demand and wage inflation.

This should result in a lower inflation rate. However, this recession is
complicated because of rising oil prices. Therefore, the forthcoming recession
may actually occur simultaneously with higher inflation - a term known as
stagflation. But, a recession will definitely reduce demand pull inflation
pressures and encourages price wars on the high street as firms seek to
retain consumers.

• Falling investment. Investment is much more volatile than economic

growth. Even a slowdown in the growth rate (economy expanding at a slower
rate) can lead to a significant fall in investment.
Effects of Recession on Business

An economic decline in the United States, is pretty much guaranteed to reduce the
income of the business sector. The recent falls in the US stock markets are largely
due to expectations of a future downturn in the economy. Lower growth leads to
lower profits, therefore dividends decline and shares become less attractive. If the
US enters into recession, firms will experience a decline in profitability. This is
because:

1. Tendency for price wars to develop in a recession. Low sales encourage firms
to cut prices.

2. Falling sales will lead to lower revenues.

Some firms will be affected more by the downturn. Firms producing luxury goods
(Income elasticity of demand >1) will experience the biggest % fall in demand. This
is likely to include manufacturers of luxury cars, 5 star hotels. Firms producing
basic necessities will be more insulated from the effects of a recession.

How To Survive a Recession

It is said that "A recession is when other people lose their jobs. A depression is
when you lose your job."

With many predicting a recession in the US, the average consumer may be
worrying how a recession might affect them and what they can do to insure against
the negative effects of recession. These are some of the effects of recessions and
how to deal with them.

More difficult To Borrow.

In a recession banks are less willing to lend. This is particularly a problem at the
moment, because of the concurrent credit crises which is reducing the availability of
loans.

• Solution: Avoid taking on any unnecessary debts. The debts you have try to
reduce and consolidate into a lower interest rates bearing account.

• On the positive side, in a recession interest rates are likely to be lower,

meaning lower interest payments for mortgage holders.
Unemployment.

This is the main concern over a recession. If output does fall, there is likely to be a
fall in demand for labour. This problem is often concentrated in those sectors most
affected by the recession. For example, in the current climate, jobs related to
finance and the housing market are more at risk than say the manufacturing sector.
• Solution: If you fear unemployment, start thinking what you might do as an
alternative. Is it viable to consider working on a second income, such as
online business.

• Do you have unemployment insurance to cover mortgage payments. If not, it

would be worth taking insurance out now.

• Don't panic. Firstly, the unemployment may not occur; there is nothing to be
gained by worrying over what we have no control other.

• If are made unemployed, the best solution is to be flexible in looking for

work. Consider new avenues and skills that you could learn. Also recessions
will be short lived; a period of temporary unemployment does not have to
become permanent.

Falling profitability of Business.

If you are a small business owner the effects of a recession can be keenly felt.
Lower profits could even threaten the survival of the business.
• Solution: Look for ways to minimize costs without compromising the
business. There are always ways to cut costs and increase inefficiency. Some
economists even go so far as to say that recessions are a good thing because
they force the economy to become more efficient.

• If your business is particularly affected by the downturn, look to see whether

you can diversify to reflect the changing economic environment. For
example, if you specialise in selling luxury goods with a high margin try
including some new product lines which appeal to people's desire for
frugality.

• A fall in profits is likely to be cyclical, therefore try to plan a financial plan to

borrow at a low cost for the difficult years.

Falling Stock Market

In a recession, stock markets are likely to fall as lower profits reduce dividend
payments. Try to diversify your investment portfolio. In a recession, commodities
such as gold often do well. Even in a recession, there can be good investment
opportunities.
Also bear in mind that stock markets can often be forward looking. For example,
stock markets have fallen sharply since the start of the year in anticipation of a
recession. When a recession comes, stock markets often don't fall any more.

Consumer Confidence

Often the worst aspect of a recession is the affect on consumer confidence and
people's fear about the future. Bear in mind, the media often exaggerate the extent
of a downturn in the economy. The media like to highlight sensationalist stories.
However, it is often not as bad as it is made out to be. Keep a calm and detached
attitude and just make the best of the current situation.

Any Benefits of a recession?

