Comparing and contrasting the Great Depression and the Great Recession that happens in today’s world’s economy may sound rather weird. A negative connotation of the first failed period in economy is obvious, while positive outcomes of the Great Recession can be rather challenging. Therefore, it is relevant to talk about the reasons that triggered the Great Depression as well as the Great Recession. The root of evil can be found for both periods of economy in debts of investors. Too many loans led to the decrease in their payments. Both, periods of 20s, 2000 and 2006 resulted in a great economical collapse.
Therefore, it is relevant to correlate historical experience of 20s with the current processes in the economy. In order to show distinctions and parallels between the Great Depression and the Great Recession, it is required to analyze the reasons of these periods in the American history, draw parallels between them in order to develop lessons for the future practical implementation of successful strategies and avoid mistakes of the previous years.
The reasons for the Great Depression
Another supposed reason for the Great Depression is often found in banks collapse. When investors took away their money from the banks to pay debts, nearly 9,000 banks failed in less than 10 years. Therefore, a credit crisis occurred. Those individuals who had bank accounts lost their savings and businesses did not have an ability to expand. Furthermore, this drastic economic situation was also spoiled by a slow process of recession. People were afraid of spending their money and many companies had to decrease their production levels. As a result, a great number of unemployed people occurred. The American government managed to correct the challenging situation and introduced The Smoot – Hawley Tariff act of 1930. In accordance with this Act, American companies could easily trade with international companies and pay fewer taxes. Still, the government could not resist dust and drought storms, which devastated agricultural sector. As a result, the prices for food were high and poverty rates increased as well. As far as we can see, there are many parallels which can be found between the Great Depression and today’s Great Recession. Let us focus our attention on the reasons that triggered the Great Recession.
The Reasons for the Great Recession
In 2008 only 19 banks have experienced bankruptcy. In 1930, 744 banks failed. In 30s, banks were protected by the FDIC (Federal Deposit Insurance Corporation) (Chee-Heong Quah and Crowley, 2009). Still, this system is more beneficial for banks nowadays. In accordance with it, DIC insurance keeps a certain percentage of assets (nearly $250,000 run). Currently, the recession is very bad as well. The consumers have reduced their spending to the greatest extent and lenders are more restrictive with credit. Nevertheless, the integration of the modern economy is more developed than in 30s. Economic prosperity is possible in the result of free trading and not economic protectionism (Recession 2008). Economic protectionist policies are challenging for free trade and thus governments do not choose these strategies. They are more focused on free trade development. According to Burton and Folson, “the seeds of the Great Recession were planted when the government in the 1990s began pushing homeownership, even for uncreditworthy people, with a vengeance. Mortgage-backed securities built on dubious mortgage loans became toxic when the housing market took a downturn, and many American banks verged on collapse. The government’s urgent desire to bail out various banks and corporations created uncertainty and instability, and this may have widened the recession” (Burton and Folson, 2010).
The Great Depression must-not-haves
In spite of the fact that during the period of the Great Depression the government was greatly concerned about the development of effective preventive and economically protectionist measures and policies, there are certain gaps in their experience. These gaps should be taken into consideration, carefully revealed and analyzed to avoid recessions in future. Protectionist tariffs and money supply restrictions are, supposedly, two negative factors that misguided governmental policy at the time (Chee-Heong Quah and Crowley, 2009). This claim can be supported in the following way: “It was thought at the time that the government should be fiscally responsible, tighten spending, raise interest rates and this would provide stability and eventually borrowing would be restored to healthy levels. It has since been shown that this is precisely the wrong thing to do in a contracting economy. Doing so leads to deflation, which is much worse than inflation” (Recession 2008).
Moreover, it should be noted that raising taxes as well as avoiding deficit is bad during the period of recession (Chee-Heong Quah and Crowley, 2009). In accordance with the modern experts, there are two possible types of coming recession: either a short-lived recession or long and relatively passing recession.
Similarities than differences between the Great Depression and the Great Recession
As far as we can see, there are more parallels than differences between the Great Depression and the Great Recession. The prices will fall in case the prices for gold are falling as well. This is the way the government can regulate the level of prices. In accordance with the differences between these two landmarks in economy, currency devaluation would finally occur (Chee-Heong Quah and Crowley, 2009). There is no money restriction for Federal Reserve to expand monetary supply, currency devaluation would occur. World’s currencies may question the importance of dollar as reserve currency and it may be conquered as a result.
In order to preserve value of US dollar, it is relevant to
raise interest rates. “In case foreign currencies devalue, US dollar, gold and silver would rise and in case foreign currencies decouple the US dollar may fall in relation to them” (Chee-Heong Quah and Crowley, 2009).
The abovementioned suggestions are drawn up from the claims of the modern economists and critics. Still, it is also relevant to summarize points that need to be avoided by contemporary economies in order to facilitate the process of Great Recession and prevent the world’s economies from the Great Depression: “although the current recession might have appeared to have started with an economic downturn that appears to be more precipitous than that of the 1930s, it is unlikely to continue on the same path” (Chee-Heong Quah and Crowley, 2009). Therefore, modern economists have taken different measures, such as fiscal, monetary and international measures in order to develop a multi-faceted preventing policy for the Great Depression occurrence. An awful Great Depression of 30s would hardly occur in the modern society in spite of the common points between two complicated periods in economy. A proper analysis of the reasons that caused the Great Depression occurrence, technological, scientific advancement of the modern society would speed up the process of the Great Recession and eliminate the possibility of the Great Depression occurrence.
Burton W., Folsom Jr. Comparing the Great Depression to the Great Recession. Our Economic Past, 2010
Chee-Heong Quah and Crowley M. Patrick. “A Reconsideration of the Great Depression”. South Asian Journal of Management 16 (3) (2009) : 7+.
Why the Recession of 2008 is More Like the Great Recession Than the Great Depression. Available at: