The Great Depression And The Ongoing Recession
The great depression was a period in American history characterized by a catastrophic economic slump that lasted from 1929 to 1939. It was the longest and the most devastating depression ever recorded in the American history. It all commenced with the collapse of the New York Stock exchange market in October 1929. This was particularly devastating for the banks and financial institutions that held stocks in their portfolios. This paper gives a comparison between the great depression and the ongoing recession.
Similarities between the current depression and the great depression
One similar aspect of the two depressions was the dramatic change in people’s lifestyles. The depressed earnings and loss of employment had catastrophic effects on people’s lifestyles. Many people adapted cost cutting measures as a means of surviving through the harsh economic hardships. Many people were driven to their homesteads where they spent most of their time with their families. In addition, just like during the great depression, it has become economical to cook at home rather than to eat out.
Both depressions witnessed the worst housing crisis of their times leading to sharp declines in the sector. The massive speculation in the poorly regulated housing industry and the under deals that riddled the mortgage industry prior to the two depressions were partly to blame for dragging the country in depression. The mortgage industries during the two periods were experiencing booms in growth causing excess lending and borrowing in the financial market leading to the subsequent excess liquidity caused by the growing investor appetite for cash. Employees have borne the full wrath of unemployment in both depressions which rose at an alarming rate with increasing numbers filing for unemployment benefits. According to Leonard (2008, Para. 4), by February 2008 the US Bureau of statistics had reported 4.8% loss of employment while the Great depression claimed between 25 to 30% of the total work force.
In both, the government came up with policy interventions to salvage the market from imminent collapse. The government banned short selling in both 2008 and the beginning of great depression to protect the stock market. Just like with the great depression, the Obama administration introduced stimulus packages to rescue the ailing economy. Tax rebates have also been offered to the first time home owners amidst the growing threat of foreclosures in the housing industry. Rescue packages also injected to falling industrial giants like general Motors and Citigroup to avert the resultant loss of jobs.
Differences
During the great depression the Federal Reserve responded by introducing contractionary monetary policies which were implemented through reduction of money supply and devaluation of the currency in the 1930s. As opposed to that, during the current depression the government has employed expansionary monetary policies and natural market adjustments to bring monetary sanity in the market. This has been made possible by expansion of money supply in the market. During the former, the gold standard was in operation whereby the currency in circulation was backed by an equivalent amount of gold. The ultimate effect of its use was a ceiling in the expansion of money supply in the economy which led to the devaluation of the dollar when the gold deposits failed to grow in tandem with the money in circulation. The result was a downward spiral in the price level.
The magnitude of the current recession has not been as high as the great depression. The current recession is much milder when compared to the great depression which claimed one third of the American banks while many firms closed business. Furthermore, the slump in industrial production and the rise in unemployment rate combined with the fall in GDP are less pronounced (Eichengreen et al 2009, Para. 1). The service industry today is much larger than during the great depression which shields United States from over dependency on the manufacturing sector. Prior to the great depression the country was heavily dependent on industrial production which placed a heavy toll on the economy when recession set in (Krugman, 2009, Para. 1).
In the today’s economy, the government sector is large and plays a pivotal role in the economy through provision of economic security due to its size. This is as opposed to the 1930s when the government was small with minimal effect in the economy. Carrick (2009, Para. 9) observes that the public service provides more job security than the private sector who usually suffer during economic melt downs. A large government sector influences the country’s economy by providing a platform for implementing monetary policies which in turn stabilize the economy.
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