Today, as I watched the Dow sink below 8,000, I wondered how the sell-off of the last six months compares to the sell-off during the Great Depression. The chart below shows what I found. To create it, I graphed historical data taken from the DJ Indexes website for the Dow Jones Industrial Average.
Let me explain how to read the chart.
The years 1930 and 2008 are time 0 on the x axis of the graph. I then looked at the 21 years before 1930 and 2008 to see how the markets performed before the 1930 and 2008 crashes. I also charted the 10 years after the crash in 1930, represented by the positive numbers on the X axis. The left Y axis shows the Dow's price during the early part of the 20th century and the right Y axis shows the Dow's price in more modern times. One other note on the methodology is that I used the closing price of the Dow on November 11 of each year.
As you can see by looking at the blue and pink lines, before both crashes there was a sharp run-up in the value of the Dow. But the data shows that the pre-crash bubble is much bigger now than it was prior to the Great Depression. While the Dow increased about 2.5x during the priod 21 years before the crash of 1929-1930, it increased over 6X from 1988 to 2008.
In 1929, with Black Friday, the Dow began to deflate and it hit a bottom in 1932. By that point, the Dow was down almost 75% from its peak a few years earlier. Today, the Dow has fallen about 42% from its high of 13,850. As the chart shows, if this economic downturn is not over and comes close to approaching the early severity of the Great Depression, then the Dow is not done falling. It's important to note that the largest damange to the market happened at the beginning of the Depression. While economic problems continue until the beginning of World War II, the stock market began to recover from its lows in 1936. What does that mean? It means that even if our current downturn doesn't last as long as the Depression, it could be as deep for a concentrated period of time, and during that time cause further equity losses.
I don't usually use Wikipedia as a source but I came across this entry on the Great Depression and thought it appropriate. You can decide if there are parallels to today:
The Great Depression was not a sudden total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929.[6] Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the northern summer of 1930.
In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the American economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.
The quote doesn't touch on the obvious parallels in the banking system. Although there haven't been as many bank failures, the magnitude of the financial failures today are enormous - Bear, Lehman, Fannie, Freddie, Wachovia, Washington Mutual, Countrywide, National Citi, AIG. I realize not all of these were failures but many of the banks listed were purchased at firesale prices to prevent a failure.
The question to ask yourself about this recession is whether you think it's like the relatively mild downturns of 2001-2002, and 1991-1992 and even 1980 or is it really the worst economic downturn since the Great Depression? Because if you believe the latter, then that blue line has further to fall.
For an update on this article from August 3, 2011, click here.
Comments
watashi-A_hadiputro@hotmail.com
February 23, 2009
Thanks for this article. I'm currently starting on a research paper for my U.S. History class and this certainly helped me start. If you have any more informations, like the suicide rate, or crime rate of the two period, it'll be a big help. Thanks.
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'Dupe
February 23, 2009
This is a brilliant comparison of these 2 periods. Will look out for more information. Thanks for sharing.
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Econometrics
February 24, 2009
While the financial crisis situation is simlair you need to factor out two key differences:
1) If FDIC can stay above water and people continue to keep their money out of their matress, the volitility shouldn't be as bad (lesser dive, but probably slower recovery). As long as capital is available, it can create jobs when the stimulus finally kicks in.
3) At least currently (knock-Knock)- we have no major (oil or food) shortage as did the great depression (Dust bowls)
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Oakridge
February 27, 2009
This is an interesting comparison. However, Hoover didn't let the Federal goverment react so we lost a few years from '29-'32. It took Roosevelt to start getting the Federal government into the act in '32 and '33 and things started to improve even though many of his programs were temporary. Perhaps Obama's program will cause a quicker recovery. It all depends on employment.
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Jacob Fries
March 01, 2009
I predict DOW 5,600 by year's end and a final bottom during the depression in coming years, below DOW 2,000. That is what an axiomatic reading of 1929 and the 1930s indicate, compared to 2008 and 2009. I trust history to repeat itself because people do not learn from their mistakes, least of all governments. There will be a Greater Depression.
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wb
March 02, 2009
The unfortunate difference between today and the Great Depression is that we had brilliant people come in to run the economy in 1932. Today, we have a bunch of thugs who are bent on recasting the socio-economic system.
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Sarb Gill
March 03, 2009
Since the government is using quantative easing (printing money) I think the DOW will bottom in nominal terms in the middle of next year around 3700.
Buy gold or other real assets to protect yourself.
High Inflation is very lickley!!
