Business Booms and Depressions Since 1775 (1943)

https://fraser.stlouisfed.org/title/business-booms-depressions-since-1775-145

by throw0101d • 2 years ago

261 267 2 years ago

fraser.stlouisfed.org

abeppu3• 2 years ago

I've always heard that deflation is awful and must be avoided. Following WWI, this marks a period of "13 Year Deflation" from ~1918 - 1931, but this includes a period marked "prosperity" from 1922-1929, though commodity prices then dive as the depression deepens. But what conditions made deflation and growth possible together in the 1920s?

godzillabrennus• 2 years ago

Irrational exuberance in stock performance.

eagerpace• 2 years ago

Irrational exuberance in crypto performance.

throw0101d15• 2 years ago

Irrational exuberance in stock performance.

And canals:

* https://en.wikipedia.org/wiki/Canal_Mania

And railroads:

* https://en.wikipedia.org/wiki/Railway_Mania

And a whole bunch of other things:

* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...

Getting overly excited about things seems to just be a thin humans tend to do.

chrisco255• 2 years ago

It wasn't just the 1920s. Take a look at the 1810s-1820s and the 1870s.

Etheryte8• 2 years ago

This is an odd statement to make, in most contexts deflation is good for the economy. It is mostly when deflation is coupled with an asset bubble and large underlying debt that it's an issue and leads to a financial crisis. Why do you think deflation is bad?

dgfitz• 2 years ago

I think it is called a deflationary spiral.

When your money becomes more valuable if you don't spend it, people spend less, which depressed prices further, so people spend even less, which even further depresses prices.

https://web.mit.edu/krugman/www/spiral.html

Dig1t• 2 years ago

I have heard what OP is talking about referred to on econ podcasts like Planet Money and Freakonomics.

yyyyybb• 2 years ago

Why is this an odd statement to make who educated you to think it’s not?

daedrdev• 2 years ago

While deflation sounds good, its is definitely bad. When prices are falling, this provides an incentive to firms and consumers to delay purchases since prices are expected to be cheaper in the future. This reduces aggregate demand, which means goods get cheaper due to less demand, causing firms to have to fire people due to lower, causing greater economic decline that spirals out of control. We now know that deflation was a primary cause of the Great Depression.

KoolKat234• 2 years ago

Economics 101, deflation is very bad. Basically it is because it directly leads to economic contraction. Why produce something if you're not sure you're going to make the necessary money if you sell it, or wait if you can buy it for cheaper.

UncleOxidant3• 2 years ago

It is mostly when deflation is coupled with an asset bubble

Isn't it usually? Such as the housing price deflation of 2008-2011.

ThrustVectoring2• 2 years ago

People have a strong and well-founded attachment to nominal values in the economy. You pay your rent or mortgage with a fixed quantity of dollars, so as a salaried employee certain pay cuts are intolerable, so employers balance their falling nominal revenues with layoffs instead of pay cuts.

These nominal agreements are significantly less flexible than real-valued ones; people are much more able to buy fewer steak dinners when they're $20 instead of $15, and much less able to stay in their house when their paycheck is $1500 instead of $2000.

csomar• 2 years ago

I've always heard that deflation is awful and must be avoided.

That doesn't mean anything. People talk about god/gods all the time, it doesn't mean they are real or exist.

Inflation/Deflation are meaningless without linking them to the system in question. Growth also, in my opinion, has little to do with inflation/deflation and more about the positive inflow of energy into the economy.

AnimalMuppet4• 2 years ago

We had a system. We saw deflationary collapses in that system. We've seen them. They're real, and they are very destructive.

So we mostly kept the same system, but tried to tweak them to make deflation 1) much rarer and 2) less destructive.

galdosdi2• 2 years ago

Fed chair bernanke famously said "the us government has a technology called a printing press" to explain why deflation was in no way to be feared, bc unlike inflation it can be fought easily and without serious drawbacks.

Deflation is good, it means cheaper prices. A deflationary spiral due to insufficient money supply despite robust economic fundamentals can be really bad in theory sure, but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression. All you have to do is print more money and problem solved. We don't expect it to happen again because we learned from it.

See https://en.m.wikipedia.org/wiki/Bernanke_doctrine

throw0101d15• 2 years ago

[…] but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression.

Or if you do not have monetary policy flexibility, like when you're on the Gold Standard, as happened in the Great Depression (until FDR went off of it).

