The early 1980s recession was a severe recession in the United States which began in July 1981 and ended in November 1982. The primary cause of the recession was a contractionary monetary policy established by the Federal Reserve System to control high inflation. In the wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the economy of the United States.
Unemployment had risen from 5.1% in January 1974 to a high of 9.0% in May 1975. Although it had gradually declined to 5.6% by May 1979, unemployment began rising again thereafter. It jumped sharply to 6.9% in April 1980 and to 7.5% in May 1980. A mild recession from January to July 1980 kept unemployment high, but despite economic recovery unemployment remained at historically high levels (about 7.5%) through the end of 1981. In mid-1982, Rockford, Illinois had the highest unemployment of all Metro areas with 25%. In September 1982, Michigan led the nation with 14.5%. Alabama was second with 14.3% and West Virginia was third with 14.0%. The Youngstown–Warren Metropolitan Area had an 18.7% rate, the highest of all Metro areas. Stamford, Connecticut had the lowest with 3.5% unemployment.
The peak of the recession was in November and December 1982, when the nationwide unemployment rate was 10.8%, highest since The Great Depression. As of 2011, it is still the highest since the 1930s. In November, West Virginia and Michigan had the highest unemployment with 16.4%. Alabama was in third with 15.3%. South Dakota had the lowest unemployment rate in the nation, with 5.6%. Flint, Michigan had the highest unemployment rate of all Metro areas with 23.4%. In March 1983, West Virginia's unemployment rate hit 20.1%. In the Spring of 1983, thirty states had double digit unemployment rates. When Reagan won re-election in 1984, the latest unemployment numbers (August 1984) showed West Virginia still had the highest in the nation, 13.6%, with Mississippi in second with 11.1%, and Alabama in third with 10.9%.
Inflation, which had averaged 3.2% annually in the post-war period, had more than doubled after the 1973 oil shock to a 7.7% annual rate. Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year, but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980 soared to 13.5%. A brief recession occurred in 1980. Several key industries—including housing, steel manufacturing and automobile production—experienced a downturn from which they did not recover through the end of the next recession. Many of the economic sectors that supplied these basic industries were also hard-hit. Each period of high unemployment was caused by the Federal Reserve, as it substantially increased interest rates to reduce high inflation; each time, once inflation fell and interest rates were lowered, unemployment slowly fell.
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, a highly important economic measure, eventually reached 21.5% in June 1982.
Financial industry crisis
The recession had a severe effect on financial institutions such as savings and loans and 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, broadened their lending powers, and raised the deposit insurance limit from $40,000 to $100,000 (raising the problem of moral hazard). Banks rushed into real estate lending, speculative lending, and other ventures just as the economy soured.
By mid-1982, the number of bank failures was rising steadily. Bank failures reached a post-depression high of 42 as the recession and high interest rates took their toll. By the end of the year, the Federal Deposit Insurance Corporation (FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat.
In July 1982, Congress enacted the Garn–St. Germain Depository Institutions Act of 1982 (Garn–St. Germain), which further deregulated banks as well as deregulating savings and loans. The Garn–St. Germain act authorized banks to begin offering money market accounts in an attempt to encourage deposit in-flows, removed additional statutory restrictions in real estate lending, and relaxed loans-to-one-borrower limits. The legislation encouraged a rapid expansion in real estate lending at a time when the real estate market was collapsing, increased the unhealthy competition between banks and savings and loans, and encouraged overbuilding of branches.
The recession affected the banking industry long after the economic downturn technically ended in November 1982. In 1983, another 50 banks failed—easily beating the Great Depression record of 43 failures set in 1940. The Federal Deposit Insurance Corporation (FDIC) listed another 540 banks as "problem banks" on the verge of failure.
In 1984, the Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank (with $45 billion in assets), failed. The FDIC had long known of Continental Illinois' problems. The bank had first approached failure in July 1982 when the Penn Square Bank, which had partnered with Continental Illinois in a number of high-risk lending ventures, collapsed. But federal regulators were reassured by Continental Illinois executives that steps were being taken to ensure the bank's financial security. After Continental Illinois' collapse, federal regulators were willing to let the bank fail in order to reduce moral hazard and encourage other banks to rein in some of their more risky lending practices. But members of Congress and the press felt Continental Illinois was "too big to fail." In May 1984, federal banking regulators were forced to offer a $4.5 billion rescue package to Continental Illinois.
Continental Illinois may not have been "too big to fail," but its collapse could have caused the failure of some of the biggest banks in the United States. The American banking system had been significantly weakened by the severe recession and the effects of deregulation. Had other banks been forced to write off loans to Continental Illinois, institutions such as Manufacturer's Hanover Trust Company, Bank of America and perhaps Citicorp would have been insolvent.
Early 1980s recession - Wikipedia, the free encyclopedia