Bank Lending in the Great Depression
First, let’s examine what happened to bank lending in the Great Depression. Figure 1 presents commercial bank loans in two formats, outstanding values (blue line) and annual percentage rate of change in loans (red bars). This figure helps us to evaluate the period from 1915 to 1946, including the Great Depression. The period includes seven recessions as defined by the National Bureau of Economic Research or NBER and shown as gray shaded bars.2
The 1929 financial crisis and the Great Depression took a huge toll on commercial bank lending, which at the time represented the bulk of total lending in the economy.3 Figure 1 provides dramatic evidence of how bank lending plunged following the stock market collapse in 1929 and the onset of the Great Depression.4 Total loan values, which peaked at nearly $36 billion in 1929, fell by more than $21 billion or 58.5 percent over the next 5½ years (blue line in Figure 1). At the same time, economic output contracted and led to a period of deflation, when the overall price level fell sharply for several years. The annual percentage change (red bars in Figure 1) indicate that loans plummeted by more than 20 percent in both 1932 and 1933 and contracted for six consecutive years from 1930 to 1935.
Lending in the Great Recession Compared with the Great Depression
Generating a comparison between lending in the Great Depression and the Great Recession presents some challenges. Loan data are not available on the same frequency for the two periods and differences in the scale are huge. To adjust for these differences, I constructed an index with a value of 100 representing the pre-crisis peak in loans for both periods.5 This index, shown as Figure 2, tracks percent changes in total bank loans for both periods on the same scale.6
Figure 2 shows that the decline in loans during the Great Recession pales in comparison to the Great Depression. In the most recent episode, ten quarters after the 2008 peak in bank lending, total loans had fallen by over 16 percent, which is a dramatic decline by post-World War II standards but small compared to the drop of 39 percent for the first ten quarters of the Great Depression.
Figure 2 also shows that bank lending increased slightly in the recovery following the Great Recession, starting ten quarters after the financial crisis peak. This modest growth resulted from improved bank industry conditions, looser lending standards, and increased loan demand.7
In contrast, following the Great Depression, total loans continued to decline at a rapid pace much longer. When loans outstanding finally stabilized, it was at a level about 58 percent below the 1929 peak. Thus, the decline in lending during the Great Depression was much more severe and lasted much longer than during the Great Recession.
How large was the decline in lending as a share of the economy?
We can take this analysis a step further using the available historical data and scaling bank loans as a percent of gross domestic product (GDP), the total output of the economy over a period of time. This allows us to account for the deeper and longer decline in GDP during the Great Depression.
This measure, shown in Figure 3, plots bank loans as a share of GDP for both periods. Over the course of the Great Depression this measure fell about 57 percent from the business cycle peak to the trough seven years later.8 In contrast, during the Great Recession, bank loans as a percentage of GDP fell less than 20 percent from the peak to the trough four years later. Again, by this measure as well, the downturn in lending relative to the size of the overall economy was more severe during the Great Depression.