See Bernanke and James (1990):

However, Temin (1989) argues that, once these destabiliz- ing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individ- ual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the ab- sence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.

* https://www.nber.org/system/files/chapters/c11482/c11482.pdf

For a fuller treatment, see Eichengreen:

This book offers a reassessment of the international monetary problems that led to the global economic crisis of the 1930s. It explores the connections between the gold standard--the framework regulating international monetary affairs until 1931--and the Great Depression that broke out in 1929. Eichengreen shows how economic policies, in conjunction with the imbalances created by World War I, gave rise to the global crisis of the 1930s. He demonstrates that the gold standard fundamentally constrained the economic policies that were pursued and that it was largely responsible for creating the unstable economic environment on which those policies acted. The book also provides a valuable perspective on the economic policies of the post-World War II period and their consequences.

* https://www.goodreads.com/en/book/show/775143

Following the rules of the gold standard is what caused the initial "negligent and incompetent" action. Of course later (1937) on they raised rates too soon (and the government dialled back deficit spending), which caused an economic slowdown.

It was not until the giant stimulus packaged often referred to as "World War Two" that the economy picked up again.

Aloha3• 2 years ago

As someone who has lots of debt, I would prefer slow, but subtle inflation.

I look forward to minimum wage jobs being 25 dollars an hour, and still poverty wages - because then the debts I have will be roughly half what they are now in constant dollars.

veqq• 2 years ago

unless the monetary authorities are totally negligent and incompetent

See Japan for the last 3 decades!

abeppu3• 2 years ago

In the context of the original chart which covers a long period of US history ... is Bernanke's statement still true for most of it?

Clearly, I am not a monetary policy buff, but certainly I've heard people talk about the US getting off of the gold standard in 1971. When the currency is by policy backed by something, you can't just print money (unless you dig a new mine, I suppose), right? When I google around for what our policy was in the 1920s, I see that it was a bit complicated in that many countries suspended the gold standard during WWI and in some cases there were pegged exchange rates, and the US intervened in gold imports.

ThrustVectoring2• 2 years ago

Every nominal asset that can be sold to take advantage of lower prices on goods and services is someone else's nominal liability that they have to cover with weakened earning power. Deflation is straight up bad compared to mild and predictable inflation, it's easy to fight off sure but it's definitely something to avoid.

akamaka• 2 years ago

But what conditions made deflation and growth possible together in the 1920s?

They didn’t go together, the chart shows two severe episodes of deflation, one of which was the Great Depression, and the other was this:

https://en.m.wikipedia.org/wiki/Depression_of_1920%E2%80%931...

It’s not clear why the chart lumps them into one period.

francisofascii• 2 years ago

I think deflation independent of anything else is neither good or bad. Deflation gets a bad rap because it tends to correlate with market crashes and contractionary periods. If you are a senior on fixed income, or have a ton of cash, it is better than high inflation.

UncleOxidant3• 2 years ago

And if you're at home buying age housing deflation would be a gift. Unfortunately for buyers it's not something we'll likely see again for a while.

logicchains• 2 years ago

I've always heard that deflation is awful and must be avoided.

Because most modern economists are state-funded and the state benefits handsomely from the ability to print money. If you look back before economics got institutionalised you'll see a consensus that inflation is far worse than depression; plenty of states have been destroyed by debasement of the money supply (as far back as the Roman Empire artificially devaluing its currency leading up to its collapse), but there hasn't been a single one destroyed by the value of its people's money increasing.

Because deflation can only be transitionary; people need food and housing and other necessities, so there's a limit to how much they can reduce spending, and once that limit is reached the economy has just shifted to a new equilibrium, one with less spending and more savings than before. Inflation on the other hand (when it's caused by printing money/defacing the currency) has the power to destroy 100% of the populace's wealth, as we saw in Weimar Germany and Zimbabwe.

creshal• 2 years ago

But what conditions made deflation and growth possible together in the 1920s?

a) It was a correction to the very unusual war years, which saw unprecedented levels of government investments, price controls, and money printing

b) It also led to a lot of money getting invested in dubious overseas markets, which directly led to the Great Depression

tim3335• 2 years ago

Deflation is just prices going down. There is a difference between the good years with prices going down but people have loads of money to spend and the bad ones of prices going down because everyone's broke.

pocketarc• 2 years ago

The most surprising thing to me about this is just how... common these market moves are. Seeing so many big swings, even in the early days of the country, really drives home the idea that actually, things aren't as bad as they always seem when you're going through them.

riffic6• 2 years ago

business cycles are natural and periodic like a pendulum swing.

kjkjadksj4• 2 years ago

Its why the rich always get richer too. They have the capital to buy into inevitable downturns and ride the bull run into orders of magnitude increases of wealth. Everyone else just loses their job and has to pay for rent and food out of savings and loses their generational wealth in the process.

aaron_m04• 2 years ago

I would call it natural in the same sense that arsenic, cyanide, and rabies are natural.

throw0101d15• 2 years ago

business cycles are natural and periodic like a pendulum swing.

