How Great Was the Great Depression?

David Wheelock: OK, how great was the Great Depression? One of the challenges of teaching macroeconomics students, or economics in general, is to put it in a perspective that the students can understand. And so, in my presentation, before I get into what caused the Great Depression, let me give you a few ways of thinking about how to compare the Great Depression with episodes that we can... that we've lived through and therefore can relate to. So, first I'll give some long-run comparisons.

Well, first let me give you some facts, some data about the Great Depression. Again, thinking of the economy in the U.S. as a balloon, the economy shrank by a third from the beginning of the Great Depression to the bottom, about four years later. So the total output of goods and services which normally is growing about 2.5% per year, instead of growing during a recession, and during the Great Depression, it shrank. Like, the air really just flew out of that balloon, so it shrank by about a third: 29% between 1929 and 1933.

The unemployment rate — that is, the percentage of the labor force, the percentage of people in the labor force who are out of work and actively seeking employment — rose from about 4% in 1929 to a peak of 25% of the labor force in 1933, and that does not include people who are working part-time when they would prefer to be working full-time.

One of my grandfathers had been a manager of a gas company plant in West Virginia. The plant closed because there wasn't enough demand for natural gas, if you can believe it, during the during the 1930s. He was the only employee retained by the firm and they kept him on as a part-time night watchman. So he was working part-time when he'd much rather be working full-time and he was working at a skill level that was below his training and so forth, but he was not part of this 25%. Those were all the guys who had been laid off. My other grandfather happened to fall in that bucket.

But price level, I talked about deflation a moment ago. We had serious deflation in the Great Depression. The consumer price level fell by 25%; wholesale prices fell by 33%.

Bank failures — we've had a tremendous number of bank failures and financial crisis over the last six years in United States. It was nothing in comparison to the 1930s however, when 7,000 banks failed between 1930 and 1933. Nearly a third of the banking system at the time just simply disappeared. And keep in mind, that was the days before we had Federal Deposit Insurance.