Recession History Pt. 1 – 1929

As a lot of people continue to self-isolate and economies remain stunted, a further recession is looking imminent. When a recession hits, unemployment and other negative impacts soon follow (which we have already seen). We have to remember, however, that we have been here before, and every time we have come back from it.

That being said, we want to take some time to look at some of the biggest recessions in the last 100 years. Looking back at past events is often enlightening and gives some perspective and hope. This week we are turning back time more than 90 years to 1929.

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What is a Recession?

Before looking at the 1929 recession, it is important to understand what a recession is.

A recession is a macro-economic term that refers to a significant decline in general economic activity. This is often measured by two consecutive quarters of negative growth.

The following are some general characteristics of a recession:

  • Real GDP decreases.
  • Firms faced with unwanted inventories and declining profits reduce production, postpone investment, curtail hiring, and may lay off employees.
  • Business failure outnumber start-ups.
  • Falling employment erodes household incomes and confidence.
  • Consumers react by spending less and saving more, which further cuts into sales, fueling the recession.

Historic Recessions

In the last 100 years, there have been 18 recessions. This means that one occurred roughly every 5.5 years. Based on the table below, the average amount of time from the end of one recession to the beginning of the next was just over 4.5 years. Each recession lasted for an average of just over one year.

Below is a table outlining those recessions:

DatesDurationTime since Previous RecessionBusiness ActivityTrade and Industrial Activity
Jan 1920 – July 211y 6m10m-38.1%-32.7%
May 1923 – June 19241y 2m2y-25.4%-22.7
Oct 1926 – Nov 19271y 1m 2y 3m-12.2%-10%
Peak UnemploymentGDP Decline
Aug 1929 – Mar 19333y 7m1y 9m24.9%-26.7%
May 1937 – June 19381y 1m4y 2m19%-18.2%
Feb 1945 – Oct 19458 m6y 8m5.2%-12.7%
Nov 1948 – Oct 194911 m 3y 1m7.9%-1.7%
July 1953 – May 195410m3y 9m6.1%-2.6%
Aug 1957 – April 19588m3y3m7.5%-3.7%
Apr 1960 – Feb 196110m2y7.1%-1.6%
Dec 1969 – Nov 197011m8y 10m6.1%-0.6%
Nov 1973 – Mar 19751y 4m3y9%-3.2%
Jan 1980 – July 19806m4y 10m7.8%-2.2%
July 1981- Nov 19821y 4m1y10.8%-2.7%
July 1990 – Mar 19918m7y 8m7.8%-1.4%
Mar 2001 – Nov 20018m10y6.3%-0.3%
Dec 2007 – June 20091y 6m6y 1m10%-5.1%
Mar 2020 – Present10y 9m

Note: The list of recession above is for the U.S. However, this has a high correlation with the Canadian economy and is for illustration purposes.

The Great Depression (Aug 1929 – Mar 1933 and May 1937 – June 1938)

Although there were technically two separate recessions (as shown above), in reality, the effects were felt during the whole time. This recession is often referred to “The Dirty Thirties”. It was the longest and most severe depression ever experienced by the industrialized western world.

A Depression is a severe and prolonged recession. It is commonly defined as an extreme recession that lasts three or more years or leads to a decline in real GDP of at least 10%.

The Great Depression saw industrial production in the U.S. drop 47%. Gross Domestic Product, on the other hand, saw a drop of 30% while the unemployment rate exceeded 20%.

What Caused This Recession?

There were several factors that played key roles in the great depression with each having an impact on the other: Stock market crash, banking panics, the gold standard, and the Smoot-Hawley Tariff Act (1930).

Stock Market Crash

The first day of the stock market crash on Oct 24, 1929, is referred to as Black Thursday. Prior to this crash, we had the roaring twenties. The twenties saw asset prices grow substantially, eventually leading to the asset bubble that would burst.

In the summer of 1929, monetary policy was adjusted and tightened, aimed at limiting stock market speculation. Stocks had seen a fourfold increase from the low in 1921 to the peak in 1929.

Part of this monetary adjustment was the raising of interest rates. This increase in rates depressed interest-sensitive spending in areas like construction and automobiles. This, in turn, reduced production.

A lot of stocks had been purchased on margin. When the prices of stocks fell, investors who used margin loans experienced a margin call. A margin call occurs when stocks, bonds, or other securities that were purchased with borrowed money fall in value to levels below the value of outstanding loans. Borrowers require more collateral from investors to keep onside, or investors are forced to liquidate their positions to repay their loans.

The cascading margin calls of 1929 only increased the pace and severity of the sell-off. Between September and November of that year, U.S. equity prices declined 33%.

Although, the crash and the depression are separate events, the crash in stock prices was a large factor in declining production and employment.

For more info on this crash, click here.

Banking Panics

Once the stock market began to see large price declines, consumers began to lose confidence in the finance and banking system. A banking panic, or bank run, occurs when depositors lose confidence in the solvency of the bank and request to have all of their money withdrawn in cash.

Although that sounds like it should be no problem, because of the way banks operate, it is essentially impossible for banks to pay out all deposits at once. Banks operate on a fractional reserve basis. In short, this means that when someone deposits money in the bank, the bank then turns around and lends that money out several times over.

The U.S. experienced five separate waves of banking panics between 1930 and 1933. This culminated in a national banking holiday on March 6, 1933, where banks closed operations. This extreme measure only eroded more confidence in the banking system. By 1933, one-fifth of the banks in operation in 1930 had failed.

