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The Great Depression of the 1930s was a complicated, traumatic period in human history. While the recent experience of the COVID-19 pandemic has generally been much less severe, by revisiting this unique period and the policy response, we may be able to better understand the vulnerabilities and reactions of our economy and capital markets to global business cycles, macroeconomic policy and capital flows. In this article we explore the events of the 1930s and consider to what extent they can be applied to the contemporary environment of ultra-low interest rates and significant fiscal stimulus.
Before delving into the Depression lessons, it is vitally important to first understand the key similarities and differences of the 1930s to the 2020s so that we, as students, can better grasp the nuances of this complex decade and the degree to which the two periods may be compared.
During the 1930s, the macroeconomic environment was marked by:
While the 1930s had a series of similarities to today’s environment, stark differences appear that complicate some of the comparisons to the 2020s, including:
Following the election of FDR in 1932, the United States entered a new period of hope and resilience after seeing the Dow Jones Index fall by almost 90% and unemployment increase to 25%. FDR pledged to make sweeping changes and deviate from the mistakes of the prior Hoover Administration’s ‘laissez faire’ economic policies. He sought to galvanise the population with significant fiscal measures to stabilise the banking system, take the US off the gold standard and rebuild consumer and business confidence. To better understand what it was like to be on the ground during this period, Benjamin Roth, a young lawyer from Ohio, kept a diary during the Great Depression and insightfully wrote on 2 January 1936 regarding the preponderance of fiscal stimulus, “the worst feature of it all is that people are no longer worried about government spending. An additional billion or two seems to mean nothing.” The applicability of this observation to the current environment is apparent.
Investors saw the Dow rally 39% in 1935 and another 25% in 1936, following reassurance from FDR of significant fiscal support and the Federal Reserve’s long overdue accommodative stance (zero rates and commencement of QE). The graph below highlights this market rally, which seems to be overshadowed by the large drop in prices from 1929-32.
As the market rallied between 1935-36, the sentiment at the time amongst market commentators was similar to today and may be summarised as:
The rally then carried over into early 1937 even while the US Government implemented contractionary fiscal policy. The budget deficit was slashed in 1936-37 as tax revenues picked up and FDR sought to balance the budget (see CPI graph below showing the remarkable recovery from deflation).
Coinciding with these fiscal policy changes during the recovery, monetary policy also took a turn. The Fed’s QE program ended a couple of years after it started since the Fed thought it was ineffectual, interest rates were hiked in 1937 and bank reserve requirements increased as confidence in the banking system returned and the unemployment rate came down to 17% by the end of 1936.
Ultimately, the US ended up in recession again in 1937 and the Dow sold off aggressively with prices falling by over 40%. The recovery from the 1937 recession commenced in June 1938 -- and it wasn’t until September 1939, with Britain and France’s declaration of war against Germany, that the world truly changed for posterity as it entered a wartime era where a rapid ramp up in economic activity to meet the war effort once and for all broke the back of what we now call the ‘Great Depression’.
Our main takeaways from this review of the 1930s that investors today should consider can be summarised as follows:
The experience of the 1930s does raise some interesting questions for investors today contemplating the future trajectory of economic activity and markets:
While talk of the experiences during the 1930s can seem distant, fanciful and far-fetched almost a century later; in extraordinary times such as the present, we can benefit from detaching ourselves from our own experiences which represent a narrow slice of human history and cast our minds back to experiences from other extraordinary periods to better understand the world we are living in today.
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