If every country is in some sort of recession, shouldn’t the economy adjust accordingly as opposed to falling even more?
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There are different kinds of recession. The Great Depression was a “demand-led recession”.
What that means is that overall, people were buying less stuff (for various complicated reasons). When people stopped buying stuff, businesses had less business, so they stopped hiring people. Since it was harder to get and keep jobs, people bought even less stuff, and so on in a vicious spiral.
The economy couldn’t properly adjust – when it was in full swing, people might have *wanted* to buy stuff, but they had no spare money, since there were not enough jobs to go around. And businesses might have *wanted* to hire people, but nobody was buying their stuff.
In the end, World War 2 came along and broke the cycle. Governments stepped in and said “we need to buy lots of stuff, to fight a war with”. Then businesses could hire people to make the stuff that the government was buying, so soon there was no trouble getting a job, so even businesses that weren’t selling to the government could afford to start making stuff and hiring people again.
It is hard to explain because this was almost a different era in terms of economics, finance and trade.
Prior to the Great Depression, there was a (ELI5) loose organization of banks and almost zero monetary policy control by the government. Banking was not a “global” affair that it is today. Basically each regional bank ran independently and this made them vulnerable to bank runs. Once a bank had a problem, this could easily lead to contagion where more and more banks became illiquid as depositors rushed to pull out their savings – there was no FDIC etc to backstop depositor’s money. Since banks were unregulated any single large bank having problems could systemically spread quickly without any formal mechanism to stop it.
This kind of system is prone to severe boom and bust cycles. And since banks and credit are crucial for manufacturing and trade, this means that it amplifies throughout the economy. So there tended to be periods of great wealth creation and economic expansion followed by periods of deeper recessions.
Modern economies are better regulated and banks are held to tighter standards. Central banks are now almost always under the control of the central government. Things like deposit insurance etc are now mostly universal. These are almost all “new” in the sense of it developing in the 1930s many of them after WW2.
They are not, of course, immune from asset bubbles (as 2008 will attest to) but the system is nowadays generally a lot more robust and stable.
The Great Depression typically was thought of happening from a crash of too much financial speculation. People without money were borrowing money and investing the money into the stock market. When the stock market crashed, essentially too much of the speculatory growth didnt happen, the people were stuck with debt without a mean of paying it back. This resonated down and down to people who were employed by the now broke speculators.
The recovery from the Great Depression happened because of the “New Deal”. A set of government subsidies and programs promoting injecting money to the regular people and helping the commons (agricultural land, rivers, roads) to be profitable again. To a European such as myself this was essentially fixing the economy by socialist policies.
New Deal had things in it like the CCC, basically setting up a HUGE government agency employing previously unemployed, but skilled workers, into nature conservation and agricultural land betterment projects. It injected purchasing power to the poorest bracket of society to generate need for products.
Without this kind of wealth redistribution to generate purchasing power every now and then, capitalism dies because purchasing power slowly dies. Private corporations require markets to their products and profits in order to inject cash to their laborers and they are always looking for ways not to give money to their laborers.
What helped the US to chug along was that at the end of the WW2, all industrial competitors were bombed to resemble the surface of the moon and US products essentially had infinite markets for them. Thusly, the US injected cash into defeated and bombed nations without purchasing power, by giving them money in the form of Marshall Aid.
Deflationary spiral. When deflation happens money becomes it’s own investment and borrowing money becomes extremely expensive, this makes it more difficult to start or expand a business and creates huge issues for businesses that rely on debt to cover short term or seasonal expenses. These businesses experience higher fail rates and and it becomes basically impossible to start a new business to replace them, this leads to more unemployment which creates more deflation in a vicious cycle that cannot easily be broken.
To break it you either need new large businesses that are massively profitable, or you need access to cheap credit. The latter can be achieved by the government either taking on debt or printing more money and injecting it into the economy through various methods to get back to some level of inflation, this has to be done kinda carefully as overcorrecting and causing massive inflation is possible.
Avoiding this whole mess is why countries typically target ~2% annual inflation, because that’s a point that is fairly stable and still gives some time to respond if something happens that starts to swing the economy one way or the other.
In a regular boom and bust cycle the economy runs hot and then cools down. The bust can be caused by a lot of factors including low amounts of currency (deflation), high amounts of currency (inflation), low productivity (regulation), or low demand.
After WW1 the demand for all goods went down severely. The world’s economy had been running hot during WW1 to keep up with demands of the field with government dollars being poured into it to keep it going (all on loans). But kind of like when COVID ended, the needs of the economy changed and this lead to an oversupply of goods.
To resolve this the government’s of the world began pouring money into the economy hoping that more free money would stimulate demand. This caused an artificial boom that crashed even harder. To try and resolve this crisis caused by the crisis’ solution they came up with another solution that created another crisis.
The governments of the world decided they were now going to directly intervene in the economy seeking to stimulate demand within their own countries and restrict trade that competed with theirs. Large falls in the global trade caused the recession to continue.
Had they done nothing at all the whole crisis would have just resolved itself. But instead all of the solutions they did created government hurdles for the economy to try and overcome.
Since then the way we handle recessions is quite a bit different and a lot more hands off. Most money tends to go to maintaining large institutions that might crash rather than handing out copious amounts of cash to the public.
You have some good answers here on the financial aspect which was obviously the catalyst, but start of the Dust Bowl in 1930 on what had previously been a breadbasket of both the US and Canada had a debilitating effect on the availability (and thus price) of food as well as the livelihood of the farming communities in the region.
What do you mean “Shouldn’t the economy adjust”？ As in, shouldn’t prices go down because everyone’s poorer?
Not really. You can think of the strength of an economy (this is very, very much on paper, especially with things like wealth inequality that I won’t get into) as “the total amount of resources available.”
If you have economic contraction, that leads to less goods/services, and higher prices.
Here’s a good way to imagine it. Imagine we found a gold asteroid, and had an infinite amount of gold. What would happen to the price of gold? It’d plummet. Everyone would be able to afford it, because there’s now a new resource more people can access, and technically, even though the gold is borderline free, the economy has still grown because you have more people buying it, and with their saved money they’re probably buying other goods and services as well.
In theory, when the economy is strong, we have more resources available– thus more people can buy them.
The economy can only adjust if it is allowed to adjust. The Great Depression did not become Great until FDR responded to the recession (caused, like most recessions, by inconsistent policy at the central bank) by forbidding natural adjustments.
If you were thinking of buying a new car but you knew it would be 10k cheaper in 1 month, are you going to wait or buy now? What about food? In 1 week food is going on sale. You waiting to buy or stocking up right now? The problem with recessions is things go on sale so people wait to buy, and companies need to make sales so they lower prices more and it’s a game of chicken of who can survive longer.
Also this goes for companies, so the grocery store isnt going to have money to pay employees so they lay employees off.
Now these employees have no money so they cant buy groceries
Also I’m not 100% sure here but theoretically it makes sense
People have no food and need to feed their family so they steal, so companies have to start paying insurance, insurance starts losing money so they have to raise rates, companies cant afford insurance so when they get broken into they have to pay out of pocket causing them to go under, so now we have no where to buy so people also see making a grocery store seem like a risky investment
Traders were more prone to panic selling before the 2010s. Gov’t action is also faster. 2008 & 2020 could have worse if it wasn’t for gov’t intervention.
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