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Running head: ECONOMIC CRISIS
Comparing the Great Recession to the Great Depression
Professor’s Name: Dr. Malavika Nair
Course: Econ 3353 – Money and Banking
Date: 3/22/2019
Running head: ECONOMIC CRISIS
Comparing the Great Recession to the Great Depression
Abstract
The Great Recession is a period that saw a great economic decline between the late 2000s
and early 2010s. The economic recession affected the world markets but had an especially great
impact on the US. The Great Depression, on the other hand, took place from 1929 to 1939 is one
of the worst economic declines that have been referred to alongside the Great Recession in the
US. The period that preceded the economic crises of the Great Depression and the Great
Recession had several key similarities of importance to governments for the implementation of
future recessions. The three main similarities that have been discussed are government
interference, the lack of inflation, and increased liquidity. The similarities suggest two things that
the government can do to avoid or mitigate an economic crisis. To begin with, there is a need to
avoid prolonged interference with market demand and supply forces and where necessary then
the government should be actively involved instead of taking an action, then wait and see the
strategy. Additionally, the government can control inflation during prolonged sustained inflation
rates to avoid the economy getting stuck by increasing the inflation to boost economic activity
and reduce complacency and uncertainty.
Running head: ECONOMIC CRISIS
Introduction
The Great Recession is a period that saw a great economic decline between the late 2000s
and early 2010s. The economic recession affected the world markets but had an especially great
impact on the US. The Great Depression, on the other hand, took place from 1929 to 1939 is one
of the worst economic declines that have been referred to alongside the Great Recession in the
US. A study of the two economic decline periods has shown some similarities and differences.
For one to be better prepared for the future, it is imperative that the past is studied. Therefore, by
comparing the Great Recession and the Great Depression relative to the factors influenced the
economic downturns, we can establish some proposals for government interventions that can
promote or deter an economic downturn.
Research Question
The US economic environment preceding the Great Depression was marked by great
prosperity. The period referred to ‘the Roaring 20s’ by some, saw a great industrial gain in the
US. There was general peace in the US which promoted a healthy economy. The mass
production of commodities such as the automobile and household appliances among other
consumer goods promoted a vibrant consumer culture that enabled prosperity. The fiscal policies
implemented by three consecutive Republican governments were generally conservative which
promoted private investments and business. Consumerism as a market concept also evolved into
its own driving force that was largely driven by mass production and new advertising techniques.
On the other hand, the period preceding the Great Recession was marked by lots of mixed
fortunes. To begin with, there was a strong economic expansion characterized by low
employment rates in 2000. The internet boom also played a critical role in this economic boom.
Running head: ECONOMIC CRISIS
This strong expansion was shocked by a major terrorist attack in 2001. A war on terrorism and
Iraq war became a priority which saw the US economy get drained off a huge amount of money.
In the year 2002, there was a stock market crash just after the economy had begun picking
strongly after the terrorist attack. In 2005, India and China grew to be global financial powers
while Hurricane Katrina and Rita hit the US causing losses worth hundreds of billions in dollars.
In 2007 and 2008, there was a housing crisis which together with one of the biggest Wall Street
fraud schemes led to the Great Recession.
As seen, the periods before the Great Depression and the Great Depression are marked by
different economic conditions. As such, one cannot clearly identify a pattern that links some key
similarities leading to both crises. Therefore, there is a need to analyze the two periods to find
similarities. Additionally, L’Huillier & Yoo (2017) note that the activities of the federal
government on the economy affect the private institutions and businesses and can lead to an
economic downturn. As such, there is a need to determine the role of government intrusion in the
build-up to the economic downturns. To satisfy these queries fully, the paper adopts two key
research questions: are there similarities between the great depression of the 1930s and the great
recession of 2007-2009? Did government intrusions help in dealing with the crisis in the two
events?
Methodology
There are numerous research studies that have been conducted in the areas pertaining to
the Great Depression and the Great Recession. The research studies have been fueled heavily by
the great impact that the two economic downturns had on the US economy for analysis of current
and future economic trends to predict the possibility of the events recurring. These research
studies have collected actual primary data and opinions from the 1920s and the 2000s that are not
Running head: ECONOMIC CRISIS
possible to collect at the time due to time and resource constraints. Due to the reliability of the
accuracy of data from past research, the paper will use secondary and tertiary data from peerreviewed and scholarly journals and books to answer the research questions. The data will be
used to analyze the similarities and government interventions applied during the periods.
Therefore, this paper utilizes past literature and research studies on the Great Depression and
Great Recession to examine the similarities and develop possible future strategies to avoid
economic downturns.
Analysis
The Great Depression
To begin with, the period of the Great Depression saw an increased amount of private
investments and businesses. In the 1920s, the government slashed the taxes by a huge amount
moving from about 70% to 25% on income and capital taxes (Temin, 2010). The slash was done
on a gradual basis beginning from 1922 then 1924 and finally 1925. As a result, there was more
revenue for the citizens. With more revenue, there was an increase in the amount of disposable
income. There was a substantial gain in the proportion of the high-income taxpayers who were
paying taxes as compared to the period before. The people from the lower classes had more
disposable income too. The disposable income was used to buy luxury goods and other
commodities that were out of reach.
