Preamble
Michigan became a state on Jan. 26, 1837. Ironically, the year was ushered in with the state’s first economic downturn — the Panic of 1837. The recession rippled through Michigan (chiefly Detroit) more fully in 1838, and slowed the state’s economy for another four years.
Michigan’s bonds, issued to support companies that were expanding the state’s infrastructure, ended up in default. In response, the state’s outraged electorate and legislators demanded and approved a new constitution (in 1850) with added restrictions on the quantity of allowable state debt, along with stronger procedural safeguards to assure future Michigan bond-purchasers that the state would not again repudiate its debt obligations.
Many national recessions affecting Michigan and Detroit during the 19th century were called “Panics.” They often occurred as a result of sudden interruptions in the availability of credit from banks. For the most part, businesses involved in the transportation industry — railroad, canal, and road-building sectors of a vast and rapidly expanding frontier — caused banks to fail or become illiquid when individuals and firms associated with land and transportation speculation were unable to repay maturing loans.
The losses and bankruptcies impaired confidence and frequently induced runs on small banks, which sought help from their larger counterparts in major money-centers such as New York, Philadelphia, and Boston. Failure to stem runs on local banks caused hometown financing and deposits to dry up, so the panic contagion spread beyond state and territorial boundaries.
Despite an often-checkered fiscal beginning, the U.S. has exercised a leadership role in the financial world since 1872. Among other benchmarks, 1872 placed the U.S. first in iron and steel output, transforming the country into an industrialized society.
To that end, Michigan’s core industrial base added productivity and entrepreneurial dynamism for the next century and a half. Before the emergence of Michigan’s automotive industry, the state’s boom years for early wealth formation in the second half of the 19th century were grounded in a special “Big Three” — forestry (logging), mining (iron and copper), and agriculture. These primary industries confronted periodic setbacks, but rapid population growth throughout Michigan and the U.S. eased the depth and duration of most early business slides. In fact, those hard years instilled in our nation an aptitude for realism and adaptation, and an intangible toughness.
The hardships resulting from the Great Depression (both Phase I and Phase II), its predecessor Panic of 1907, the 1973-75 slump, the double whammy of 1980-82, and the Great Recession of 2007-09 offer lessons of financial loss, psychological and physical pain, unemployment and disappearing family choices, and truncated career mobility.
Here’s an account of Michigan’s worst economic times.
No. 1 Great Depression, 1929-1939
What we call the Great Depression was actually a compound impact of two very serious, conjoined recessions occurring in 1929-33 and 1937-39. The Depression ranks first in trauma because that entire period constituted the loss of an entire decade of economic growth and optimism.
Metrics of recession-scoring typically include unemployment rates, national and personal income declines, the evaporation of financial wealth and saving, and an erosion of household living standards that typically register as impaired capacity to provide independent, head-of-household coverage of food, clothing, housing, and health care.
These metrics reveal that Michigan’s distress equaled or exceeded the wretched national experience. It began during the final week of stock market trading at the end of October 1929. What had been a stock market price boom and bubble between 1926 and 1929 first burst and then crashed. The decline continued until mid-1932.
Any severe downturn puts a heavily industrialized economy in harm’s way — especially one with a dominant industry like automotive, which employed four out of every five manufacturing workers in Michigan. In 1929, more than 5.3 million vehicles were produced, but in 1930 production fell below 3.4 million units.
By 1931, only 1.3 million vehicles came off Detroit’s assembly lines. Consequently, by year’s end, GM alone had laid off 100,000 workers — and that was just in Detroit. In 1932, Ford laid off more than two-thirds of its workers. Making matters worse, many employees remaining on payrolls were reduced to part-time. All told, 223,000 workers were jobless in the streets of Detroit by the winter of 1931-32.
By early January 1933, a downward-spiraling economic situation tugged at bank liquidity, strained mortgage and bank note repayment, and threatened runs on remaining bank deposits. Sure enough, on Feb. 14, Michigan’s Gov. William Comstock declared a “bank holiday” in Detroit. Those who transacted business by check found they had no funds. As a result, merchants were unable to pay their bills and employers couldn’t meet payrolls.
Detroit had actually become a leading indicator of what turned into the financial trough of the Great Depression, because on March 6, 1933, President Franklin Roosevelt also declared a “national” bank holiday. Two weeks later, on March 21, all of the still-solvent banks reopened, and newly capitalized banks began operating.
