Comparing Recession to Great Depression

The Great Depression was a harsh global economic depression in the decade prior World War II. The Great Depression, while it happened far before the “Great Recession” of 2008, it can be greatly compared. During the Great Depression, all income, tax revenue, and prices dropped. International trade decreased by more than 50%, and U. S. unemployment climbed to just above 25%. Industrial cities like Detroit and Pittsburgh took the heaviest hits. While the recession of 2008 was not as drastic, it affected the world economy and resulted in a global recession more so than ever before.

The percent of U. S. citizens unemployed had reached 10% as of 2009. Along with the challenges unemployment presented, consumer self-confidence, the decline in home values, and an ever-increasing federal debt were also prominent problems. The causes of the Great Depression are more obvious than those of the recession, being the stock market crash of 1929, bank failures, and the notorious Smoot-Hawley Tariff. The causes of the 2008 recession can be tied to the dangerous sub-prime loans, the decisions of the Federal Reserve, and again, the failure of banks and the economic stimulus plan that followed it.

While the Great Depression started under president Hoover, Roosevelt is given the most credit for trying to repair America from the Great Depression. Obama’s “solution” to the recession was the economic stimulus plan, which spent 700$ billion tax-payer dollars to save banks from closing. The big question here being, could we face another global recession or a second Great Depression in the future? The Great Depression had overwhelming outcomes for the rich and the poor in almost every country.

All monetary factors such as income, and tax revenue took a dramatic downfall, and international trade declined by over 50%. The decline in the Dow Jones industrial average was -89. 2%. The percent of unemployed people in the United States was between 25% and 30%, which was a staggering low for the population at the time. Though suburbs, smaller towns, and rural areas were affected by the Great Depression, cities that were considered “industrial giants” at the time, such as Pittsburgh, Pennsylvania, Gary, Indiana, and Detroit, were racked with job losses and living conditions went from bad to worse.

Over two million high-paying jobs were lost, which left most companies with virtually no profit, and easily left those families without homes, food, and money. During the Great Depression, foreclosure was a huge problem faced by mostly farmers. Farmers in the prosperous years before the threat of a depression bought expensive machinery and land with loans from banks. Many farmers offered their resources as a form of security for the banks, which meant that if the farmers failed to pay back the bank, the banks could repossess their resources – the land.

After the stock market crashed, not many people had money to buy land, and the land prices plummeted. Banks would take all the assets offered when the farmer’s took the loans, which were their lands and ultimately their homes. The bailouts during the Great Depression were much more controlled than during the 2008 recession. All loans had to be secured and no more than 5% of the money could go to just one company, and the process by which some industries got loans was more complicated. For example, if railroads accepted loans, they had to be suitable to the Interstate Commerce Commission.

People’s reactions to the Great Depression varied depending on their finances. Many rich people felt little to no influence, and were even unaware of the suffering of others. Families during the Great Depression faced the most challenging times. Many couples delayed marriage; the divorce rate fell abruptly because it was often too costly to pay legal charges. Roles in the family reformed in the 1930s. Many men, being out of work, had to look to their wives and children to work to make enough money to support the family.

Women felt empowered by the change in society, having more choices to go against history and work outside of the home. The status and power of women were increased, which expanded them to a new say in decisions. The recession of 2008 is also called the ‘Great Recession’, said to have begun in December 2007, and took a turn for the worse in September 2008, and it was a severe economic problem expanded globally. This recession affected the world economy, and is said to have been the worst financial disaster since the Great Depression.

The decline in the Dow Jones this time was -53. %. Since the official start of the recession in December 2007, and through June 2010 there have been about 2. 3 million homes foreclosed in the United States. In 2012, the state with the most foreclosures in January alone was California, with 51,584 houses being repossessed. Unemployment during this collapse was 8. 5%, and continued to increase to about 10% as of 2010. People’s reaction to this recession was a huge decrease in spending and borrowing from banks, but an increase in saving. There were easily multiple causes for the start of the Great Depression in 1929.

Many historians and economists put emphasis on organizational causes such as actions by the Federal Reserve. Often part of any business cycle are recessions due to the changes of supply and demand, but what turns this business cycle into a depression is always up for debate. In the case of the Great Depression, the stock market crash of 1929, bank failures, debt deflation, and American economic policies with Europe were all contributing factors to the Great Depression. Before the crash of 1929, many assumed that the stock market would continue to increase indefinitely.

The confidence and economic advances were tested when the share prices on the New York Stock Exchange sharply fell on “Black Thursday”, October 24, 1929. In the few days before the crash, the market had been noted with being ‘severely unstable’, which was later linked to the debates for the passage of the Smoot-Hawley Tariff Act. This act, that was passed by President Hoover on June 17, 1930, raised a tax rate of 60% on over 3,200 imported products, which was at record levels, only lower than the Tariff of 1828. This act reduced American world trade by almost 66% between 1929 and 1934.

Unemployment rates also jumped from 7. 8% in 1930 when this act was passed, to 25% in 1933, just before the act was basically countered in 1934 with the Reciprocal Trade Agreements Act. On “Black Monday”, October 28th, more stockholders decided to get out of the market, and the Dow Jones continued to fall 13% that day. The next day, “Black Tuesday”, 16 million stocks were traded, and the Dow leaped another 12% downward. Many economists argue whether the Great Depression began bank failures, or bank failures began the Great Depression.

One known fact is that by 1933, almost 11,000 out of 25,000 banks in America had died out. Just overnight, hundreds of thousands of consumers removed their deposits. Also contributing to the bank failures, was the Dust Bowl of the 1930s. Farmers had loans on their farms that could not be repaid because of the drought conditions, which led to no crops being produced to sell for profit, and the American banking disaster expanded. Another major cause of the Great Depression is said to be debt deflation.