But how long the downturns last is a policy choice:

I would summarize the Keynesian view in terms of four points:
1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

* https://archive.nytimes.com/krugman.blogs.nytimes.com/2015/0...

WalterBright12• 2 years ago

They are natural, but are not cycles nor periodic. They are a chaotic system, like predator/prey relationships.

PheonixPharts2• 2 years ago

There's another name [0] for the "business cycle" and it doesn't rely on superstition either. Unfortunate that theory predicts those crises will trend getting worse and worse until the eventual breakdown of the system.

0. https://en.wikipedia.org/wiki/Crisis_theory

jimmytucson• 2 years ago

My takeaway was the exact opposite: in the 1930s, things really were as bad as they seemed, and the U.S. was justified in taking extreme measures to avoid it happening again.

willmadden• 2 years ago

and the U.S. was justified in taking extreme measures to avoid it happening again

What part of the chart shows this?

WalterBright12• 2 years ago

All the country had to do was to stop doing the things that caused the Depression:

1. pegging the dollar to gold

2. inflating the dollar

3. having the Fed set the money supply by fiat rather than the pre-1914 way of letting the market forces do it

zelcon• 2 years ago

This time is different

riffic6• 2 years ago

cycles are natural. instead of fighting it and treating the system as a fragile too big to fail egg, maybe we embrace the pendulum and think more about antifragility? Taleb's antifragility concept, if it's an obscure matter.

kjkjadksj4• 2 years ago

Easier said than done. People have 401k instead of pensions now. Everyone and everything is too overleveraged in the market to not be so affected by it. If they weren’t so leveraged you could imagine volitility dropping like a stone and these cycles becoming smaller with less participants trying to eek out a big return.

kwere2• 2 years ago

Its common knowledge that you should have around 50% of your assets in fixed income generating assets by the time your retire to not be forced to liquidate stocks in a downturn.

barrenko• 2 years ago

It's just our usual "avoid the small fires because of discomfort until a big one burns LA equivalent of money to the ground".

adverbly• 2 years ago

I'd recommend looking at the full PDF(make sure you zoom out or scroll horizontally as its very wide):

https://fraser.stlouisfed.org/files/docs/publications/1943ch...

Incredible visualization. Insane given they didn't have computer screens at the time.

What stands out the most to me is that the 30s were really, really bad. Way worse than anything that came before.

OnlyMortal• 2 years ago

It was so bad, some arseholes started a war at the end of the decade.

h0l0cube11• 2 years ago

The crippling reparations exacted on Germany were probably the greatest geopolitical miscalculation to date

derbOac• 2 years ago

I kind of wish the scale would go out further into history; I'm not sure if something like that exists (maybe for someplace like England or China?). I also would like to see it replicated for different areas of the world, as well as how the trends correlate with one another over time.

The period since the industrial revolution has been anomalous in many respects in terms of population dynamics and public health, and I imagine it would show up somehow in economic trends? On the other hand going back further in time I assume it becomes increasingly difficult to scale things on some common metric.

mr_toad• 2 years ago

There are just so few sources of economic data when you go back further.

waveBidder• 2 years ago

check out "Why the West Rules for Now", it's a historian's attempt at that

webnrrd2k• 2 years ago

The feature that stands out the most to me is that the black "boom or bust" line that shows prosperity/recession is effectively never at 100. It crosses the line (going up or down) a bunch of times, but is almost never on the line. I have to wonder if more balance with this would result in better outcomes, or worse.

Also, and this is just an eyeball analysis from the pdf, the booms seem roughly balanced with the busts until the great depression. The prosperity of WWI seems to have set up the cycle of bust for the great depression.

WalterBright12• 2 years ago

but is almost never on the line

The water surface in the ocean is almost never at "sea level".

Markets are a chaotic system.

the booms seem roughly balanced with the busts until the great depression

Yup. Like waves in the ocean!