One of the most impressive, but insufficiently known, facts about the demise of two of Detroit’s largest financial institutions is that Michigan’s liquidation of those banks recognized their illiquid condition (lack of sufficient cash on hand to meet demand for immediate funds by their 800,000 depositors) — yet those banks were neither fundamentally insolvent nor bankrupt. From the ashes sprang Manufacturers National and National Bank of Detroit.
Unemployment rates at the depths of the Depression soared to 25 percent; from peak-to-trough in the first phase of the Depression, gross domestic product fell by almost 27 percent (August 1929 to March 1933).
Just as Detroit was among the first cities to experience the Great Depression, so, too, did it prove to be among the first to climb its way out. In keeping with much of Michigan’s subsequent history of recovery, there developed a cumulative pent-up demand for vehicles. By 1936, the auto industry had ramped up production to 4.5 million cars and trucks, and unemployment rates declined to 16.9 percent.
Unfortunately, the recovery was short-lived; Phase II of the Depression was about to begin. Despite many pump-priming (deficit spending) stimuli from Washington, the national recovery from 1933’s nadir was incomplete. Following two years of improvement, things changed quickly; the accelerating federal budget deficits and massive accumulations in national indebtedness that accompanied New Deal spending programs spooked policymakers at that time.
They chose to take what seemed to be a steady economic recovery as pretext for adopting tighter monetary and fiscal policies, but the timing proved presumptuous and exacerbated the economic fragility stemming from higher taxes and trade restrictions that had been imposed between 1930 and 1933. Within a year, the U.S. economy experienced a severe secondary slide that, by 1938, returned unemployment rates to 19 percent.
No. 2 The Panic of 1907
In hindsight, the Panic of 1907 foreshadowed the Great Depression as well as Michigan’s other three most significant recessions. It deserves our attention, in light of its seminal impacts on all subsequent economic and financial activity.
In one sense, the Panic of 1907 was a sleeper. It was not of exceptional duration; and it ran its course within 13 months. Nor was it particularly noteworthy for being tightly hinged to some earlier economic blowout, akin to the double-plunge of the Depression. Quite the contrary, 1907’s Panic was preceded by a rather modest recession that ended more than three years earlier, in June 1904.
What distinguishes 1907’s Panic for Michigan and U.S. economic annals is a twofold tale: 1907 foreshadowed the escalating economic turbulence caused by public loss of confidence in the security of America’s financial markets (i.e., the public’s ability to retrieve their deposited funds).
The Panic became a benchmark event, motivating the creation of the Federal Reserve System in 1913 and the Federal Deposit Insurance Corp. Consequently, for the past 100 years, the Fed (also known as the Central Bank, U.S. monetary authority, and a bank regulator) has been responsible for promoting depositor confidence by protecting the purchasing power of the dollar (maintaining a stable price level) and smoothing — to the extent possible — amplitudes of U.S. business cycles.
The Panic of 1907 ended in June 1908. Both unemployment rates and the peak-to-trough decline of estimated income and output verged on 30 percent. Thereafter, liquidity and security were considered paramount objectives in the conduct of fiscal and monetary policy. Over the next half century, financial market participants increasingly sought and received reassurance in the form of FDIC deposit insurance, multilayered financial audits conducted by state and federal regulators, and mandated capital reserves to be held by commercial banks.
In retrospect, none of these buffers averted the losses and despair associated with the profoundly difficult recessions of 1973-75, 1980-82, or 2007-09. Yet, considering the ever-growing challenges to the market economy posed by radically increased public sector budget deficits, debt, onerous tax codes, regulatory burdens, and welfare programs, some of these reforms may have provided sufficient safety nets to avert deeper trauma.
It now appears equally possible, however, that — especially since the 1960s — new waves of invasive (and more ideologically-driven) mandates, taxes, and regulations have reduced overall U.S. productivity, while inverting work incentives. If this is the case, future business cycles might very well resemble the recent Great Recession, in which both depth and length have been transformative, leaving us materially more vulnerable than we were a century earlier despite today’s rich, technologically-advanced environment.
No. 3 1973-1975 Slump: First Oil Crisis
Since World War II, 11 recessions have been quantified and cataloged by the National Bureau of Economic Research. Ten recessions prior to the Great Recession of 2007-2009 vary from mild adjustment along a positive growth trend to jolts persisting nearly as long as some business expansions.
