Not a Recession: A Depression
Why does this economic downturn seem different than previous ones in our lifetime? Why does it seem familiar to anyone who is familiar with the economic history of 19th and early 20th centuries?
Because, up to the mid 1940s, the US tended to face economic depressions. Since then, we had not had one…until now.
What we are suffering, today, is an economic depression.
Sure, it had been trendy, in the last decade or more, to say “we just stopped using the D word after the Great Depression”. But, once again, anyone who knows economic history realizes there’s more to it than that.
There is no official definition of an economic depression, other than the idea that they’re worse than recessions.
There isn’t really an official definition of an economic recession, either, although the pat answer is “two quarters of GPD shrinkage”. Real economists hate that definition, because it ignores more factors than it considers, to the point of being almost useless.
But we can simply examine what were called “depressions”, from 1800 through 1938, and compare them to the recessions between 1947 and 2007, and the differences are obvious.
Each depression / panic from 1819 through 1938 shared certain traits:
A shortage of money itself, leading to
- Usually at least 2 years, as many as 23 years
- Sudden runs on banks, causing bank failures
- Commodity price collapse, where something generic like cotton, steel, oil, or real estate plunged in value, causing a domino effect that devastated the economy
- A more general decline in prices across the economy
- A collapse in capital, for example stock market collapse, once that became an important factor
- A credit freeze, making loans and other forms of obtaining temporary money more difficult
- Massive business closings
- Astonishing amounts of job loss and unemployment
Now what about the subsequent “recessions”, from 1948 through 2003?
Every one of them happened like this:
A dramatic raising of interest rates by the Federal Reserve, followed by
- Usually only a few months, rarely more than a year
- An increase in private interest rates
- An increase in unemployment
- Moderate to extreme price increases
- A plunge in the stock market and moderate tightening of capital
- Some amount of business failure
You can see examples of both recessions and depressions at the History of Economic Downturns.
What’s the Difference?
Now the most obvious difference is timespan.
During the days of economic depressions, the downturns lasted much longer. Always years, sometimes decades. Economic recessions generally only last months, rarely more than a year…the longest recession has not lasted as long as the shortest depression.
The second is that the trigger is slightly different.
Depressions were caused by a direct shortage of currency (money) in the economy. This, in fact, led to the other obvious differences, like runs on banks, mostly caused by a shortage of money making people worry about bank stability.
Recessions, on the other hand, have been preceded, in every single case, by the Federal Reserve raising rates, trying to make it harder to get new money. That’s very similar, but it leaves the financial sector able to compensate, however painfully, so that bank runs and commodity price failures never become “necessary”.
And that’s probably the next most important difference:
During the depressions, bank runs were almost universal, commodity price collapse was normal, the loss of huge numbers of jobs and businesses was a constant.
In the era of recessions, none of those things occurred at all. Unemployment, though miserable, was generally only a few percentage points higher, and while some businesses failed, nothing like the tens of thousands of the depression days, even though the economy was smaller back then.
Now, which are we seeing today?
Are We Depressed?
- Runs on banks, and bank failures
- Real estate price collapse, along with some other commodities, including many metals like gold, copper, and nickel
- The massive price inflation expected to result from high energy prices failed to materialize, representing an inability of people to pay more, even though production cost had to rise
- A collapse in capital, for example stock market free-fall
- A failure in credit, making loans and other forms of obtaining temporary money more difficult
- Massive business closings
- A rising snowball of job loss and unemployment
Well, this does indeed sound almost exactly like a depression, not a recession.
And, in fact, it was preceded by a money shortage, just like other depressions. In our case, the shortage was caused by high oil prices, two wars, and hundreds of billions in new foreign “aid” shipping trillions of dollars overseas, much faster than the Federal Reserve was creating new money. This meant that, while the surplus of foreign-based dollars caused its value to plunge compared to foreign money, here in the US there was less money available than usual.
Without as much money, we could not maintain the prices of some commodities, we became distrusting of banks, credit became scarce…ultimately, a new economic depression was natural.
Why didn’t we have depressions from 1948 through 2007?
Up to the 1940s, the US had usually depended upon gold, and sometimes silver, to back its money. It claimed you could cash in a paper dollar, any time you wanted, for gold. This meant that money was, in a sense, just a glorified form of barter for a commodity.
In those days of a gold standard, if the economy grew faster than the supply of gold, this created a shortage of money, which could only grow as fast as people could dig up gold. When the economy grew faster, the relative shortage of money would eventually force banks to close, commodity prices to plunge, prices to decline, credit to freeze, and generally the economy to grind to a halt, to wait for gold to catch up.
That ended in 1946, when the US entered into the Breton Woods agreement. This was a sort of price fixing scheme, where instead of making a dollar equal to a certain amount of gold for exchange, each government just attempted to force the price of gold to remain a certain amount, compared to its money.
This happened to coincide, exactly, to the end of economic depressions. Without money being linked to the barter of a commodity that had its own separate value and supply, it did not end up in such short demand that the whole economy would fail. The recessions that did occur were from money shortages caused by the Federal Reserve, but these could be overcome, so banks never had runs, commodity prices never collapsed, et cetera.
This became even more true in the 1970s, when even the Breton Woods agreement was ended, and the price of gold became a legitimate free market price, not a fixed one.
Why are we having a depression, today?
As I noted earlier, this is the first time since the 1930s when there was a shortage of money so grave that we stopped trusting banks, could not pay for important commodities, and so on.
This is because we sent so much money overseas, out of our own reach.
The normal money we have sent abroad for decades, because we buy goods, was actually barely enough to keep up with foreign demand for dollars…but in 2001, that began to change:
The price of oil went through the roof. At its peak, we were paying 700% of oil’s natural price. This amounted to as much as one trillion dollars leaving the US to import oil, without getting anything in return (beyond what we normally got for 1/7th the amount).
Meanwhile, we engaged in two wars, that cost hundreds of billions of dollars, much of which went to foreign countries.
And, in order to support those wars, paid hundreds of billions in new “foreign aid”, money shipped abroad with no imported wealth to offset it, at all.
This left us without enough money to simply run our own economy.
The result? Bank closings, real estate and other price failures, massive unemployment, bankrupcies, business failures…
Another economic depression.