The prosperity of WWI seems to have set up the cycle of bust for the great depression.

The setup was to peg the dollar exchange rate with gold, and then inflate the money. Such "pegging" historically has always led to a massive correction.

SkyMarshal• 2 years ago

I have to wonder if more balance with this would result in better outcomes, or worse.

Iirc that is exactly the problem that the Soviets claimed they solved with state-owned and centrally planned production, no more boom/bust cycle. And early on it did have some in the West worried about it. Turned out not to work, probably b/c you can't stablize an inherently unstable complex system.

eru3• 2 years ago

Historically, the US was a particularly crisis prone economy. Have a look at Canada for something much more stable. See eg https://www.cato.org/blog/there-was-no-place-canada

huijzer• 2 years ago

I have to wonder if more balance with this would result in better outcomes, or worse.

After reading Taleb, these "boom or bust" cycles are a feature not a bug. My own simplified interpretation: You need booms to fund moonshot ideas and busts to get rid of ideas that don't work. Also a bit similar to neural network training. You first pump in all kinds of information and then aggressively prune to get rid of mostly bad information.

tim3335• 2 years ago

I'm trying to figure what the black "boom or bust" line actually is mathematically speaking. It looks a bit like they've run a regression on GDP and show the deviation above or below trend? Maybe it's in the text? Trying to figure it.

feedforward• 2 years ago

The responses to your observation are hilarious. They'd have you think that the mass hiring by FAANG in 2021 and early 2022 followed by layoffs was a good thing. You accurately observe it as being screwy, which it is, but people are brainwashed into thinking it isn't - or is even a good thing.

DenisM• 2 years ago

Stability will beget over-confidence which will bring exuberance. If the system feeds on its own information it might be impossible to stabilize.

And do you even want stability? The boom cycle produces exuberance that allows funding risky projects of which a small number become smashing success. The bust destroys the rest of risky project, which allows recycling of labor and resources. Arguably this is a better model for economic advancement, compared to a steady state where stagnating businesses continue to stagnate, hoarding resources in under-productive pursuits.

rybosworld2• 2 years ago

I also think it's interesting that the 2008 mortgage crisis was very close to becoming just as bad as the great depression, but fiscal policy prevented that.

It's easiest to see this in side by side charts. The magnitude of stock market losses and economic data was tracking almost exactly with the great depression, until the central banks intervened.

Global stock markets: https://cepr.org/sites/default/files/styles/flexible_wysiwyg...

U.S. Unemployment: https://obamawhitehouse.archives.gov/sites/whitehouse.gov/fi...

Global Industrial production: https://cepr.org/sites/default/files/styles/flexible_wysiwyg...

We're still feeling ripple effects from 2008, but things aren't nearly as bas as they could have been.

PheonixPharts2• 2 years ago

but fiscal policy prevented that.

That fiscal policy prevented collapse in 2008 by creating an unimaginably large asset bubble we're still living in.

We're still feeling ripple effects from 2008, but things aren't nearly as bas as they could have been.

Those aren't ripple effects, it's the strain from an unsustainable "solution" to a crisis we still haven't really felt yet.

MetricT• 2 years ago

I also think it's interesting that the 2008 mortgage crisis was very close to becoming just as bad as the great depression, but fiscal policy prevented that.

Compare unemployment in the Great Depression vs Great Recession:

https://i.imgur.com/pjyczeq.png

Fiscal policy certainly did help, but the Great Recession probably would have still been significantly smaller than the Great Depression for several reasons.

(I suspect the Great Recession is more analogous to the Long Depression of the late 19th century, in that both of them significantly worsened inequality, while the Great Depression reduced inequality. I suspect whenever the US starts dealing with its mountain of debt, the resulting recession/panic/depression will also reduce inequality, though I doubt too many people will be cheering that when it happens).

jgbmlg• 2 years ago

Just because an economist puts a name on an economic trend like "secondary post war depression" doesn't mean they understand it. The economy goes up, it goes down, it goes up, it goes down, it goes up, it goes down, economists usually don't know why or how.

kjkjadksj4• 2 years ago

I like reading stock news twice a day. Once, during trading when they have no idea what is happening in the trenches. And then again in the evening, to see what creative narrative msnbc came up with to justify a total about-face from what they wrote a few hours earlier.

prewett• 2 years ago

I regularly see some article on the iPhone stock app saying something like "Dow (rise|plunge) on <reason>, markets wrapped", five minutes after open. Look guys, "markets wrapped" means "it's after close" and that doesn't happen for another 6:55 hours...

