Introduction
The Great Depression was an economic downturn that mainly affected the industrialized nations of the world in North America, Europe, and the Far East during the period running from 1929 to 1939. It happened to be the longest and the most devastating depression in the world. The depression was characterized by the plummeting of stock markets prices in the New York stock exchange from the year 1929. By the year 1932, the stock prices had fallen to a point where stocks were worth only 20% of their value in 1929. The most strained were banks and financial institutions that held stocks in their portfolios. As a result, close to 11000 out of 25000 American banks were forced to go under spelling doom to the financial market.
The mass collapse of the financial institution and widespread loss of confidence in the economy caused a reduction in aggregate expenditure and depressed demand resulting in low production. This further worsened the situation by accelerating the downward slide towards depression. The result was a drastic fall in output which went down by 54%. The depression quickly spread to other European economies owing to the prevailing interdependency that existed at the time. The most hit countries were those that were highly indebted to the United States especially great Britain and Germany that had been worse devastated by the First World War. The underlying weaknesses and imbalances within the U.S. economy that had been aggravated by the boom psychology and speculative tendencies of the 1920s were partly to blame for this predicament.
Though not as severe as The Great Depression, the current recession is projected to have started around November 2007. That does not however downplay its magnitude as it is the worst recession ever experienced in the world since the Great Depression as Lightman (2009) concludes. It came with serious economic devastation starting with the crumble of the American financial giants on Wall Street especially JP Morgan, Enron, Citibank, and other large companies such as General motors. Many others followed suit taking a heavy toll on employment, economic output, and GDP. Due to the heavy interaction of the world states the effects quickly spilled over to the rest of the world economies becoming a global disaster. The reason for the speedy infiltration of these effects to other countries is because of the loss of America’s place as the only country with a considerable disposable income with the emergence of other industrial powers in South America and Asia.
Similarities
Change of peoples lifestyles
One of the most conspicuous similarities between The Great Depression and the current recession is the significant change in lifestyles. The decreased earnings and the marked loss of employment have driven people to adopt cost-cutting measures to survive through the harsh economic hardships. Increasingly more and more people are spending more time at home with their families. And just like the other depression, people are finding it easier and more economical to cook at home rather than to eat out. Gardening is also gaining increased prominence as people take to farming to cut the cost of buying vegetables. Home entertainment is also becoming popular with more and more people.
Decline in housing
The current recession is witnessing the worst housing crisis since The Great Depression with a sharp decline in housing as Leonard (2009) observes. One of the contributory factors that cut across the two recessions is the rampant speculative tendencies in the housing market and the fraudulent handling of the mortgage industry. The poor regulatory framework and inadequate scrutiny of the industry only acted to fuel the recession. The unrealistic lending and borrowing planted the seed of both recessions due to excessive liquidity in the market.
Loss of employment
With both recessions, the rate of unemployment is shot up at an alarming rate across the globe with more and more Americans filing for unemployment benefits. By February 2008, the US Bureau of statistics was reporting an estimated 4.8% of unemployment. Its predecessor claimed between 25 to 30% of the total workforce in terms of unemployment. The situation was accelerated by the rising rate in which companies were going into insolvency leaving thousands jobless while others get retrenched in restructuring efforts aimed at reducing running costs (Leonard, 2009).
The global decline of the financial markets
Just like in the former, the global financial markets are experiencing their worst financial crisis since the Great depression mainly as a result of weak regulatory structures of the Wall Street financial market that was riddled with underhand deals and massive fraud. Wall Street is the worst affected by the collapse of the leading financial giants like Citibank, Enron, Bear Sterns, and JP Morgan. In comparison, during the great depression, the stock market shed 90% of its value while 40% of the banks crumbled. In the year 2008, many mortgage lenders were declared bankrupt sending many people in America reeling under the effects of foreclosures. Just like with the great recession, these events have led to a severe loss of confidence with the financial market dealing a cropper to an already worsening situation.
The global slump in the manufacturing sector
Just like the previous recession, the current global meltdown has had adverse effects in the manufacturing industry with a sharp decline in the global output which in turn resulted in a dramatic loss of jobs worldwide. This has forced world states to come up with rescue packages to salvage such companies as General motors that were in the blink of going burst. Krugman (2009) suggests that bailing out the consumer would be more practical at this stage. This scenario is no different from the one witnessed in the 1930s where many industries in the western industrialized nations grounded their operations with extreme devastating effects to the economies. Others scaled down their production capacities to unsustainable levels owing to aggregate demand leading to massive unemployment.
Credit fueled bubbles
Both recessions were preceded by a prolonged period of credit-fueled bubbles just a few years before the recession. Just before the current recession, the world experienced a bullish economic development just as the Roaring 20s became a precursor of the great depression. The economic boom combined with the poor regulatory framework laid the foundation of unchecked disinvestment resulting from an excessive expansion of the money supply. This further plunged the country into a deeper recession setting off a losing spiral that spread fast across the globe.
Policy interventions from the government
In both, the government intervened to salvage the market and prevent the downward spiral of the asset prices in the market which could spell doom to the respective economies. For example, as a precautionary measure, the government slapped a ban on short-selling in both 2008 and the beginning of the great depression. Similarly, countries prescribed stimulus packages to rescue their economies from imminent disintegration. In both, these packages had mixed results ranging from failure to modest successes.