Additionally, people also invested in businesses and on Wall Street. The major Wall
Street investments were in tax-exempt shares. The government was for the rationale that the tax
cuts would lead to created wealth for the government and the people. The taxes that were high
were expected to be paid now that they had been slashed. Since the tax cuts meant there was
Running head: ECONOMIC CRISIS
reduced revenue for the government from taxes, the government also slashed on its spending
during this period. Therefore, in the 1920s, there were income and capital tax cuts which led to
reduced government spending but increased spending by individuals leading to an economic
boom and high investment in the stock market.
The Great Recession
On the other hand, the period preceding the Great Recession saw mortgage taxes that
favored high purchases on housing. To begin with, there was a construction boom in the mid2000s that was higher than the population growth rate. As such, there was an over-supply of
houses that resulted. The US government also encourages citizens to own homes. The mortgage
tax for the owner-occupied house is deductible on the income tax. The imputed tax that is lost
from owning a home and not paying tax to a landlord is also tax-free.
As such, these two tax policies encouraged people to buy houses and they were readily
available due to the surplus supply from the construction boom. The tax policies also encourage
homeowners to pay slowly which means that people have less incentive to clear mortgages
quickly. Additionally, these policies encourage people to buy and sell immediately which can
create high value for houses. This practice is blinding since investors are blind to the rate of
supply versus demand as indicated by real sale prices of houses. To capitalize on this fact, the
financial institutions gave loans at very low-interest rates and at the time required no down
payment (Temin, 2010). However, soon people realized that they had assets that they could not
pay for and additionally there were no people to buy them off. The financial institutions were
majorly affected (Koch, et al., 2016). The assets that banks and financial institutions could
repossess had no one to buy yet the people who owned could not pay off their loans.
Running head: ECONOMIC CRISIS
Similarities of the Great Recession and the Great Depression
a. Federal Government Interference
There are various similarities that can be seen in the build-up to both recessions. To begin
with, there are rapid growths that are marked with no contractions. The periods were marked
with long periods of no depression. While one would normally expect apprehension, the opposite
effect was seen. As such, the public had more confidence in the system leading to increased
spending and investments with little analysis of risks and without reading the economy
accurately. This accounted for increased spending and growth of investments and businesses
over both periods. From 1921 to 1929 there was a great economic expansion just as it was in the
period 2001 to around 2007 (Ohanian, 2017). However, one clear similarity appears in the
periods. There were policies from the federal government that favored extreme economic
expansion.
The federal government had a great influence on the economic expansions that were seen
in the lead-up periods of both the Great Recession and the Great Depression. The federal
government implemented expansive credit policies that favored home-ownership among the
public. One more aspect led to the backfire of the expansive credit that was characterized by
low-interest rates. In 2001, one of the biggest scandals in corporate governance led to the
collapse of Enron. Enron was an energy company that had shares that were high reaching above
$90 per share but plummeted to about $1 per share within a period of one year. Enron filed
bankruptcy with an asset base of $60 billion. Moreover, with its downfall, there were casualties
such as Arthur Andersen, which was one of the biggest audit firms in the country that had a wide
portfolio too. The collapse of such corporations due to poor governance was a huge hit to the
economy.
Running head: ECONOMIC CRISIS
The federal government sustained the economy through increased expansive credit
policies to avoid inflation. As such, the debt that the economy had incurred from the collapse if
the corporations were shifted to the households which engaged in increased spending aided by
loans at low-interest rates. Soon, there was more debt in the public that could be sustained by the
financial institutions.
Similarly, in the period 1921 to 1929, the federal government played a hand that led to
the expansive economic growth that artificially created. During the period there was a recession
that lasted about 14 months from 1923 to 1924. Additionally, there was another recession that
lasted from 1926 to 1927 that lasted a similar period as the previous one. However, the
recessions were mild and steady that no one noticed that there was an economic recession that
was set up. In the period on 1923 to 1924, the government helped sustain the economic
expansion through lowering of income and capital tax even further to reach 25% in 1925. Just
like the fall in corporations in 2001 that saw the government react with sustained expansive
credit policies, the government reacted to the short recession by sustained tax cuts on income and
capital which helped the households sustain the economy.
b. Increased Liquidity
The periods that preceded the economic downturns were both characterized by increased
liquidity. The government expansive credit policies in the period 1920 to 1929 led to an increase
in the amount of money that the citizens were taking home. This increase in money allowed for
more money to circulate the economy. In the peak of the 1920 to 1929 period, the stock money
in the US government stood at about 45% of the while period in 1929 which was the peak. This
stock market boom was limited slightly in 1929 by government restrictive monetary measures.
Running head: ECONOMIC CRISIS
In the period that led up to the Great Recession, there was also an increase in liquidity.