• Lower interest rates. Good for borrowers

• Lower inflation rates. Good for saver

• Sometimes difficult times can force us to reevaluate our financial situation. It

can make us look for new business avenues and new ways to cut costs and
spending. Although it may be temporarily unpleasant, the important thing is
not to panic but try to make the best of any situation we find ourselves in.

It is argued by some people that a recession can benefit the economy, at least in
the long run. The reasoning is that falling revenues force firms to become more
efficient, e.g. cutting unnecessary costs e.t.c. In a recession, inefficient firms will go
out of business and this shake up is necessary to weed out the inefficient and
provide incentives for firms to be as profitable as possible.

This belief was articulated by the Chairman of Ryanair, Michael O'Leary's recently,
arguing that a recession would be a good thing.

Problems of Recession - Why A Recession is Bad

1. A recession will make it difficult for new firms who have just entered
the market. Most new firms have high set up costs, therefore, a downturn in
the economy could make them close down. However, this does not mean
that they are inefficient. It just means they are new and struggling to get
established.

2. Increased Monopoly Power. If a recession causes the smaller and newer

firms to go out of business then the larger dominant firms will gain more
monopoly power. In the long run this will lead to less choice and higher
prices. This is a definite disadvantage of a recession. When the Chairman of
Ryanair argued recessions would be a good thing, maybe he meant - a good
 thing for Ryanair, as it may involve new firms going out of business leaving
him more market power.

3. Hysteresis. This is the argument that the past is a predictor for the future.
Basically, if you have high unemployment, then it is more likely to have high
unemployment in the future. If people are made unemployed in a recession,
it may take a long time for them to find work again. When they are
unemployed they lose skills, become demotivated and become less attractive
to employers. Note after the recession of 1981, Unemployment remained
stubbornly high in the UK, even into the boom years of the late 1980s.

4. Fall in Productive Capacity. A recession can damage the productive

capacity of an economy. Firms can go out of business and therefore shut
down their resources. Furthermore in a recession, there will be a significant
fall in investment, this can harm the long term development of an economy.

5. You don't need a recession to weed out inefficient firms. If markets

are reasonably competitive, inefficient firms will be forced out of the market
anyway.
Conclusion:

A recession is unnecessary to increase economic efficiency. The long term future of

an economy can be best helped through stable growth, which avoids the extremes
of boom and bust economic cycles.

Can a Recession Really be a Good Thing?

According to economists, since 1854, the U.S. has encountered 32 cycles of

expansions and contractions, with an average of 17 months of contraction and 38
months of expansion. However, since 1980 there have been only eight periods of
negative economic growth over one fiscal quarter or more, and four periods
considered recessions:

• July 1981-November 1982: 14 months

• July 1990-March 1991: 8 months
• March 2001-November 2001: 8 months
• December 2007-July 2009: 19 months

For the past three recessions, the NBER decision has approximately conformed with
the definition involving two consecutive quarters of decline. While the 2001
recession did not involve two consecutive quarters of decline, it was preceded by
two quarters of alternating decline and weak growth.
Official economic data shows that a substantial number of nations are in recession
as of early 2009. The US entered a recession at the end of 2007, and 2008 saw
many other nations follow suit.

United States

The United States housing market correction (a possible consequence of United

States housing bubble) and subprime mortgage crisis has significantly contributed
to a recession.

The 2008/2009 recession is seeing private consumption fall for the first time in
nearly 20 years. This indicates the depth and severity of the current recession. With
consumer confidence so low, recovery will take a long time. Consumers in the U.S.
have been hard hit by the current recession, with the value of their houses
dropping and their pension savings decimated on the stock market. Not only have
consumers watched their wealth being eroded – they are now fearing for their jobs
as unemployment rises.

U.S. employers shed 63,000 jobs in February 2008, the most in five years. Former
Federal Reserve chairman Alan Greenspan said on April 6, 2008 that "There is more
than a 50 percent chance the United States could go into recession.” On October 1,
the Bureau of Economic Analysis reported that an additional 156,000 jobs had been
lost in September. On April 29, 2008, nine US states were declared by Moody's to
be in a recession. In November 2008, employers eliminated 533,000 jobs, the
largest single month loss in 34 years. For 2008, an estimated 2.6 million U.S. jobs
were eliminated.

