History of Depressions in the United States
The Great Depression is so ubiquitously-cited that most people aren’t even aware that depressions occurred about every 25 years between 1789 and 1930. The first occurred between 1807-1814 and was caused by a trade embargo implemented by Thomas Jefferson in order to avoid being drawn into European military conflicts, devastating the export markets. Thirty years later, another roiled the economy due to a concerted effort by Andrew Jackson to stem land speculation through a reduction in the money supply, leading to land deflation and venture failures. “The Long Depression” of 1873-1879 was precipitated by the bust of the railroad-building industry, which sent shock waves through the iron and steel industries. In 1893, another railroad-related bust (this time at the retail level) forced 500 banks and 16,000 businesses to declare bankruptcy over the next five years. Lastly, the depression we all recognize: the Great Depression of 1929-1941.
Unlike previous depressions, fiscal policy was utilized in significant measure to combat the Great Depression. Although accurate record-keeping is difficult to find, evidence suggests that the government ran at a cumulative surplus between 1789 and 1849, and a modest cumulative deficit between 1850-1900. In the 29 years leading to the stock market crash, the U.S. balanced its budget 20 times. The onset of the Great Depression began a cycle of deficit spending never before seen in American history. The results appear to have substantially lengthened the business cycle, albeit at a mind-boggling price tag.
Has Increased Fiscal and Monetary Policy Delayed Inevitable Cyclical Economic Slowdowns?
It’s an interesting question with no certain answer. Up until 1930, the United States generally balanced its budget, with recessions typically happening every 3-5 years. Depressions were more sporadic, but on average occurred every quarter-century. Since the mid-1940s there have been just twelve balanced budgets, eleven recessions — one every six years — and no depressions. In the past thirty years, the lengthening of the business cycle has been even more pronounced, with just three official recessions declared.
With the battle over the debt ceiling and impending fiscal cliff threatening to plunge the economy into contraction once again, the white noise threatens to drown out a much more fundamental question: has monetary and fiscal policy over the past 30 years been expanded to such a rampant degree as to ultimately have done more harm than good?
Massive Monetary and Fiscal Policy: Net Results
Based upon the frequency of previous contractions, the evidence suggests governmental intervention may have helped thwart five recessions and as many as two depression since the end of World War II. With contractions occurring every four years, seventeen could be juxtaposed into the nearly 70-year period; instead, the U.S. experienced twelve. Likewise, over that same length of time, two depressions would have been the norm. Instead, the United States has experienced none — yet. More on that in a minute.
Meanwhile, the national debt has skyrocketed from $1.2 trillion (37% of GDP) to over $16 trillion (102% of GDP) in just the past 30 years. Moreover, $6.8 trillion has been added to the national debt since the beginning of the Great Recession, much of which went to avert a perceived impending depression.