Page 107 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

markets with protectionist measures, global trade dropped by
nearly two-thirds (from $2.998 billion in January 1929 to
$992 million four years later).
The four years after the crash of 1929 were among the
bleakest in economic history. Industrial output in the United
States declined by nearly 50 percent. Businesses were faced
with exceptionally difficult conditions as consumption fell by
25 percent. As a result, corporate profits fell 131 percent, and
the value of the Dow Jones Industrial Average declined 89 per-
cent. The unemployment rate rose from 3.2 percent in 1929 to
25 percent in 1933 and remained stubbornly high throughout
the decade—in 1939, it was still 17 percent. (Driving this, in
part, was a persistent deflationary cycle, as described by Irving
Fisher in his debt-deflation theory, which we discussed in
Chapter 2.)
With the election of Franklin D. Roosevelt in 1932 and the
adoption of the New Deal policies starting in 1933, government
fiscal and monetary policies turned from being concretionary
in nature to expansionary. Prior to the Great Depression, gov-
ernment expenditure amounted to 9 percent of GDP; by 1939,
that share had grown to 16 percent. Although economic condi-
tions began to improve quickly from the 1932 trough, recovery
was far from steady. In 1937 and 1938, the U.S. economy
entered a recession again as a result of efforts in 1937 by the
federal government to rebalance its budget by letting payments
to World War I veterans (a form of fiscal stimulus) expire and
by beginning to collect Social Security payroll taxes for the
first time. Only in the buildup to World War II was growth
finally sustained.
In the end, the Great Depression ushered in more changes in
society and government policy than any other era. In its wake,

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