The unemployment rate of US grew to 8.5 percent in March 2009, and there have
been 5.1 million job losses till March 2009 since the recession began in December
2007. That is about five million more people unemployed compared to just a year
ago. This has become largest annual jump in the number of unemployed persons
since the 1940s.

Although the US Economy grew in the first quarter by 1%, by June 2008 some
analysts stated that due to a protracted credit crisis and "rampant inflation in
commodities such as oil, food and steel", the country was nonetheless in a
recession. The third quarter of 2008 brought on a GDP retraction of 0.5% the
biggest decline since 2001. The 6.4% decline in spending during Q3 on non-durable
goods, like clothing and food, was the largest since 1950.

A Nov 17, 2008 report from the Federal Reserve Bank of Philadelphia based on the
survey of 51 forecasters, suggested that the recession started in April 2008 and will
last 14 months. They project real GDP declining at an annual rate of 2.9% in the
fourth quarter and 1.1% in the first quarter of 2009. These forecasts represent
significant downward revisions from the forecasts of three months ago.
A December 1, 2008, report from the National Bureau of Economic Research stated
that the U.S. has been in a recession since December 2007 (when economic activity
peaked), based on a number of measures including job losses, declines in personal
income, and declines in real GDP. By July 2009 a growing number of economists
believed that the recession may have ended. The National Bureau of Economic
Research will not make this official determination for some time. In the 2001
recession, for example, the recession ended in November 2001, but it was not until
July 2003 that the NBER announced its official determination.

Late-2000s recession

The late-2000s recession (or the Great Recession) is an economic recession

that began in the United States in December 2007 as determined by the U.S.
National Bureau of Economic Research. It spread to much of the industrialized
world, and has caused a pronounced deceleration of economic activity. This global
recession has been taking place in an economic environment characterized by
various imbalances and was sparked by the outbreak of the financial crisis of 2007–
2010. Although the late-2000s recession has at times been referred to as "the
Great Recession," this same phrase has been used to refer to every recession of the
several preceding decades. In July 2009, it was announced that a growing number
of economists believed that the recession may have ended. However, in the United
States, the requisite two consecutive quarters of growth in the GDP did not actually
occur until the end of 2009.

The financial crisis has been linked to reckless lending practices by financial
institutions encouraged by the government and the growing trend of securitization
of real estate mortgages in the United States. The US mortgage-backed securities,
which had risks that were hard to assess, were marketed around the world. A more
broad based credit boom fed a global speculative bubble in real estate and equities,
which served to reinforce the risky lending practices. The precarious financial
situation was made more difficult by a sharp increase in oil and food prices. The
emergence of Sub-prime loan losses in 2007 began the crisis and exposed other
risky loans and over-inflated asset prices. With loan losses mounting and the fall of
Lehman Brothers on September 15, 2008, a major panic broke out on the inter-
bank loan market. As share and housing prices declined, many large and well
established investment and commercial banks in the United States and Europe
suffered huge losses and even faced bankruptcy, resulting in massive public
financial assistance.

A global recession has resulted in a sharp drop in international trade, rising

unemployment and slumping commodity prices. In December 2008, the National
Bureau of Economic Research (NBER) declared that the United States had been in
recession since December 2007. Several economists have predicted that recovery
may not appear until 2011 and that the recession will be the worst since the Great
Depression of the 1930s. The conditions leading up to the crisis, characterized by
an exorbitant rise in asset prices and associated boom in economic demand, are
considered a result of the extended period of easily available credit, inadequate
regulation and oversight, or increasing inequality.

The recession has renewed interest in Keynesian economic ideas on how to combat
recessionary conditions. Fiscal and monetary policies have been significantly eased
to stem the recession and financial risks. Economists advise that the stimulus
should be withdrawn as soon as the economies recover enough to "chart a path to
sustainable growth".

Pre-recession economic imbalances

Among the various imbalances in which the US monetary policy contributed by
excessive money creation, leading to negative household savings and a huge US
trade deficit, dollar volatility and public deficits, a focus can be made on the
following ones:

Commodity boom

The decade of the 2000s saw a global explosion in prices, focused especially in
commodities and housing, marking an end to the commodities recession of 1980–
2000. In 2008, the prices of many commodities, notably oil and food, rose so high
as to cause genuine economic damage, threatening stagflation and a reversal of
globalization.

