The Great Depression and the Great Recession
The relationship between the Great Depression of 1929 and the Great Recession of 2008 has attracted a lot of attention from various economists and even other professionals. Some of the micro-economic fundamentals that have been used in their comparison are the fall in the manufacturing production, the crashes in the stock market, as well as unemployment rates. Though a section of authors have limited their comparison to the U.S, this paper will look at the similarities and differences of the two financial crises in the global scale. In its second section, the paper will evaluate the effectiveness of Keynesian demand policies in both of the two cases.
Key words: Keynesian demand policies, Great Depression, Great Recession, crises.
Both the Great Recession and the Great Depression have their origin from the United States. However, they grew to become global phenomena. Thus, it is only in order that the two crises are looked at in a global scale. In fact, the great transmission of the Great Depression occurred internationally through commodity prices, trade flows and capital flows. On the other hand, their experiences are totally different from that of the US. Almunia, Benetrix, Eichengreen, O’Rourke, & Rua (2009) add that from the 2008’s, spring events outside the United States took an even graver turn. Other countries experienced larger falls in equity prices, manufacturing production and exports.
Overall, the decline in manufacturing experienced in 2008 was just as severe as that after the peak of 1929. In a similar way, the fall as was experienced in the stock market in the U.S paralleled that experienced in 1929 during the first 12 months of the crisis. However, the fall in the global market was faster in 2008 compared to what was the case with 1929. The same was experienced in that effect on trade by the two crises. Almunia et al. (2009) observe that the effect of the Great Recession was also greater than that of the Great Depression in as far as destruction of trade is concerned. He observes that the rate at which world trade fell in 2008 was faster than that which was experienced during the Great Depression. Equally, when looked at in general, various countries responded through various fiscal and monetary policies faster during the recession than was the case during the Great Depression of 1929.
The Comparison of the Two Crises
As shown in the figure below, the June 1929 peak was followed by a more rapid fall in the US industrial output than was the case in the period following the December 2007. However, to show the shifts in global industrial output as it occurred during the two crises, the two indices can be plotted from their peaks as were experienced globally during the two periods. Almunia et al. (2009) places the peaks in April 2008 and June 2009. It makes it clear that the first year of recession experienced a faster rate of fall in the industrial production for the two crises. The rate was lower during the spring after which it started rising. This is different from what was experienced during the Great Depression, which had two different recovery periods with output falling on an average for the first three years following 1929 (Almunia et al., 2009).
Figure 1. US Industrial Production compared for the two periods.
Figure 2. World Industrial Output Compared. Source: Almunia et al. (2009).
The difference is brought about by the location of the industrial production. During the 1929 Great Depression, industries were majorly located in North America and Europe. Since, the industrial production is what collapsed disproportionately, its disproportionate effects were felt most in employment and output. The international trade was still more like exchanging of the southern primary products for the industrial goods from the north (Almunia et al., 2009).
Thus, the Great Depression was not felt much in the developing regions like Africa, Latin America and Asia which were dominated by primary productions like agriculture. In the same way, there was a rapid fall in the international trade in the already manufactured goods than that in the primary products. The result was deterioration in the terms of trade in the South due to a rapid fall in the prices of various commodities compared to that of the manufactured goods. It also resulted in lower income by the southerners though the output was generally more stable (Almunia et al., 2009).
The 2008 recession hit when industrialization had spread all over the world. This meant that the output was going to fall rapidly across the globe. However, the first one year, beginning with April of 2008, saw the falling of industrial output at a similar rate just as was the case during the Great Depression. The initial decline was not very alarming since industry only contributed to a smaller share of employment and GDP than was the case in 1929 (Fishback, 2010).
Client says about us
I needed help with a Psychology essay, this was just what I needed. Definitely worth the money.
Really, this 1108535372 has been another amazing job of your writers. The latest essay I've ordered from your service is the proof you guys are really the best and why I continue using your assistance!
I would like to express my appreciation for the amazing job you did for me. I am sure I'll get a good grade for this essay. How could it not? Thanks for your help.
All I can say is that I am very impressed. My writer completed an order on time and followed every single instruction I gave! You have done a great job guys, many thanks!
