David R. Henderson  

Hummel on Recessions and Banking Crises

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Monetary economist and economic historian Jeffrey R. Hummel has done a real service by putting together a table, with surrounding discussion, that gives the dates of major recessions. He also gives, for each recession, whether it was accompanied by a bank panic or suspension and also whether it was accompanied by numerous bank failures.

But why put together a table of recessions when the National Bureau of Economic Research, the generally agreed on arbiter of recessions, has already done so? Why, in short, reinvent the wheel? Hummel's argument is that the wheel is broken. (Those are my words, not his.)

He writes:

I have almost entirely confined the list of major recessions to those constituting part of a standard business cycle, omitting periods of economic dislocation resulting from U.S. wars or government embargoes. For the number and dating of recessions from 1948 forward, I have exclusively followed the National Bureau of Economic Research (NBER). But prior to 1929, the NBER notoriously exaggerates the volatility of the U.S. economy. Moreover, between 1929 and 1948, the NBER reports a post-World War II recession lasting from February to October 1945 that no one was aware of at time, as easily confirmed by looking at the unemployment data as well as contemporary writings. Richard K. Vedder and Lowell E. Gallaway (1993) pointed out in their neglected study of U.S. unemployment that this alleged postwar recession is a statistical artifact that varies in severity with the regular comprehensive revisions of GNP/GDP estimates by the Bureau of Economic Analysis (BEA). The BEA's original estimates showed only a minor downturn, subsequent revisions converted it into a major downturn, and the latest comprehensive revision of 2013 have reduced its magnitude, although not to the level of the BEA's original estimates.

I saw his point up close a few years ago when I was researching my Mercatus study "The U.S. Postwar Miracle."

I wrote:

According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone's idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?

If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about "the postwar boom." They saw it as a time of prosperity.


In my piece, I delve in a different way into why the GNP data are so off. Jeff does it above. The two methods are complimentary, not contradictory. We both, though, point to the same statistic, which is awfully hard to ignore: the low unemployment rate. I point out that the unemployment rate during the 1946 "recession" never even got as high as 4 percent.

Back to Jeff's post. He points out that it is very hard to make a case for the Federal Reserve as a stabilizing force, even if you throw out its biggest mistake: the Great Depression. He writes:

Once the Great Depression is thrown out as a statistical outlier, we observe no significant change in the frequency, duration, or magnitude of recessions between the period before and the period after that unique downturn. Given that the Great Depression witnessed the initiation of extensive government policies to alleviate depressions and that the Federal Reserve had been created fifteen years earlier explicitly to prevent such crises, this overall historical continuity with a single exception indicates that government intervention and central banking has done little, if anything, to dampen the business cycle.

He ends thus:
In short, the widespread belief among economists, historians, and journalists that the Federal Reserve was an essential, major improvement appears to be no more than unreflective faith in government economic management, with little foundation in the historical evidence.


Comments and Sharing






COMMENTS (5 to date)
anon writes:

Maybe government magnifies growth rates and risk while the fed acts to reduce risk to an acceptable level.

Mark V Anderson writes:

I am very curious about this issue. I have often heard that panics in the 19th Century were more severe than they were in the 20th, in fact several were somewhat equivalent to the Great Depression. They may have been shorter, but they were very tough on the workers.

Unfortunately, Hummel's data doesn't say much to this point. He lists the 19th Century recessions and their length, but nothing of their severity. I would be curious as to unemployment in those 19th Century setbacks. Maybe that info isn't available?

Roger McKinney writes:

Yeah, a couple of years ago the Bank of England did a study of world finance for a couple of centuries and found that the period of the classical gold standard was the most stable financial environment of all.

The BIS has done some interesting studies, too, using frequency filters and shows more downturns in the US data than does the NBER since WWII. Also, the NBER uses a trigger of two consecutive quarters of negative GDP. But there have been several periods in which there was a huge decline in GDP from a peak to a trough that should indicate a recession even though the data didn't turn negative.

Mainstream economists promoted the myth that the government could control the economy from 1932 until the early 1980s, but eventually the data against them accumulated until even they were too embarrassed. The data against the Fed has been accumulating as well, but it will take decades of such evidence before the mainstream gives up. Japan has enjoyed mild deflation with stagnant nominal GDP growth for a generation, butt mainstream considers it an outlier.

Philip George writes:

I am glad to see someone paying attention to the non-recession of 1945. Incidentally, Paul Samuelson predicted an economic catastrophe after the end of World War II.

The 1945 non-recession is the starting point of the second half of my book Macroeconomics Redefined which shows exactly why the Keynesian method of treating aggregate income as the driving force of the economy is incorrect. It is not consumption expenditure which is a function of aggregate income (as both Friedman and Keynes believed) but aggregate income that is a function of consumption expenditure.

When macroeconomics is reconstructed on the latter premise many of the current disputes vanish. Indeed, monetarism and Keynesian economics can be shown to be variations of a more general theory.

Incidentally, one prediction that follows from my book is that 2017 will almost certainly see a major financial crash, possibly of spectacular proportions.

Jeffrey Rogers Hummel writes:

Mark: You’re quite right, I didn’t go into unemployment data in the chart. But my post did refer to articles by Vernon and Romer where you can get the most recent estimates for the post-Civil War, pre-Fed period. Vernon shows the unemployment rate never exceeding 9 percent even during the depressions of 1873 and 1893, and thus not quite reaching the level during the post-war recessions of 1982 and 2007-2008, which had the two highest rates since the Great Depression. I know of no good time series for the pre-Civil War period, but given that a majority of workers were employed on farms, rates were likely much lower. Of course, if you measure unemployment as a percentage of the industrial labor force, you will get higher numbers across the board, with the difference between the two measures decreasing over time.

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