The American Recession of 1953 and Its Effects
The Recession of 1953 occurred three years after the beginning of the Korean War. It began in the second quarter of 1953 and went on until the first quarter of 1954.
Causes
The Korean War (1950- 1953) was held between North Korea (backed by communist powers) and South Korea (backed by the US).
The large amount of funding going into South Korean aide rose the inflation of the US by 5.3 percent and the nominal GDP.
The average citizen was rushing to buy goods that would run out as America sent support to their South Korean allies. In turn, producers were buying more raw materials to support the massive demand and war effort. This led to demand pulled inflation, or inflation brought on by high demand, and thus higher prices.
After the start of the war demand started to return to its normal state, but inflation was expected to continue to rise as prices did.
In 1952 The Treasury was attempting to slow down the rate at which the national debt was rising by raising bond interest rates. When interest rates rise, the price of the bond usually lowers. (which should lower inflation and increase demand.)
However, The Federal Reserve attempted to lower interest rates, and raise prices, by introducing more reserves. It worked, but interest rates on bonds lowered too much.
As mentioned, inflation was rising, and was expected to continue to, due to the war. When inflation is expected to rise investors want higher interest rates in order to compensate for the lost value of their bonds. By lowering the interest rates the Federal Reserve caused the demand of bonds to plummet and lead to a recession.
And so the constant increase of inflation, due to the Korean War, and the drop of demand led to the eventual recession of 1953.
Did you know?
Because of its sharp recession and sharp recovery the recession of 1953 is considered a V-shaped recession. It is also a demand driven recession.
Effects
Lower interest rates meant that the prices of bonds would be higher, which is actually a good thing for people looking to buy high value bonds, (except no one wanted to buy them due to low aggregate demand).
The total price of the recession of 1953 was about $56,000,000,000 US dollars (worth $545,905,617,977.53 today)
It lasted for three quarters before upward change started happening. The end of the recession marked the lowest point, or trough, of the business cycle during the 1950's, and so it was followed with a sharp recovery in 1954 all the way until 1955.
Did you know?
The speech writer of President Truman and member of the Bureau of the Budget, James L. Sundquist described the recession of 1953 as “relatively mild and brief”.