Debt deflation, developed by Irving Fisher, is an idea of economic cycles which says that recessions and depressions happen due to the overall level of debt reduction. Debt deflation is really hard to explain, but basically pessimism and loss of confidence in the market leads to withdrawals from banks, which leads to people hoarding their money, but the economy still circulates at the same pace. The causes of the recession of 2008 are also greatly debated, but possible causes are excessive debt levels, sub-prime lending, and government deregulation.

To counter the stock market crash of 2000 and the following economic slowdown, the Federal Reserve decided to make credit accessibility easier and drove interest rates down to levels lower than had been seen in many decades. Any ‘default’ or failure to pay back a loan, in debt has the opportunity of causing the lender to default as well. The second default can lead to more defaults through the domino effect. Attempts to stop the domino effect were the bailing out of Wall Street lending companies such as Fannie Mae, Freddie Mac, and AIG, and the complete takeover of Bear Stearns.

These attempts have had mixed success. Assuming that sub-prime lending led to the recession, some have said that the problem started in the Clinton Administration. It is also said that the passage of the Gramm-Leach-Bliley Act in November of 1999. This act annulled the part of the Glass-Steagall Act of 1933, eliminating barriers in the market among banking, insurance, and security companies that banned any one establishment from acting as any combination of a commercial or investment bank, and an insurance company.

When the Gramm-Leach-Bliley Act was passed under Bill Clinton, commercial and investment banks, security firms, and insurance companies were allowed to unite. President Obama has said that the GLB led to deregulation that allowed the establishment of oversized financial supermarkets and critics say that it cleared the way for corporations that were “too big to fail”. This statement was obviously wrong. There were few attempts by President Hoover to recover from the Great Depression because he felt that the government should not become too involved in helping individuals with their economic troubles.

He did pass some legislation, such as the Emergency Relief and Construction Act in 1932, which created the Reconstruction Finance Corporation. The RFC released assets for public works developments across the country like maintenance of railroad systems, waterfront quays, and roofs. This act was intended to be a provisional mean of providing jobs. Although Hoover did not contribute much, Roosevelt’s contribution to the Great Depression was the New Deal! The New Deal was a series of economic programs applied in 1933-1936. Roosevelt’s focus was on the three R’s : Relief, Recovery, and Reform.

His most successful New Deal programs were the Civilian Conservation Corps (CCC), the Federal Housing Administration (FHA), and the Social Security Act (SSA). The CCC was a public work aid program that provided unskilled and manual labor jobs. The jobs were in the fields of development and conservation of natural resources. The CCC was in effect from 1933 to 1942 for the unemployed and unmarried men ages 18-25, and 2. 5 million men joined this new work force. The Federal Housing Administration was formed as a portion of the National Housing Act of 1934.

It covered loans made by banks and other private lenders for the building and buying of homes. The goals of the FHA were to improve housing and living standards and offer acceptable home funding system through protection of mortgage loans. In 1965, the FHA became part of the Department of Housing and Urban Development, and is still in wide use today. After the sub-prime mortgage crisis, the FHA became a source of the U. S. mortgage financing. The Social Security Act was an effort to limit the ‘dangers’ in the contemporary American life, including poverty, unemployment, old age, and widows and fatherless children.

This act gave benefits to unemployed and retirees and a lump-sum of money at death. The SSA is also greatly known today for providing Medicare, Medicaid, and State Children’s Health Insurance Program. By signing this act in August 1935, Roosevelt became the first president to sponsor federal support for the elderly. To combat the sudden recession in 2008, President Obama and his key advisors presented a series of regulatory applications in the 2009-2010 years, and the Emergency Economic Stabilization Act of 2008, which was passed on

October 3, as a response to the sub-prime mortgage crisis. This act allowed the United State Secretary of Treasury to expend up to $700 billion of American tax-payer dollars and give cash straight to banks to reimburse them for their lost loans. After that bill was passed, the annual budget debt for the 2009 would raise by the $700 billion, to $11. 3 trillion from the already extreme cost at the time of $10. 6 trillion. Another act passed to counter the recession was the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This act was to endorse financial solidity by improving liability in the financial system, to end companies that were “too big to fail”, and to protect customers from abusive financial services practices. Yet another act to help with the recession was the American Recovery and Reinvestment Act of 2009 (ARRA). This act incorporated direct spending on education, health, and energy, and the increase of unemployment welfares. The main purpose of ARRA was to preserve and produce jobs almost immediately. Other aims were to provide provisional assistance programs for those most affected by the recession.

The justification for ARRA was from the Keynesian macroeconomic theory which states that during recessions, the government should counterbalance the decrease in private spending with an increase in open spending in order to protect jobs and stop more economic decline. Roosevelt’s program significantly reformed the relationship between the government, the market, and its people. For the first time in the country’s history, it created innovative programs and associations dedicated to providing people with protection against the volatile turns of the American capitalist market.

Although the New Deal was effective in fulfilling short and long-term basic reform, when it came to actual regaining from the Great Depression, it’s fix was not as fast as everyone hoped it would have been. Roosevelt shaped a leading Democratic political alliance, and he forever changed the anticipations of American citizens for their future leaders. While President Obama’s attempts to recover America ended up costing the country over $700 billion dollars, these huge companies were prevented from going out of business and kept the country out of more economic turmoil.

Situations of the stock markets have greatly improved since the recession, and even household spending and loaning has shown to definitely be stabilizing. While unemployment in the United States is still at about 10%, it shows to be plateauing. Though Obama increased the national debt by $700 billion (or more), the economy is luckily on the up rise. As Europe is slowly sliding into another recession, many economists say that the United States could face another recession in 2012 or the years to follow as well.