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Anonymous
March 06, 2009
"Today, we have a bunch of thugs who are bent on recasting the socio-economic system. " quote above
What we had for the last 8 years of republican rule was a false economy based on crazy credit practices that enriched the super-rich of wall street, the bankers, etc, in an almost ponzi-like scheme. This scheme was not paying off old investors with new investors money, but bulls..ting people into bad loans, which the banks then flipped and kept their commission, while selling these known bad loans into the securities market.
Meanwhile the Bush admin, which also gave us Iraq and $4/gal gas, deregulated instead of stopping these schemes, which benefited their very wealthy pals.
Ultimately the housing bubble burst. And the people who got themselves into the economic hole are victims of the old adage that marketing really works. In this case because we had individuals buyers up against super-sophisticated bankers and lawyers and marketers who have spent their lives in that business.
So while there is some blame for the dems also from the 90's, it is the Bush administration of the right wing repubs who have stolen this country blind. AND THEY ARE USING THE OLDEST TRICK IN THE WORLD - BLAMING THE VICTIMS, THE ORDINARY PEOPLE THEY SCAMMED, FOR THE PROBLEM.
There is fundamentally something wrong with a nation where the top 400 peoples combined wealth is the same as the bottom 150 million people. Maybe we do need to recast the economic system, just as FDR did decades ago, which resulted in insuring our old people could live in dignity, and set up the conditions that resulted in medical care for our parents and ourselves in their old age. And ultimately, after WWII, in the middle class being able to buy their own homes, rather then being beholded to the wealthy landlords. (interesting use of a word that relates to God, btw)
And the writer who made the quoted comment at the top is just a perfect example of the republicans, who would continue to destroy this nation, and the world, to continue feeding their greed. Note how the republicans, who doubled our national debt during the Bush years, scream about being fiscal conservatives, while during the later clinton years our debt was actually being paid off.
And, by the way, while Obama is reaching out to the republicans, he is getting almost zero back, except for total recalcitrance and blame. Why - because that party's base is the old south, where segregation still rules in the minds of those people, and they are still mentally fighting the civil war.
The republican party realizes that if Obama - a black man - succeeds, it will be the end of their base support amongst much of the southern 'confederacy' folks, and especially amongst the younger generation there, who are not poisoned by racial hatred, even though it isn't publicly expressed as such. And hence permanent minority status for the republicans.
And another part of the republican party is the small 'self-made' businessmen, who are proud of whom they are and what they have accomplished, but are seeing their work of a lifetime destroyed. Some - there have been three incidents I alone know of where these people are so distraught that they have killed their entire family and then committed suicide. But if this part of the republican base comes to see a recovery under the Democrats, many of them will be republicans no longer.
In summary - THE CURRENT BATTLE IS SIMPLY A BATTLE BY THE REPUBLICAN PARTY TO PREVENT THEIR RECEIVING THE BLAME DUE THEM, AND BECOMING A MINORITY PARTY. AND TO KEEP THEIR POWER THEY WOULD CHANCE DESTROYING AMERICA - RATHER THEN ADMIT THAT THE CRISIS LIES WITH THEIR WILD WEST ANYTHING GOES CAPITALISM, WHICH ENRICHED THEIR SUPER-WEALTHY PALS BEYOND ALL BELIEF.
And, RE HISTORY, the great depression, which was world wide, also spawned Adolf Hitler. Distraught German people saw their economy totally collapse, so they fell for his message of hatred and power. And that spawned WWII and 50 million deaths. The current depression is spreading, and who knows what will happen somewhere else? Eg what will happen if the economies of the Arab states collapse, and they turn to Bin Laden by the millions, rather then the current small number of religious nut cases.
But the republicans don't care. All they want to do is save their party, and they would do to America what happened with their like kind in Argentina some decades ago. A corrupt, militaristic like government stole everything, & destroyed their middle class who ended up living in trailers.
That is what the struggle is really about - The republican partyââ¬â¢s , morally destroyed by Bush and his gang, keeping Power and wealth. They would destroy the middle class and this nation rather then admit their policies are the prime cause of the depression.
Because their true God, and their so-called moral values (hitler spoke about values in his campaign for election btw) are really defined by 4 words - their God of Greed.
May the real God bless America, and save the republican party from the monsters who control it, and save America and its middle class.
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Turner
March 06, 2009
Nice analysis! Thanks.
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Anonymous
March 06, 2009
Great idea, but your numbers are not exact. The DOW did break 14,000 at one point in 2007.
Tweak your analysis.
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