As examples of milder recessions, Michigan’s “Arsenal of Democracy” foundation from World War II and the Korean conflict suffered readjustment when transitioning to nonmilitary footings in both 1946 and 1954. The peacetime that followed brought rapid solace to the state with more optimism, more population, and more spending power, combined with a surge in household formation and spending for homes, furnishings, cars, and civilian services.
Similarly, when periodic labor unrest and work stoppages coincided with the Federal Reserve’s money-tightening, Michigan’s economy sustained brief but memorable soft patches, specifically in sectors such as motor vehicles (in 1958 and 1970) and residential housing (1960-61).
There were also some very sudden and dramatic recessions, which seemed directed more at Detroit’s auto industry and impacted manufacturing in Michigan with greater intensity than they affected the nation as a whole.
The first of two major shocks to the economy in the second half of the 20th century reflected the convergence of two forces: the postwar recovery of Japan as a competitive threat to Detroit’s Big Three automakers, and the petroleum embargo enacted by the oil cartel nations in the fall of 1973.
Gasoline prices at the pump, responding as markets do when supplies are suddenly reduced to a trickle, quadrupled overnight. Although people can adapt to gradual changes in economic conditions, a quantum leap in fuel costs for life’s necessities (commuting and heating) hastened an equally prompt curtailment of economic activity (shopping and investment).
It’s a curiosity that Detroit posted its two finest vehicle sales years in 1955 and 1965 — in the middle of the two prior decades. But this happy symmetry failed to materialize in 1975.
Crucial energy disruptions led to rampant uncertainty regarding the extent of shortages and their impacts on budgets (companies and households). Michigan succumbed to a severe recession. The number of Michigan permits issued for new, privately owned housing units fell by 52 percent between 1972 and 1975. Surging oil prices and the stagnation of real U.S. GDP in the aftermath of Uncle Sam’s deficit spending on the Vietnam War and “Great Society” programs contributed to a stock market crash.
This national recession lasted 16 months; unemployment rates peaked at 9 percent, and U.S. real output fell 3.2 percent from peak-to-trough. In Michigan, average real personal income slumped 4.7 percent. Relative to U.S. personal income rankings among states, Michigan lost 2.3 percentage points in its standing.
No. 4 1980-1982 Double-Whammy
The 1973-75 Recession was a dress rehearsal for a sharper decline in 1980-82. The first slump of the 1980s was prefaced by a simple six-month mini-recession between January and July 1980. U.S. unemployment rates shot to 7.8 percent and output tanked by 2.2 percent.
Surprisingly, unemployment rates remained elevated during the Federal Reserve’s desperate effort to wrestle to the ground escalating, double-digit inflation and interest rate levels. It took another 16-month recession (July 1981 to November 1982) to whip inflation and return borrowing for homes and autos to more affordable rates.
Undoubtedly, that was the proper and courageous monetary policy prescription for restoring America’s business climate for a subsequent decade of prosperity — and it succeeded in delivering the strongest and longest such recovery Americans will see in their lifetimes. For Michigan and Detroit, the interim pain was reminiscent of Phase II (1937-39) of the Great Depression years. Unemployment rates for the U.S. in 1982 peaked at 10.8 percent, but Detroit and much of Michigan experienced peak unemployment rates nearly double that level.
At its low point in 1982, Michigan’s overall rate of new building permits collapsed catastrophically, dropping 77 percent from peak levels in 1978. Similarly, real personal incomes in Michigan fell 12 percent from peak-to-trough, and the state lost another 10.3 percentage points in its relative standing compared to average U.S. income.
By 1982, Michigan’s average purchasing power had fallen 3.7 percent behind the U.S. average — a dramatic reversal of fortunes from 1978’s position, in which Michigan’s per capita personal incomes were 6.6 percent higher than the national average.
The severity of the 1980-82 Recession reflected the special injury to states that depend heavily on exports of large-ticket durable goods such as autos and trucks. Sizeable proportions of Michigan’s workforce were at risk of layoff and reduced hours. An adverse confluence of 11 percent inflation rates and a final U.S. confrontation with Iran’s effort to reap revenge on our oil-dependent economy was the proximate cause for this very unpleasant — but inevitable — convergence to a stable, good-growth economy over the balance of the 1980s.
No. 5 Great Recession of 2007-09
Officials will record the Great Recession of 2007-09 as an 18-month decline. Its national profile includes a peak unemployment rate of 10 percent and a peak-to-trough decline of 4.3 percent in overall production. In Michigan, the fallout was much worse, in part because the economy of the state and the competitiveness of our central industry — automotive — had been slipping since the new century dawned.
