Recession and the History behind It

Economists agree there are many possible reasons for the fluctuations in the economy over the years. Whether from an increase in government spending or an increase in interest rates, the business cycle is forever expanding or contracting. There is no exact timetable for when each phase begins or for the length of each phase. The chart below from crawfordsworld.com depicts the business cycles in the United States from 1914 – 1992.

Business cycle expansions occur in times of economic prosperity when the economy is booming and continues until there is a peak. Once this occurs, the business cycle is said to contract. This contraction is called a recession or depression. During this period, the economy is in decline. The decline continues until the economy hits a trough. Recession, defined more specifically, is when “businesses cease to expand, the Gross Domestic Product diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline” (investopedia.com). Although there have been some notable recessions/depressions in the history of the United States, the causes for these contractions in the business cycle can vary greatly from period to period. These variations depend on the social, economic and political environment that prevails at each point in time. The following is a comparison and contrast of four recessionary periods in the United States: The Great Depression:
Dates: August 1929 – Late 1930s –Early 1940s
Peak Unemployment: 24.9%
GDP decline: -26.7% The Wall Street Crash of 1929 is considered the main cause of the Great Depression. The initial crash occurred over several days with ‘Black Tuesday’ being the most devastating. On this day, the market lost $14 billion. The loss for the whole week was $30 billion. The Dow Jones market peaked at 381 on September 3, 1929 and bottomed out at 42 in 1932. This was an 89% decline. Other causes of the Great Depression include a weak banking system, overproduction and a bursting credit bubble.

The 1973-1975 Recession:
Dates: November 1973 – March 1975
Peak Unemployment: 9.0%
GDP decline: -3.2% The reasons for this recession include the quadrupling of oil prices by OPEC (Organization of Petroleum Exporting Countries), high government spending because of the Vietnam War, The 1973 oil crisis and the 1973-1974 stock market crash. The oil crisis started when an embargo was initiated by OAPEC (Arab countries of OPEC, plus Egypt, Syria and Tunisia) in response to the United States’ stance on the Yom Kippur War (1973 Arab-Israeli War). This crisis resulted in a state of ‘stagflation.’ This term is used when there is a slow economic growth accompanied by high unemployment and high inflation. The stock market crash affected all the major stock markets in the world, especially in the United Kingdom. This crash was viewed as one of the worst collapses in the modern era. In addition, the collapse of the Bretton Woods System was another factor. This was an agreement developed in 1944 and resulted in the International Monetary Fund, the International Bank for Reconstruction and Development and foreign exchange rate system that was tied to the U.S. dollar. This collapse aided in the devaluation of the U.S. dollar.

The Early 1980s Recession:
Dates: July 1981- November 1982
Peak Unemployment: 10.8%
GDP decline: -2.7%
The recession of 1980 was deemed the most severe global recession of its time. The primary cause was the monetary policy, adopted by the Federal Reserve. People often called it the “Regan Recession”, because it coincided with U.S. President Ronald Reagan’s steep cuts in domestic spending policy. This policy was adopted in an effort to control inflation and to offset the energy crisis that resulted from a regime change in Iran. At the time, Iran was a major producer of oil around the world. The Iranian Revolution in