The decline of Equity Prices and loss of confidence with the stock market
In both recessions, there was a sharp decline in the value of stocks across the globe. The downward spiral was large as a result of loss of confidence and panic as people damped their stocks to escape the imminent losses (Labonte, 2002 p.32). This destabilized the price in the market further pushing the country into recession. Those firms that held their portfolios in form of stocks were the most adversely hit by the slump as the paper value was precipitated by the loss of value in stocks. The end effect was a dramatic fall of firms in the financial market with many others merely struggling through the storm.
The decline in Investment
During the two recessions, investment declined more than output as a result of depressed earnings that weighed down heavily on the purchasing power of consumers (Labonte, 2002 p.36). Due to the credit crunch consumers were forced to tone down on their expenditure resulting in excessive inventory being held by firms. The downturn in investment was thus caused by these disincentives. But the most affected were the property sector where the value plummeted down to a historical low leaving investors in awkward situations.
The surge in oil prices
In both recessions, oil prices spiked up significantly just before the commencement of the recession. During the current recession oil prices surged up to $148 per barrel, the highest ever experienced in history. At the onset of the current oil price spike, few people imagined that the engine of development that had catalyzed the rise would soon grind almost to a halt. Labonte (2002 p.36) points out compelling evidence that an exogenous oil price spike is harmful to the economy which appears to be true going by the current recession.
Differences
Deterioration of America’s large influence as the determinant of the global economy
Unlike the current recession, the great recession was largely dependent by a huge extent on America’s consumption patterns as a result of having the greatest disposable income. With a population of 300 million which accounted for 40% of the world’s GDP, the economic fate of the world was under the US fate. In the current recession, things are much different with the rise of other populous industrial powers such as Russia, Brazil, India, and China combined with the effect of European powers. This means that close to 3 billion people across the globe have a considerable impact on the global aggregate demand hence heightening the scope and magnitude of recession.
Policy responses
Unlike during the great depression where The Federal Reserve undertook contractionary monetary policies with adverse effects on America. Expansionary monetary policy and natural market adjustments have been employed during the current recession to contain the recession (Eichengreen, 2009). This has been implemented through the expansion of money supply as opposed to a reduction in money supply and devaluation of the currency that was carried out in the 1930s. Automatic stabilizers have also been widely utilized to ease the credit crunch.
Use of the gold standard
During the great depression, every note of currency in circulation was backed by an equivalent amount of gold. This had the effect of putting a cap on the extent of monetary expansion. Due to the failure of the supply of gold to grow along with the demand for money balances, the Federal Reserve was forced to devalue the US dollars to match the gold reserves. This caused a downward turn on the price level plunging the country into deflation (Eichengreen, 2009).
Magnitude
Between 1929 and 1933, the magnitude of the recession was higher than the current depression recording a 27% fall in GDP and unemployment rate of 25%, and the fall in the price level. Unlike today which is much milder, one-third of the American banks collapsed with many firms wounding up their business. The decline in industrial production is less severe than it was in the 1930s hence slowing the unemployment rate and the fall in GDP as Eichengreen (2009) points out. During the Great depression, these effects were catastrophic. This is no longer the case in the current recession.
High indebtedness
Unlike during the great depression, America is highly indebted today. The national debt and deficit spending were not as pronounced as it is today while credit cards were unknown. Their high prevalence today has just but complicated the whole scenario driving economies into difficult situations. Credit cards have pushed enough of the consumers into financial crisis due to difficulty to service them as a result of lost employment and reduced incomes. On average each American is said to be owed $8000 in credit card debts while health care is becoming out of reach for those without medical covers as Leonard (2009) laments.
Use of fiat currency
Unlike the past, all major world currencies today use fiat currency with US currency being the world’s reserve currency. This has placed many countries in awkward positions during this recession as countries inflate their supply of money to conform to US dollars to bring uniformity. This has the effect of importing inflation during recessions by the affected countries.
Differences in the world trade
Protectionism in the world trade during the great depression ground the trade to a halt as each country rushed to shield its economy from the surging recession. This distorted their markets causing adverse effects to their economies and thereby aggravating the effects that came with depression. This is unlike today where trade barriers are largely eliminated leaving the market forces to regulate the market.
Size of the government as important players in the market
As opposed to the 1930s, the government sector plays a key role in the economy through the provision of economic security owing to its size. Public servants everywhere have much secure job prospects as opposed to their counterparts in the private sector who are usually the victims of economic meltdowns (Krugman, 2009). A large government sector is thus a huge advantage to a country as it is capable of influencing the economy through monetary policies bringing about stability in the market. This was unlike the 1930s when by its size it had minimal effect on the economy.
The shift of industrial production to service
Since the great depression, the service sector has grown in bounds shielding the United States and other industrial powers from gross dependency on the manufacturing sector. This is unlike during 1929 when most of these countries were almost fully dependent on industrial production so that when the recession came they were heavily beaten as Krugman (2009) notes. The massive service sector today has largely slowed down the effects of surging inflation.
Reference
Eichengreen, B. (2009). A Tale of Two Depressions. Web.
Krugman, P. (2009).The Great Recession versus the Great Depression. Web.
Labonte, M. (2002). “The Current Economic Recession: How Long, How Deep, and How Different From the Past? The Library of Congress”, 30-41
Leonard, A. (2009). The Great Depression: The sequel. Web.
Lightman, D.(2009). Congressional Budget Office compares downturn to Great Depression. Web.