In January 2008, oil prices surpassed $100 a barrel for the first time, the first of
many price milestones to be passed in the course of the year. In July 2008, oil
peaked at $147.30 a barrel and a gallon of gasoline was more than $4 across most
of the U.S.A. The economic contraction in the fourth quarter of 2008 caused a
dramatic drop in demand and prices fell below $35 a barrel at the end of the year.
Some believe that this oil price spike was the product of Peak Oil. There is concern
that if the economy was to improve, oil prices might return to pre-recession levels.

The food and fuel crises were both discussed at the 34th G8 summit in July 2008.

Sulfuric acid (an important chemical commodity used in processes such as steel
processing, copper production and bioethanol production) increased in price 3.5-
fold in less than 1 year while producers of sodium hydroxide have declared force
majeure due to flooding, precipitating similarly steep price increases.

In the second half of 2008, the prices of most commodities fell dramatically on
expectations of diminished demand in a world recession.
Housing bubble

By 2007, real estate bubbles were still under way in many parts of the world,
especially in the United States, United Kingdom, United Arab Emirates, Italy,
Australia, New Zealand, Ireland, Spain, France, Poland, South Africa, Israel,
Greece, Bulgaria, Croatia, Canada, Norway, Singapore, South Korea, Sweden,
Finland, Argentina, Baltic states, India, Romania, Russia, Ukraine and China.

U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a
minimum, there's a little 'froth' (in the U.S. housing market) ... it's hard not to see
that there are a lot of local bubbles". The Economist magazine, writing at the same
time, went further, saying "the worldwide rise in house prices is the biggest bubble
in history".

Real estate bubbles are (by definition of the word "bubble") followed by a price
decrease (also known as a housing price crash) that can result in many owners
holding negative equity (a mortgage debt higher than the current value of the
property).

Inflation

In February 2008, Reuters reported that global inflation was at historic levels, and
that domestic inflation was at 10–20 year highs for many nations. "Excess money
supply around the globe, monetary easing by the Fed to tame financial crisis,
growth surge supported by easy monetary policy in Asia, speculation in
commodities, agricultural failure, rising cost of imports from China and rising
demand of food and commodities in the fast growing emerging markets," have
been named as possible reasons for the inflation.

In mid-2007, IMF data indicated that inflation was highest in the oil-exporting
countries, largely due to the unsterilized growth of foreign exchange reserves, the
term "unsterilized" referring to a lack of monetary policy operations that could
offset such a foreign exchange intervention in order to maintain a country's
monetary policy target. However, inflation was also growing in countries classified
by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and
"Developing Asia", on account of the rise in oil and food prices.

Inflation was also increasing in the developed countries, but remained low
compared to the developing world.

Causes
Excessive Debt Levels as the Cause

In order to counter the Stock Market Crash of 2000 and the subsequent economic
slowdown, the Federal Reserve eased credit availability and drove interest rates
down to lows not seen in many decades. These low interest rates facilitated the
growth of debt at all levels of the economy, chief among them private debt to
purchase more expensive housing. High levels of debt have long been recognized
as a causative factor for recessions.

Any debt default has the possibility of causing the lender to also default, if the
lender is itself in a weak financial condition and has too much debt. This second
default in turn can lead to still further defaults through a domino effect. The
chances of these followup defaults in increased at high levels of debt. Attempts to
prevent this domino effect by bailing out Wall Street lenders such as AIG, Fannie
Mae, and Freddie Mac have had mixed success. The takeover of Bear Stearns is
another example of attempts to stop the dominoes from falling.

Sub-prime lending as a cause

Based on the assumption that sub-prime lending precipitated the crisis, some have
argued that the Clinton Administration may be partially to blame, while others have
pointed to the passage of the Gramm-Leach-Bliley Act by the 106th Congress, and
over-leveraging by banks and investors eager to achieve high returns on capital.

Others take full credit for deregulating the Banking Industry. In November 1999,
Phil Gramm, Republican Senator from Texas, took full credit for the Gramm-Leach-
Bliley Act with a Press Release from the Senate Banking and Finance Committee: "I
am proud to be here because this is an important bill; it is a deregulatory bill. I
believe that that is the wave of the future, and I am awfully proud to have been a
part of making it a reality."

