early 1980s recession USA
The early 1980s recession was a severe recession in the United States which began in July 1981 and ended in November 1982.[1][2] The primary cause of the recession was a contractionary monetary policy established by the Federal Reserve System to control high inflation.[3] The recession was not only unexpected but was the most serious recession since the Great Depression.[4]
Causes of the recession
In the wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the economy of the United States.
Determined to wring inflation out of the economy, Federal Reserve chairman Paul Volcker slowed the rate of growth of the money supply and raised interest rates.
The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981.
The prime interest rate, at the time a highly important economic measure, eventually reached 21.5% in June 1982.[2][8]
Economic effects of the recession
The Federal Reserve's extremely tight monetary policy intentionally plunged the American economy into a deep recession.
Employment conditions deteriorated throughout the year.
Twelve million people were unemployed, an increase of 4.2 million people since July 1981.[5]
Unemployment rates for every major group reached post-war highs
Financial institutions crises
The recession had a severe effect on financial institutions such as banks and savings and loans.
Banks
The recession came at a particularly bad time for banks due to a recent wave of deregulation. The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) had phased out a number of restrictions on banks' financial practices. Banks rushed into real estate lending, speculative lending, and other ventures just as the economy soured.
The S&L crisis
The recession also significantly worsened a crisis in the savings and loan industry.
In 1980, there were approximately 4,590 state- and federally-chartered savings and loan institutions (S&Ls) with total assets of $616 billion. Beginning in 1979, S&Ls began losing money due to spiraling interest rates. Net S&L income, which totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981 and a loss of $4.1 billion in 1982. Tangible net worth for the entire S&L industry was virtually zero.[9]
read more: Savings and Loan crisis
Recovery
Reganomics:
A combination of deficit spending and the lowering of interest rates slowly led to economic recovery.
Inflation fell from 10.3% in 1981 to 3.2% in 1983.[32][1]
See also
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