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Ask An Economist

Wednesday, July 1, 2009

Dave Wheelock, an economist at the St. Louis Fed since 1993, heads up the banking and financial markets group in the Research division. His research interests are financial and monetary history—especially the Great Depression—and banking. His outside interests include traveling, playing trumpet in the University City Symphony Orchestra and helping to coach his son's baseball team.

How do the current financial crisis and recession compare with the Great Depression?

The Great Depression of the 1930s was the most severe U.S. economic downturn of the 20th century. Between 1929 and 1933, the nation's production of goods and services (GDP) fell nearly 30 percent, the unemployment rate reached 25 percent of the labor force and the consumer price level declined by some 30 percent.

The current financial crisis is the most severe since the 1930s. However, the current
recession is unlikely to rival the Great Depression. The recession began in the fourth quarter of 2007, but GDP did not begin to contract until the second half of 2008 and has fallen by just 3 percent as of the first quarter of 2009. Many economists expect that GDP will begin to rise in the second half of this year. The unemployment rate reached 9.4 percent in May 2009, its highest level since August 1983. Economists expect that the unemployment rate will continue to rise for a while, but few expect the unemployment rate to come close to Depression levels.

In contrast with the deflation of the 1930s, consumer prices have declined only modestly since September 2008. The consumer price index fell 3 percent between its September 2008 peak and April 2009, mainly because of a sharp decline in energy prices. Energy prices have since risen and consumer prices have stabilized. Few economists predict deflation on the scale of the Great Depression.

Like the Great Depression, the current episode has been marked by a sharp decline in the stock market and by other financial distress. The S&P 500 Composite Index fell 57 percent between its peak on Oct. 9, 2007, and its recent low on March 9, 2009, with much of the decline occurring after the middle of September 2008, when the financial crisis intensified. During the Depression, the stock market lost more than 80 percent of its value.

Several very large financial firms have experienced multibillion dollar losses during the current crisis, and a few have survived only with government assistance. However, while the number of bank failures has risen, many fewer banks have failed during the current period than during the Depression or even during the 1980s and early 1990s.

Twenty-five banks failed last year and another 36 failed during the first five months of this year. By contrast, more than 100 banks failed every year from 1985 to 1992, including 221 in 1988, and many more savings and loan associations failed.

The distress in the home mortgage market has been a notable feature of the current episode. Unfortunately, the data on mortgage delinquency and foreclosure rates for the Great Depression are not directly comparable with the data for the current crisis. However, while severe, the current level of distress in U.S. mortgage markets is not as severe as the distress in those markets during the Great Depression, when approximately one-half of all homeowners with a mortgage fell behind on their payments.

To read more about this comparison, see a Q&A with Dave on the Bank's Great Depression web site for teachers. Go to For an up-to-date timeline on the current financial crisis, see

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