Motor vehicle sales for the first half of the decade had averaged nearly 17 million units annually, but Detroit’s share of the market, along with profitability, continued to slip. At its trough, vehicle sales in aggregate fell to 9 million units and GM and Chrysler filed for bankruptcy.
Total housing permits issued in Michigan fell 88 percent, from a peak in 2004 to a trough in 2009. The corresponding value of those housing starts fell from $7.6 billion to $1.2 billion — a contraction of 85 percent.
The Great Recession is indelibly imprinted in the minds of Michiganians for many reasons: the 15 percent unemployment rates it engendered; the many bankruptcies it spawned across industry lines; the net loss of population (more than 178,000), along with a decline in educated youth and entrepreneurial capital; and the record number of foreclosed properties, together with wealth and price level losses on those properties.
Economic historians claim irresponsible subprime mortgage lending was the precipitating cause of the housing bubble and blowout, yet the housing bubble was one of many economic bubbles percolating, thanks primarily to two policies that had been vigorously pursued since the Sept. 11 attacks in New York and Washington, D.C.
The first of these policies was that the Federal Reserve Bank and governmental agencies associated with stimulating the U.S. housing market at any cost (agencies such as Fannie Mae and Freddie Mac) participated daily in that real estate calamity. The Federal Reserve purposely pushed interest rates down to levels beneath inflation rates, holding them there for years, and federally sponsored housing agencies mandated and sanctioned ultra-loose capital, lending, and repayment standards for very marginal homebuyers.
Second, risky mortgages were packaged into securities and sold to domestic and global institutional investors seeking what they deemed were safe, high-yield instruments. Sadly for the buyers of these mortgage packages (and their clients), a lack of careful scrutiny proved devastating.
Even worse, the major credit-rating agencies on Wall Street, whose business it was to evaluate the financial integrity of such mortgage-based investment packages, were cavalierly stamping these extraordinarily risky investments with triple A (their highest) quality ratings — but credit worthy, they were not.
What Lies Ahead? This June represented the fifth year since the end of the Great Recession. Recovery has been inferior to post-World War II recoveries and investment remains below average, due to the fact that investor uncertainty has risen, especially in matters pertaining to health care and financial services, and to regulatory changes in the U.S. tax code. Zero-interest rates have failed to encourage investment.
Typically, when household wealth rises by $25 trillion, as it has since 2009, consumer spending rises in tandem (i.e., a wealth effect). But the expected spending gains have been nowhere near commensurate with asset appreciation on stocks and home prices. Most notably, job growth has been weak, reflecting the preference and ability of firms to use labor-saving technologies to avoid extra-costly payroll taxes and mandated benefits.
To promote and protect faster growth, Michigan and U.S. economic policies must focus on traditional market strengths. The good news is that such policy options are right under our noses; they include the exploitation of abundant U.S. energy resources.
We should be engaging more of our workforce and capital in abundant shale oil and gas recovery (which includes building the long overdue — by five years — Keystone pipeline). We should also hasten federal and local permitting for liquid natural gas-port facilities that augment U.S. natural gas exports to current and potential economic partners.
Cementing U.S. energy and technical pre-eminence also entails the construction of safe, small-footprint, ultra-modern nuclear facilities. Michigan, with its increasingly decaying energy and transportation infrastructures, would be a chief beneficiary of such growth-oriented investments. The state’s roads and bridges, meanwhile, need to be fixed and enhanced to speed up the movement of people and products and to draw more tourists. Global freight destined for the continental United States and Mexico would flow more easily through the state if a long-delayed rail tunnel is built between Detroit and Windsor, making it easier for goods from Europe, Asia, and elsewhere to be broken down and repackaged for final delivery.
Other growth sectors include medical, tourism, exports, fresh water technology, and aviation, especially with the emergence of unmanned aerial vehicles (drones) in such fields as agriculture, energy, rail, oil and gas, environmental cleanups, and numerous other industries. More business accelerators, both private and public, should be green-lighted to ensure the state is on the cutting edge of the next wave of business opportunities.
Admittedly, diversifying the economy won’t be easy. Over the past 100 years, our local, state, and national legislatures have created economic barnacles, inverting growth incentives and saddling our markets with noncompetitive, nonproductive personal dependencies and business subsidies at the expense of generations yet to enter the workforce.
A failure to reverse such obvious threats to prosperity will assure deeper and lengthier business-cycle setbacks, coupled with an inflationary stagnation. Economic history can be Michigan’s finest teacher. db
