Felix Salmon e-mails saying he wants to hear my explanation for why payroll employment dropped so much more precipitously in the early 1930s than it has in this recession. Here are a couple of thoughts:
The initial sharp decline in the last few months of 1929 and first few months of 1930 was simply a reflection of how the labor market worked in those days—manufacturing made up a bigger share of the nonfarm workforce, job protections were fewer, government was smaller. The result was more volatility than we see today: When the economy hit a bump, the labor market impact was more dramatic. Nonfarm employment had dropped even more precipitously in 1921, but it bounced right back in 1922.
After that initial drop in late 1929/early 1930, a lot of people believed the worst was over. Then, late in 1930, the bottom began to fall out, and kept falling until April 1933. Those happen to be pretty much the start and end dates of the banking crisis. Banks failed, people’s savings were wiped out, the money supply shrank, confidence plummeted, deflation brought more bank failures, etc. It’s basically the Irving Fisher-Milton Friedman explanation of the Depression, with a bit of Keynes thrown in. And despite being caught in a financial crisis worse in some ways than the one that unleashed the Depression, we haven’t had 1930s-style bank failures or serious deflation. Not yet, anyway. I’d guess not ever. But don’t hold me to that.
The Depression ended in the spring of 1933. What followed was a disappointingly anemic recovery, then a sharp recession in 1937-1938. But the Depression proper—the truly horrible years of plummeting employment, a shrinking economy, and sharp deflation—was over almost as soon as FDR took office in March 1933. Why? I think because he fixed, or at least restored confidence in, the banking system.