Some believe the roots of the crisis can be traced directly to sub-prime lending by
Fannie Mae and Freddie Mac, which are government sponsored entities. The New
York Times published an article that reported the Clinton Administration pushed for
sub-prime lending: "Fannie Mae, the nation's biggest underwriter of home
mortgages, has been under increasing pressure from the Clinton Administration to
expand mortgage loans among low and moderate income people" (NYT, 30
September 1999).

In 1995, the administration also tinkered with Carter's Community Reinvestment

Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt
by many that this was done to help boost a stagnated home ownership figure that
had hovered around 65% for many years. The result was a push by the
administration for greater investment, by financial institutions, into riskier loans. In
a 2000 United States Department of the Treasury study of lending trends for 305
cities from 1993 to 1998 it was shown that $467 billion of mortgage credit poured
out of CRA-covered lenders into low- and mid-level income borrowers and
neighborhoods. (See "The Community Reinvestment Act After Financial
Modernization," April 2000.)
Government deregulation as a cause

In 1992, the 102nd Congress under the George H. W. Bush administration

weakened regulation of Fannie Mae and Freddie Mac with the goal of making
available more money for the issuance of home loans. The Washington Post wrote:
"Congress also wanted to free up money for Fannie Mae and Freddie Mac to buy
mortgage loans and specified that the pair would be required to keep a much
smaller share of their funds on hand than other financial institutions. Whereas
banks that held $100 could spend $90 buying mortgage loans, Fannie Mae and
Freddie Mac could spend $97.50 buying loans. Finally, Congress ordered that the
companies be required to keep more capital as a cushion against losses if they
invested in riskier securities. But the rule was never set during the Clinton
administration, which came to office that winter, and was only put in place nine
years later."

Others have pointed to deregulation efforts as contributing to the collapse. In 1999,

the 106th Congress, under Bill Clinton, passed the Gramm-Leach-Bliley Act, which
repealed part of the Glass-Steagall Act of 1933. This repeal has been criticized by
some for having contributed to the proliferation of the complex and opaque
financial instruments which are at the heart of the crisis. However, some
economists object to singling out the repeal of Glass-Steagall for criticism. Brad
DeLong, a former advisor to President Clinton and economist at the University of
California, Berkeley and Tyler Cowen of George Mason University have both argued
that the Gramm-Leach-Bliley Act softened the impact of the crisis by allowing for
mergers and acquisitions of collapsing banks as the crisis unfolded in late 2008.

Over-leveraging, credit default swaps and collateralized

debt obligations as causes

Another probable cause of the crisis—and a factor that unquestionably amplified its
magnitude—was widespread miscalculation by banks and investors of the level of
risk inherent in the unregulated Collateralized debt obligation and Credit Default
Swap markets. Under this theory, banks and investors systematized the risk by
taking advantage of low interest rates to borrow tremendous sums of money that
they could only pay back if the housing market continued to increase in value.

According to an article published in Wired, the risk was further systematized by the
use of David X. Li's Gaussian copula model function to rapidly price Collateralized
debt obligations based on the price of related Credit Default Swaps.[53] Because it
was highly tractable, it rapidly came to be used by a huge percentage of CDO and
CDS investors, issuers, and rating agencies.[53] According to one wired.com article:
"Then the model fell apart. Cracks started appearing early on, when financial
markets began behaving in ways that users of Li's formula hadn't expected. The
cracks became full-fledged canyons in 2008—when ruptures in the financial
system's foundation swallowed up trillions of dollars and put the survival of the
global banking system in serious peril...Li's Gaussian copula formula will go down in
history as instrumental in causing the unfathomable losses that brought the world
financial system to its knees."

The pricing model for CDOs clearly did not reflect the level of risk they introduced
into the system. It has been estimated that the "from late 2005 to the middle of
2007, around $450bn of CDO of ABS were issued, of which about one third were
created from risky mortgage-backed bonds...[o]ut of that pile, around $305bn of
the CDOs are now in a formal state of default, with the CDOs underwritten by
Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS
and Citi." The average recovery rate for high quality CDOs has been approximately
32 cents on the dollar, while the recovery rate for mezzanine CDO's has been
approximately five cents for every dollar. These massive, practically unthinkable,
losses have dramatically impacted the balance sheets of banks across the globe,
leaving them with very little capital to continue operations.