During the 1930s both money supply and real economic output declined. This decline in the money supply decreased spending in several ways. Consumers began to expect deflation and did not want to take on debt because they believed they wouldn’t be able to afford it in the future.

Here is more information on the banking panics of the 1930s.

Gold Standard

Back in the 1930s, a country’s fiat currency was set at a fixed price in terms of gold. Monetary policy was then used to defend that fixed price. It is believed that the US Federal Reserve did not expand the money supply because it would have led to lost confidence in the US’s commitment to the gold standard. However, had the Federal Reserve increased money supply, they may have been pressured to devalue their currency or leave the gold standard like Great Britain.

By 1933 the US was in crisis mode and politicians needed to do something to maintain order and get the economy back on track. They made private ownership of gold illegal and asked all citizens and corporations to turn in their bars and coins. In 1934, once all the physical gold was safely tucked away in the hands of the Federal Reserve, they repriced gold with a doubling of the price in US dollar terms. This effectively created a surge of money supply and price inflation without departing from the gold standard.

Smoot-Hawley Tarrif Act (1930)

In the 1920s, U.S. lending to Germany and Latin America expanded drastically. However, in 1928-1929 because of high-interest rates and the booming stock market, international lending fell. This contraction probably led to further contractions in output of borrowing countries.

The Smoot-Hawley tarrif was meant to boost farm incomes by reducing foreign competition in agriculture products. However, other countries followed suit with retaliation and in an attempt to force a correction of trade imbalances. It is believed that, although this played a role, its significance was quite minor in comparison to other factors mentioned.

How Did the Recession End?

After nearly a decade of one of the worst economic times in history, particularly in the U.S., it was finally resolved. There was another downturn in 1937-38 but by mid-1938 the American economy was growing faster than in the mid-1930s. The recession in 1937 was due in large part to the Federal Reserve increasing the reserve requirements for lending institutions. The country’s output finally returned to its long-run trend path in 1942. But how was this achieved?

There were two main sources of recovery: currency devaluation and monetary expansion.

There is a high correlation between when countries devalued their currencies or gave up on the gold standard completely and when growth finally returned. Devaluing currencies allowed countries to increase their money supply without concern over movement in gold and exchange rates.

The U.S. money supply increased by roughly 42% from 1933 to 1937. This was in large part due to a lot of gold inflows. With increased money supply came increased spending. Interest rates were cut thus making credit more attainable.

Expectations of deflation turned to expectations of inflation. Borrowers now believed that if they took on debt, their capacity to pay for it in the future would increase.

One tell-tale sign that monetary policy played a key role is the increased spending on interest-sensitive items. Purchases of vehicles and machinery saw increases well before consumer spending on services.

Applying the 1929 Recession to Today

The 1929 Recession is arguably the worst economic time in the last 100 years. There were a lot of lessons that came out of it. How can we apply what we learned nearly 100 years ago to today? Are there any similarities between the two dates? This is something we will answer below.

Flash Crash

If we look back at 1929 there were several notable days of sell offs; Black Thursday, Black Monday and Black Tuesday. These 3 days within a 1 week span saw the Dow Jones fall 9%, 12.8% and 11.7% respectively.

This is quite similar to what we saw earlier in 2020. Monday March 9, 2020 saw the largest single day point drop in Dow history. It was shortly followed by 2 more days, the 12th and 16th, setting new records for single day point drops.

Although the individual crashes, 1929 and 2020, may have had different causes, on a chart, they look eerily similar, see below:

The green box in the first chart shows almost identical shape to what we see in chart two (Today). The red arrow shows roughly where we would be if we transposed today onto the 1929 chart.

The two graphs are very similar. If, I repeat, if, 1929 is an indicator of what is going to happen going forward, we could be in for a wild ride.

Rising Unemployment

As we mentioned above, 1929 saw unemployment increase drastically. Unemployment peaked at nearly 25%.

At the end of 2019 and the beginning of 2020, we were near full employment. We had hit historically low levels of unemployment. However, March of 2020 had a different plan in mind.

Canada lost more than 1 million jobs in March. This loss of jobs saw unemployment rise from 5.6% to 7.8%. Still a long way from 1929 levels, but we are also only one month in. The U.S., on the other hand, had 15 million Americans claim unemployment in just 3 weeks and now has unemployment of 4.4%.

Asset Bubbles

If you go through our older posts you can see that we believed some assets were overvalued. We also were preparing for a recession. The amount of leverage and debt that was/is propping up the economy is not sustainable.

People have been taking on more and more debt pushing asset prices higher and higher. Now a scary amount of people are on the brink of solvency every month. When they lose their job, those debt payments will be missed. In turn, banks and other lenders will call for those loans to be repaid. When those loans cannot be repaid, we will see asset prices decline. If enough loans become delinquent, we could see the bank’s trend towards a banking panic.

If we look at the stock market, the number of margin calls has increased as well. Heightening the effects of the current sell-off. It sounds extremely similar to what happened in 1929.


Although there are a large number of similarities between 1929 and 2020, there are some stark differences as well. One of which is that the U.S. dollar is no longer tied to gold. This means that the Federal Reserve can, and has already announced that they will, print unlimited amounts of money with “NO” effect on the economy. Obviously, this isn’t true and effects will definitely be felt in the long term. This does, however, allow the eventual decline to be potentially more gradual.

Another difference is our current work environments. Our rising unemployment isn’t due fully to there being no jobs. Rather, it is because of a pandemic forcing us to stay at home and curbing both supply and demand for goods and services. Furthermore, thanks to technology, a lot more people are able to work from home. This might mean that the amount of people that become unemployed may not be as numerous as nearly 100 years ago.

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