This increase in liquidity was aided by two main factors. To begin with, the expansive credit
policies by the government led to increased money on the households due to low-interest rates by
the financial institutions. The liquidity during this period was also aided by the increase in
financial might of China and India. China and India’s economies were booming and the two
countries had emerged as financial might in the global economy. As such, their exchange
reserves had grown too which allowed for increased commercial trade. Therefore, increased
liquidity was a key factor in that is similar between the Great Recession and the Great
Depression.
c. Lack of Inflation
The increase in liquidity over the periods preceding the Great Depression and the Great
Recession also meant that there was a lack of inflation. This was the opposite of what is expected
in a period of liquidity. The steady increase in the stock market over the period of 1921 to 1929
saw a slight dip in 1929 due to restrictive monetary policies. The wholesale prices over the
period remained rather stable with prices of commodities remaining rather low throughout the
period. These factors show a lack of substantial inflation.
In the period leading up to the Great Recession, similarly enjoyed a lack of substantial
inflation. The combination of external and internal factors aided this lack of inflation. The
increase in China and India’s economic might as well as the expansive credit policies allowed for
the inflation rate to remain rather stable. The inflation rate maintained over both periods because
the goods that were manufactured were demanded by the growing economies which helped
sustain the market forces and as such maintain the inflation rates over both periods.
Running head: ECONOMIC CRISIS
Preventive Government Interventions
From the analysis above, it is possible to see that there were great similarities between the
Great Depression and the Great Recession. As such, there are lessons that can be drawn from
these two periods that can be applied by the federal government to look for signs of a recession
as well as take action to prevent or mitigate the effects.
To begin with, there was excessive government intervention over both periods. The
government intervention took the form of tax-cuts on income and capital as well as expansive
credit policies. The two steps by the government over both periods led to the creation of
artificially-created economic expansion by putting more money in the pockets of households
leading to more investments and spending. Additionally, the sustained periods of artificial
economic expansion increased the risk appetite of the households leading to investments that
were not well-analyzed by the financial institutions as well as the households. As such, soon
afterward there was an over-supply of products that lead to a fall in prices since there was no one
to consume them and similarly there were no returns leading to a financial crisis in the periods.
This suggests that first, the government should avoid interference with the market
demand and supply forces (Duca, 2017). Demand and supply forces naturally reach an
equilibrium that best governs the economy. Interference in the government should be only for
short periods of time. If an intervention is to be sustained for a prolonged period of time, such as
the ones witnessed in the preceding periods of the Great Recession and the Great Depression, the
government should apply an active role in maintaining the equilibrium of the market and supply
forces rather than taking a wait and see approach as seen in the periods. The active observance
should involve the active adjustments of production of goods and policies that favor
sustainability.
Running head: ECONOMIC CRISIS
Another intervention that the government can pursue is the control of inflation. Both
periods preceding the economic recessions saw a general lack of inflation despite increased
money going to the pockets of the citizens and reduced government spending. This is a sign that
should be looked out for. When identified, there is a need to target economic growth by causing
an increase in the inflation rate. This is based on the rationale that maintained inflation and low
inflation rates leads to the economy getting stuck in the period. Therefore, to avoid the economy
remaining stuck and creating a sense of complacency and high uncertainty, the government can
intervene with increasing inflation rates that will boost the economic growth by breaking
deflationary spending.
Conclusion
In conclusion, the period that preceded the economic crises of the Great Depression and
the Great Recession had several key similarities of importance to governments for the
implementation of future recessions. The three main similarities that have been discussed are
government interference, the lack of inflation, and increased liquidity. Government interference
took the form of tax-cuts on income and capital and expansive credit policies that were sustained
for a prolonged period of time. There was a lack of substantive inflation over both periods
despite the government cutting on spending and consumers having increased disposable income
which was attributed to high export demand for excess goods produced by the market. There was
also increased liquidity in both periods due to increased access to loans by consumers due to low
-interest rates and increased revenue. The similarities suggest two things that the government can
do to avoid or mitigate an economic crisis. To begin with, there is a need to avoid prolonged
interference with market demand and supply forces and where necessary then the government
should be actively involved instead of taking an action, then wait and see the strategy.
Running head: ECONOMIC CRISIS
Additionally, the government can control inflation during prolonged sustained inflation rates to
avoid the economy getting stuck by increasing the inflation to boost economic activity and
reduce complacency and uncertainty.
Running head: ECONOMIC CRISIS
References
Barranco, J. A. P., & Sudrià, C. (2012). ‘The Great Depression’ versus ‘The Great Recession.’
Financial crashes and industrial slumps. Revista de Historia Industrial, (48), 23-48.
Duca, J. V. (2017). The Great Depression versus the Great Recession in the US: How fiscal,
monetary, and financial policies compare. Journal of Economic Dynamics and Control,
81, 50-64.
Koch, C., Richardson, G., Van Horn, P. (2016). Bank leverage and regulatory regimes: Evidence
from the great depression and great recession. American Economic Review, 106(5), 53842.
L’Huillier, J. P., & Yoo, D. (2017). Bad news in the Great Depression, the Great Recession, and
other US recessions: A comparative study. Journal of Economic Dynamics and Control,
81, 79-98.
Ohanian, L. E. (2017). The Great Recession in the Shadow of the Great Depression: A Review
Essay on Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and
Misuses of History, by Barry Eichengree …
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