Credit creation as a cause

The Austrian School of Economics proposes that the crisis is an excellent example
of the Austrian Business Cycle Theory, in which credit created through the policies
of central banking gives rise to an artificial boom, which is inevitably followed by a
bust. This perspective argues that the monetary policy of central banks creates
excessive quantities of cheap credit by setting interest rates below where they
would be set by a free market. This easy availability of credit inspires a bundle of
malinvestments, particularly on long term projects such as housing and capital
assets, and also spurs a consumption boom as incentives to save are diminished.
Thus an unsustainable boom arises, characterized by malinvestments and
overconsumption.

But the created credit is not backed by any real savings nor is in response to any
change in the real economy, hence, there are physically not enough resources to
finance either the malinvestments or the consumption rate indefinitely. The bust
occurs when investors collectively realize their mistake. This happens usually some
time after interest rates rise again. The liquidation of the malinvestments and the
consequent reduction in consumption throw the economy into a recession, whose
severity mirrors the scale of the boom's excesses.

The Austrian School argues that the conditions previous to the crisis of the late
2000s correspond exactly to the scenario described above. The central bank of the
United States, led by Federal Reserve Chairman Alan Greenspan, kept interest rates
very low for a long period of time to blunt the recession of the early 2000s. The
resulting malinvestment and over-consumption of investors and consumers
prompted the development of a housing bubble that ultimately burst, precipitating
the financial crisis. This crisis, together with sudden and necessary deleveraging
and cutbacks by consumers, businesses and banks, led to the recession. Austrian
Economists argue further that while they probably affected the nature and severity
of the crisis, factors such as a lack of regulation, the Community Reinvestment Act,
and entities such as Fannie Mae and Freddie Mac are insufficient by themselves to
explain it.

A positively sloped yield curve allows Primary Dealers (such as large investment
banks) in the Federal Reserve system to fund themselves with cheap short term
money while lending out at higher long-term rates. This strategy is profitable so
long as the yield curve remains positively sloped. However, it creates a liquidity risk
if the yield curve were to become inverted and banks would have to refund
themselves at expensive short term rates while losing money on longer term loans.[

The narrowing of the yield curve from 2004 and the inversion of the yield curve
during 2007 resulted (with the expected 1 to 3 year delay) in a bursting of the
housing bubble and a wild gyration of commodities prices as moneys flowed out of
assets like housing or stocks and sought safe haven in commodities. The price of oil
rose to over $140 dollars per barrel in 2008 before plunging as the financial crisis
began to take hold in late 2008.

Other observers have doubted the role that the yield curve plays in controlling the
business cycle. In a May 24, 2006 story CNN Money reported: "...in recent
comments, Fed Chairman Ben Bernanke repeated the view expressed by his
predecessor Alan Greenspan that an inverted yield curve is no longer a good
indicator of a recession ahead."

Oil prices
Economist James D. Hamilton has argued that the increase in oil prices in the
period of 2007 through 2008 was a significant cause of the recession. He
evaluated several different approaches to estimating the impact of oil price
shocks on the economy, including some methods that had previously shown
a decline in the relationship between oil price shocks and the overall
economy. All of these methods "support a common conclusion; had there
been no increase in oil prices between 2007:Q3 and 2008:Q2, the US
economy would not have been in a recession over the period 2007:Q4
through 2008:Q3." Hamilton's own model, a time-series econometric forecast
based on data up to 2003, showed that the decline in GDP could have been
successfully predicted to almost its full extent given knowledge of the price of
oil. The results imply that oil prices were entirely responsible for the
recession; however, Hamilton himself acknowledged that this was probably
not the case but maintained that it showed that oil price increases made a
significant contribution to the downturn in economic growth.
Effects
Overview

The late-2000s recession is shaping up to be the worst post-World War II

contraction on record:

• Real gross domestic product (GDP) began contracting in the third quarter of
2008, and by early 2009 was falling at an annualized pace not seen since the
1950s.
• Capital investment, which was in decline year-on-year since the final quarter
of 2006, matched the 1957–58 post war record in the first quarter of 2009.
The pace of collapse in residential investment picked up speed in the first
quarter of 2009, dropping 23.2% year-on-year, nearly four percentage points
faster than in the previous quarter.
• Domestic demand, in decline for five straight quarters, is still three months
shy of the 1974–75 record, but the pace – down 2.6% per quarter vs. 1.9%
in the earlier period – is a record-breaker already.

