Research Paper on "Great Depression of 1929 vs. The Global 2008 Economic Crisis"

Research Paper 8 pages (3030 words) Sources: 10

[EXCERPT] . . . .

Great Depression of 1929 vs. The 2008 Global Economic Crisis

For many people, the Great Depression of 1929 and the 2008 Global Economic Crisis are synonymous with: greed along with vast excesses that came to a sudden halt. As both events, would signal how the government's response to financial related calamites would shape economic growth going forward. In the case of the United States, the policy decisions that were taken at the beginning and during both crisis, would determine the overall events of the economic implosion. As the Great Depression would highlight how various polices would make the economic situation worse. Evidence of this can be seen by looking no further than the collapse in economic activity that occurred in country between 1929 and 1933. As the unemployment rate would rise from 3.4% (in 1929) to 24.9% (in 1933). At the same time, real GDP would decline by 27% in four years. (Tucker, 2008, pg. 422) This is significant, because the extent of the contraction and the policy decisions made; would have an impact on how the U.S. Government responded to the economic implosion of 2008. To fully understand how these events would affect policymakers requires comparing the government's response to: the Great Depression and the 2008 Global Economic Crisis. This will be accomplished by examining: the underlying causes of each event, the responses and how it would impact the economy. Together, these various elements will provide the greatest insights as to how the actions taken by the government would shape both events.

Causes of the Great Depression

To fully understand the Great Depression requires going back to World War I. This is when the world economy would undergo a severe transformation. As the war and its lasting effects, would create a shift in the economic power base. For many European countries, they would begin to experience a decline in economic strength. As the winners of the war (the U.S., Great Britain along with France) would impose severe penalties and reparations on those nations, that were believed to have started the different events (Germany). At the same time, the United States was undergoing a tremendous amount of economic growth from the war. Where, it would create a shift in manufacturing and in the automation of agriculture. This is significant, because it shows how the war would set the stage for the tremendous amounts of economic growth throughout the 1920's (the Roaring 20's). However, by 1929 the economy in the United States was beginning to overheat, as stock prices were at an all time high and the nation's manufacturing activity would slowly begin to flatten out in August 1929. Despite this ominous sign the stock market continued to head even higher, fueled by rampant optimism. Once October 1929 arrived, the stock remained at these lofty levels (as the crash would come on the 29th). This is when the different actions taken by the government would make the effects of the Great Depression worse. (Temin, 1999, pp. 41 -- 89)

As a result, three different events would contribute to the severity of the Depression to include: the stock market crash / the Hawley Smoot Tariff, the banking crisis and the collapse in commodities prices. Together these different events would spread the Great Depression around the world.

The stock market crash and the Hawley Smoot Tariff would play an equally important part in spreading the effects of the Great Depression. What happened was the stock market crash of 1929 would provide an initial shock to the economy. Where, it would attack the wealth of many different individuals. This is because, the initial declines market sparked tremendous waves of selling that would cause a panic. At which point, the averages would continue to see consistent declines on a regular basis. As the stock market, would take out key levels of support easily. This would impact the liquidity positions, of many individuals and their personal net worth. The reason why, is because a larger number of people and financial institutions (i.e. banks, brokerage firms along with insurance companies) were investing a significant amounts of money into the market. As prices continued to head lower, this would have ripple effect on consumer spending. Where, the banks were facing a liquidity crisis because they did not have enough cash in reserve (as this money was invested in the stock and through various loans). Once their stock positions declined, this would have ripple effects on business loans. At which point, many companies began to lay people off and a downward spiral of economic activity would take place from 1929 to 1933. (Temin, 1999, pp. 41 -- 89)

As the Great Depression, was beginning to have an adverse effect on jobs, the federal government began a new initiative of raising tariffs. This was in an effort to: protect manufacturing and prevent the economy for seeing any more increases in the unemployment rate (the Hawley Smoot Tariff). However, the effects would be devastating, as the high tariffs would result in retaliatory measures from trading partners. At which point, global trading would slow down significantly, resulting in an even more pronounced down turn. (Temin, 1999, pp. 41 -- 89)

The above two events would have an impact on the banking sector, as the stock market would force many banks to face the possibility of bankruptcy. Where, they did not have enough money, to satisfy the demands of depositors. This caused fear to spread about the liquidity of the entire system. At which point, runs would become common at a number of banks around the country. This led to even further declines in economic activity, as the banks were not lending money and businesses could not finance the operations of a number of different activities. As many different large and small companies would disappear (due to the fact that they could not obtain financing). (Temin, 1999, pp. 41 -- 89)

The implosion in commodities prices were from a lack of demand from businesses, as consumer spending had slowed to a halt. This would force many manufacturers, to cut back on their use of different raw materials in the production of various goods. At which point, commodities prices would decline, leading to a cycle of crippling deflation. (Temin, 1999, pp. 41 -- 89)

Response from the Government

At first, the federal government's response was limited, as the President (Herbert Hoover) believed that they needed to take a hand hands off approach when it comes to the economy. Part of the reason for this, was because Hoover was self-made millionaire. He felt that the role of government in the economy should be: to allow various economic forces, to sort out the imbalances that were taking place. The problem with this strategy was that the federal government would do little, to spur the economy during the beginning of the Great Depression. As time went by, Hoover would engage in different actions to support the economy. However, this was that it was too little too late and it did not tackle the fundamental issues that contributed to the economic collapse. As the federal government would utilize of number of different tools: lowering taxes, providing loans to the railroad as well as other industries and raising tariffs (to protect jobs). This is troubling, because the half hearted effort from the Hoover Administration and the contradicting economic policies (i.e. lowering taxes / raising tariffs) would make the situation even worse. (Wiegard, 2009, pp. 195 -- 210)

As the effects of the Depression become gloomier, Franklin Roosevelt would engage in a new strategy called the New Deal. This is where the federal government would spend massive amounts of money on various social programs. While at the same time enacting different regulations, to protect the economy from extreme boom and bust cycles. The most notable programs include: the Securities & Exchange Act of 1934, the creation of the FDIC and the Work Progress Administration just to name a few. These different laws, agencies and programs would form the basic foundation for helping to provide a floor to the economy. Where, they would allow economic growth to: stabilize and various businesses to begin slowly hiring once more. The different regulations and programs (i.e. The Securities & Exchange Act of 1934 and the FDIC) would address the long-term issues facing the economy. As they would limit the activity of traders in the stock market and require the banking sector to follow a number of different practices. (Flynn, 2008, pp. 142 -- 147) (Khademian, 1992, pp. 33 -- 40) This is important, because the focus of the government on addressing the various economic issues helped to establish a foundation for the economy. (Edsforth, 2000, pp. 121 -- 149)

The actions taken by the federal government initially would have a negative impact on economic growth. Where, the contradictory policies and the lack of fully supporting them caused the situation to become worse. This is because the loss of wealth that was occurring from the stock market was having an adverse effect on: the banking… READ MORE

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