Not to mention -1% is not a "plunge", it is well within the normal variance.

banish-m4• 2 years ago

Wat? Macroeconomic observations don't individually track every single microeconomic occurrence and assign a root cause that "Bob did it". There are many possible factors leading to recession but no singular root cause because it's macroeconomic, some include:

- OXPC: Over-expansion of productive capacity

- Contraction of credit

- Contraction of demand

- Knock-on effects of layoffs harming other sectors

seventyone• 2 years ago

Beautiful. Buy a copy and frame it.

https://www.ebay.com/itm/355379334117

sixhobbits• 2 years ago

This time is different

throw0101d15• 2 years ago

This time is different

Actually, it is/was: post-WW2 there was no deflationary period.

And in general, post-WW2, wild swings as illustrated rarely happened. This is because we have monetary flexibility (i.e., no gold standard) and fiscal tools (Keynesian economics).

AnimalMuppet4• 2 years ago

Post-2008 tried really hard to be a deflationary period. Instead, the Fed intervened ($4 trillion evaporated, and the Fed created another $4 trillion through QE), and we got a flat decade. Compared to the 1930s, that was a massive step up.

antisthenes• 2 years ago

Well illustrated in this poignant clip from Margin Call (2011):

https://youtu.be/IAqAl292ozs?t=101

zachmu• 2 years ago

Ah to have been born in the Era of Good Feeling

buildsjets• 2 years ago

It's alright, 'cause the historical pattern has shown how the economical cycle tends to revolve in a round of decades. Three stages stand out in a loop. A slump and war, then peel back to square one and back for more. Bigger slump and bigger wars, and a smaller recovery. Huger slump and greater wars, and a shallower recovery. You see the recovery always comes 'round again. There's nothing to worry for, things look after themselves. There's nothing to worry, if things can only get better.

There's only millions that lose their jobs and homes, and sometimes their accents. There's only millions that die in their bloody wars, it's alright. It's only their lives and the lives of their next of kin that they are losing. Don't worry, be happy, things will get better naturally. Don't worry, shut up, sit down, go with it and be happy.

Thanks to Stereolab!

sneilan1• 2 years ago

Are you referring to the band Stereolab?

TeaBrain• 2 years ago

Besides the last line, their entire comment is just a quote of Ping Pong by Stereolab.

jongjong• 2 years ago

Interesting to note that after the Federal Reserve Bank was established in 1919, the crises have only gotten more severe... This is ironic given that the Fed was established to increase stability.

Not surprising though. It's a well known fact that debt/leverage increases volatility. What the Fed did is remove the limits which constrained the amount of debt in the system... For all we know, we could have been living an inefficient economic lie for 30 years and not realize it so long as new debts are taken out faster than the old ones are repaid... But what about when the borrowing slows down? Where will debtors find the liquidity if not from freshly injected credit? That's what's been happening over the past few decades. New borrowers monetizing the pyramid schemes of old borrowers... What happens when the economy runs out of suckers to enter at the bottom of the pyramid and the government is in perma-bailout mode. Zimbabwe rings a bell.

DavidPiper• 2 years ago

Could somebody ELI5 for me why, during periods of both prosperity decline, the economy movement is stable for the most part, but in order to cross over from decline->prosperity or prosperity->decline, there is a huge and sudden swing?

1837 and 1873 appear to be bubbles bursting (maybe) - is every sudden downswing a literal, practical panic?

And why are the upswings just as sharp? What is happening practically during those moments that make the swings so sudden compared to economic activity "during" a prosperous or downturn period?

debacle• 2 years ago

There's a momentum to consumer confidence and credit crunches. Folks were talking about the 2008 crash for about 18 months before it happened. We're staring down something on the horizon now, and I'm sure someone more economically minded than me can envision what it is, but will it hit in 1 year, 3, 5?

Everything is usually sunshine and roses until it's not, and then things stay conservative until there's some sort of all clear.

marcosdumay• 2 years ago

People are moody, and will ignore the problems and keep pushing further investment / work harder / we need to hire now! or nobody can make money / why bother going to work / fire people or get bankrupt! for way longer than it makes sense.

la64710• 2 years ago

Things are bad now. Specially the job market for white collar jobs. It is hyper competitive.

carimura• 2 years ago

Has anyone tried to take this and bring it forward to today?

Business Booms and Depressions Since 1775 (1943)

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