Trade and industrial production

In middle-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by
50% in one week, as the credit crunch made it difficult for exporters to obtain
letters of credit.

In February 2009, The Economist claimed that the financial crisis had produced a
"manufacturing crisis", with the strongest declines in industrial production occurring
in export-based economies.

In March 2009, Britain's Daily Telegraph reported the following declines in industrial
output, from January 2008 to January 2009: Japan −31%, Korea −26%, Russia
−16%, Brazil −15%, Italy −14%, Germany −12%.

Some analysts even say the world is going through a period of deglobalization and
protectionism after years of increasing economic integration.

Sovereign funds and private buyers from the Middle East and Asia, including China,
are increasingly buying in on stakes of European and U.S. businesses, including
industrial enterprises. Due to the global recession they are available at a low price.
The Chinese government has concentrated on natural-resource deals across the
world, securing supplies of oil and minerals.
Pollution

According to the International Energy Agency man-made greenhouse gas emissions

will decrease by 3% in 2009, mainly as a result of the financial crisis. Previously
emissions had been rising by around 3% per year. The drop in emissions is only the
4th to occur in 50 years.

Unemployment

The International Labour Organization (ILO) predicted that at least 20 million jobs
will have been lost by the end of 2009 due to the crisis — mostly in "construction,
real estate, financial services, and the auto sector" — bringing world unemployment
above 200 million for the first time. The number of unemployed people worldwide
could increase by more than 50 million in 2009 as the global recession intensifies,
the ILO has forecast.

In December 2007, the U.S. unemployment rate was 4.9%. By October 2009, the
unemployment rate had risen to 10.1%. A broader measure of unemployment
(taking into account marginally attached workers, those employed part time for
economic reasons, and some (but not all) discouraged workers) was 16.3%.[88] In
July 2009, fewer jobs were lost than expected, dipping the unemployment rate from
9.5% to 9.4%. Even fewer jobs were lost in August, 216,000, recorded as the
lowest number of jobs since September 2008, but the unemployment rate rose to
9.7%. In October 2009, news reports announced that some employers who cut jobs
due to the recession are beginning to hire them back. More recently, economists
announced in January 2010 that economic growth in the U.S. resumed in the fourth
quarter of 2009, and some have predicted that limited job growth will begin in the
spring of 2010.

The average numbers for European Union nations are similar to the US ones. Some
European countries have been hit by recession very hard, for instance Spain's
unemployment rate reached 18.7% (37% for youths) in May 2009 — the highest in
the eurozone.

The rise of advanced economies in Brazil, India, and China increased the total
global labor pool dramatically. Recent improvements in communication and
education in these countries has allowed workers in these countries to compete
more closely with workers in traditionally strong economies, such as the United
States. This huge surge in labor supply has provided downward pressure on wages
and contributed to unemployment.

Financial markets

For a time, major economies of the 21st century were believed to have begun a
period of decreased volatility, which was sometimes dubbed The Great Moderation,
because many economic variables appeared to have achieved relative stability. The
return of commodity, stock market, and currency value volatility are regarded as
indications that the concepts behind the Great Moderation were guided by false
beliefs.

January 2008 was an especially volatile month in world stock markets, with a surge
in implied volatility measurements of the US-based S&P 500 index, and a sharp
decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing
to a lesser extent in some markets on January 22). Some headline writers and a
general news columnist called January 21 "Black Monday" and referred to a "global
shares crash," though the effects were quite different in different markets.

The effects of these events were also felt on the Shanghai Composite Index in
China which lost 5.14 percent, most of this on financial stocks such as Ping An
Insurance and China Life which lost 10 and 8.76 percent respectively. Investors
worried about the effect of a recession in the US economy would have on the
Chinese economy. Citigroup estimates due to the number of exports from China to
America a one percent drop in US economic growth would lead to a 1.3 percent
drop in China's growth rate.

