Mr. Kinneberg, could you please get me my money? Remembering the Bad Times of Recession or Depression

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1 Mr. Kinneberg, could you please get me my money? Remembering the Bad Times of Recession or Depression When I was a kid, my Grandpa Kinneberg worked as a sales clerk in various departments of Sears in Portland, Oregon. He and my Grandma owned a small house in the woods on NE 127 th. Every day after work Grandpa checked the value of Sears stock in the local paper, the Oregonian. He received Sears stock as part of a profit-sharing retirement plan with the company. In the era before Craftsman tools became disposable and J.C. Higgins sporting goods became a joke, Sears did well. The stock went up, split, went up some more, and split again. Grandpa thought American capitalism was OK. He hadn t always felt that way. Even though my grandparents seemed financially secure, my Grandpa saved on his water bill by lowering a bucket on a rope into a cistern to retrieve stored rainwater he then hand-carried to his flowers. As a Norwegian-American, he was genetically frugal, but he d also been in France in World War I and had experienced the 1930s in the United States. He d seen hard times. I didn t think much about it at the time, but Grandpa always seemed to be good with figures. He had a small bookkeeping and tax preparing business on the side. I later learned that he d gone to business college in Lacrosse, Wisconsin, after the war. Yet he never had jobs that utilized these talents much. At least that s what I thought at the time. Only a couple of years ago, in a conversation with my mother, did I find a missing piece of Grandpa s life puzzle. He had worked in a bank in Litchville, North Dakota, and had shown great promise as a young banker. Then, in 1930, the bank closed its doors. In

2 those days, before deposit insurance, depositors lost all their money when a bank closed. My mom remembers a lady coming up to Grandpa in church one Sunday. She pleaded, Mr. Kinneberg, could you please get me my money? Grandpa moved the family to Ayr, North Dakota, shortly thereafter, where he drove a truck for a local oil distributor. He never worked in a bank again. I never even heard him talk about it. In the early 1930s, Grandpa had experienced American capitalism at its modern nadir, the Great Depression. We usually apply the term Great Depression to the time period beginning with the stock market crash in October 1929 and ending with the beginning of World War II, in While the Great Depression is an apt description of those difficult, economically depressed and mentally depressing times, the term has a less precise economic meaning than the term recession. A committee at the National Bureau of Economic Research (NBER), a private research organization, decides when the economy enters and exits a recession. They define a recession as a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy. Most economists define a recession as two or more consecutive quarters of declining Real GDP, which is GDP adjusted for inflation. When the contraction ends and real GDP starts growing again, the NBER marks the date as the beginning of a recovery, the early part of an expansion. The Great Depression actually contained two recessions, the initial one a real whopper. The U.S. economy started into a recession in August 1929, its fourth recession of the decade. Real GDP had grown dramatically by the end of the Roaring 20s, but like the new pleasure of driving a car on American roads, the ride had been a bumpy one.

3 The business cycle of macroeconomic expansions and contractions had been alive and well in the 1920s. Then, on Black Thursday, in late October, the growing tree of U.S. stock market speculation snapped like a frost-laden North Idaho pine. The Dow Jones Industrial Average plunged 23% in two days, closing 40% down from its September peak. The fall would continue. No one could have imagined that times would get so bad. In 1929, the average annual unemployment rate had been a low 3.2%. By 1933 it was nearly 25 %. Real GDP declined not for two quarters, but for 43 months in a row, falling nearly 14% in 1931 alone. In March of 1933, the U.S. economy reached the trough of the largest business cycle downturn in U.S. history. The economy started to grow again in 1933, and it grew rapidly, but the decline had been so great that the unemployment rate was still almost 10% in Except for a bad double-dip recession in the early 1980s, where the unemployment rate reached double digits for the first time since the Great Depression, post World War II recessions in the U.S. have become mild, short, and infrequent. Long expansions have become the rule for the U.S. economy. We had uninterrupted expansions of 106, 92, and 120 months in the 1960s, 80s and 90s, respectively. Some economists question whether the most recent recession even happened. Both macroeconomic fiscal and monetary policy should receive much of the credit for trimming the depth and length of post WWII recessions in the U.S. economy. Had the President and members of Congress realized that they could spend on their constituents, cut their taxes, and fight a bad recession at the same time, the Great Depression might have been just another bad recession. But in 1930 politicians governed

4 six years before John Maynard Keynes fathered the child called expansionary fiscal policy. Little old ladies lost their money in my grandfather s bank in 1930 because deposits were not insured, which caused a bank run, and because the Federal Reserve System (Fed) did not undertake expansionary monetary policy. Had the Fed flooded the banking system with money, the Great Depression would have been much milder, and My grandpa might have retired a banker. Even political conservatives like President George W. Bush embrace the idea that, when facing a recession, the government should stimulate the economy through more spending and tax cuts. His father understood this political-economic axiom less well, and some say it cost him the election in No Federal Reserve Board today would allow a contraction of the money supply in a recession. We ve been leaning against the macroeconomics winds too long now to be blown over by a downturn in economic activity. But who knows what the future will bring? In the spring of 2003, the U.S. economy was growing slowly, too slowly to reduce the unemployment rate. The Fed didn t have much wiggle room. It couldn t make interest rates much lower than they were. The Congress and the President were spending with abandon, and cutting taxes dramatically at the same time, yet the word deflation appeard in the financial and economic press. What if some day the economy doesn t respond to the stimulus we give it? What if the fiscal policy child of Keynes reaches his dotage? What if the Fed s control over interest rates is usurped by international investors? We might get evidence that a new paradigm is in order and change they way we approach macroeconomic

5 policy. Until then, we ll continue to use standard tools of fiscal and monetary policy to avoid a large recession, the ones we ve used with some success for sixty years. Unfortunately, for Grandpa, the Depression banker, our understanding of macroeconomic policy came too late.