There were several large Monday declines in stock markets world wide during 2008,
including one in January, one in August, one in September, and another in early
October. As of October 2008, stocks in North America, Europe, and the Asia-Pacific
region had all fallen by about 30% since the beginning of the year. The Dow Jones
Industrial Average had fallen about 37% since January 2008.

The simultaneous multiple crises affecting the US financial system in mid-

September 2008 caused large falls in markets both in the US and elsewhere.
Numerous indicators of risk and of investor fear (the TED spread, Treasury yields,
the dollar value of gold) set records.

Russian markets, already falling due to declining oil prices and political tensions
with the West, fell over 10% in one day, leading to a suspension of trading,[101]
while other emerging markets also exhibited losses.

On September 18, UK regulators announced a temporary ban on short-selling of

financial stocks. On September 19 the U.S. Securities and Exchange Commission
(SEC) followed by placing a temporary ban of short-selling stocks of 799 specific
financial institutions. In addition, the SEC made it easier for institutions to buy back
shares of their institutions. The action is based on the view that short selling in a
crisis market undermines confidence in financial institutions and erodes their
stability.

On September 22, the Australian Securities Exchange (ASX) delayed opening by an

hour after a decision was made by the Australian Securities and Investments
Commission (ASIC) to ban all short selling on the ASX. This was revised slightly a
few days later.
As is often the case in times of financial turmoil and loss of confidence, investors
turned to assets which they perceived as tangible or sustainable. The price of gold
rose by 30% from middle of 2007 to end of 2008. A further shift in investors'
preference towards assets like precious metals or land is discussed in the media.

In March 2009, Blackstone Group CEO Stephen Schwarzman said that up to 45% of
global wealth had been destroyed in little less than a year and a half.

Travel

According to Zagat's 2009 U.S. Hotels, Resorts & Spas survey, business travel has
decreased in the past year as a result of the recession. 30% of travelers surveyed
stated they travel less for business today while only 21% of travelers stated that
they travel more. Reasons for the decline in business travel include company travel
policy changes, personal economics, economic uncertainty and high airline prices.
Hotels are responding to the downturn by dropping rates, ramping up promotions
and negotiating deals for both business travelers and tourists.

According to the World Tourism Organization, international travel suffered a strong

slowdown beginning in June 2008, and this declining trend intensified during 2009
resulting in a reduction from 922 million international tourist arrivals in 2008 to 880
million visitors in 2009, representing a worldwide decline of 4%, and an estimated
6% decline in international tourism receipts. The decline caused by the recession
was further exacerbated in some countries due to the outbreak of the AH1N1 virus.

Countries in economic recession or depression

Many countries experienced recession in 2008. The countries/territories currently in
a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong,
Singapore, Italy, Russia and Germany.

Denmark went into recession in the first quarter of 2008, but came out again in the
second quarter. Iceland fell into an economic depression in 2008 following the
collapse of its banking system.

The following countries went into recession in the second quarter of 2008: Estonia,
Latvia. Ireland and New Zealand.

The following countries/territories went into recession in the third quarter of 2008:
Japan, Sweden, Hong Kong, Singapore, Italy, Turkey and Germany. As a whole the
fifteen nations in the European Union that use the euro went into recession in the
third quarter, and the United Kingdom. In addition, the European Union, the G7,
and the OECD all experienced negative growth in the third quarter.

The following countries/territories went into technical recession in the fourth

quarter of 2008: United States, Switzerland, Spain, and Taiwan.
South Korea "miraculously" avoided recession with GDP returning positive at a
0.1% expansion in the first quarter of 2009.

Of the seven largest economies in the world by GDP, only China and France avoided
a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth
in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. This is
interesting as China has until recently considered 8% GDP growth to be required
simply to create enough jobs for rural people moving to urban centres. This figure
may more accurately be considered to be 5–7% now that the main growth in
working population is receding. Growth of between 5%–8% could well have the
type of effect in China that a recession has elsewhere. Ukraine went into technical
depression in January 2009 with a nominal annualized GDP growth of −20%.

The recession in Japan intensified in the fourth quarter of 2008 with a nominal
annualized GDP growth of −12.7%, and deepened further in the first quarter of
2009 with a nominal annualized GDP growth of −15.2%.