Man, this thing is getting better and better as I learn more about it. 123helpme did exactly what you said it does.
In terms of trade, the quarterly data as provided by the monthly bulletin published by the League of Nations shows that the trade declined by 36% between the third quarter of 1932 and the fourth quarter of the previous year. It is evident that there was a more rapid fall in world trade during the year one of the Great Recession than during the year one of the Great Depression. The period running to January 2009, right from April 2008, saw world trade fall by 20%. This was more than half of what was witnessed three years following the Great Depression (from 1929-1932). There was then stabilization with a slight fall the next four months prior to moderate increase in June and a vigorous one in July (Almunia et al., 2009).
The most convincing explanation given for grater elasticity in the world trade during the recession is the change in the trade composition. Almunia et al. (2009) note that in 1929, manufactured goods contributed up to 44% of world merchandise trade, while in 2007 this proportion had reached 70%. In terms of equity markets, the stock markets were rapidly affected in the early stages of the Great Recession compared to the case with depression.
Another difference is found in the kind of policy responses fronted during the two crises. The late 2008 saw an extremely aggressive cut in rates by the Fed and the Bank of England. It replaced the initially experienced less aggressive move by ECB. Another issue that stood out was the raising of interest rates by Germany, the U.K, the U.S and Japan in 1931 and 1932. This was a perverse effort by these countries to defend their currencies. As can be evidenced in the figure below, both crises experienced a six or five months of the lag period prior to the response by the discount rates to the downturn. This was different from what happened in 2007 when the crisis rate was cut in a more rapid way (Almunia et al., 2009).
Figure 3. The discount rates by the Central Bank (6 Country Average; Germany, the U.K, the U.S and Japan, Sweden and Poland)
Source: Almunia et al. (2009)
The way in which countries responded policy wise to the recession was because the major economies were experiencing flexible rates of exchange at the moment. This triggered the central bank to respond more aggressively. On the other hand, during the Great Depression, those countries which were on the gold standard could not take part in expansionary monetary policy. Equally, such countries were more reluctant to fiscal stimulus, as this would attract imports leading to draining in reserves. However, they also went into deficit because of the decline in their revenues.
The Effectiveness of Keynesian Demand Policies in Both Cases
The Keynesian policy breaks its explanation of the Great Depression and the Great Recession into consumption, government purchase and investment. The argument is widely consistent with the occurrences of the Great Depression of 1929 (Farmer, 2012). This is because there was a great reduction in aggregated demand which adversely affected the output of the economy. It resulted into a recessionary gap which did not change for over a decade. The aggregate demand’s fall started with a collapse/reduction in investment. The 1920’s investment boom made banks expand their capital stock. This saw firms cutting back on investment since they no longer needed much new capital. The 1929 crash in the stock market greatly shook the confidences of businesses resulting into a further reduction in investment. This saw real gross private domestic investment plunging nearly 80% during the first three years (from 1929-1932). There was much volatility of investment in the first year following the Great Depression (“A brief history of microeconomic thought and policy,” n. d.).
Equally, a reduction in aggregate demand was based on the fact that the crash in the stock market led to the reduction of the wealth held by those who owned stock at the time while reducing the consumption rate of the general population. Equally, the consumer confidence was greatly reduced by the same crash in the stock market. The reduced confidence and consumption worked to shift the aggregate demand curve towards the left (“A brief history of microeconomic thought and policy,” n. d.).
The fiscal policy also contributed to this reduced demand aggregate. This is because of the fall in income and consumption which led to the falling in government tax. Most governments raised their tax rates in an effort to have their budgets remain balanced. A good example is the Federal government which doubled its rates of income tax in 1932. However, this only worked to reduce aggregate demand and consumption making it harder for governments to correct the situation. Most governments had to cut purchases while increasing their taxes (McKenna, 2013).
The same was the case with the Great Recession. As stated in “A brief history of microeconomic thought and policy” (n. d.), George Bush had promised to cut down on tax rates, but this did not help matters. The economy continued to become weaker and weaker. As a response to the recession, there was a resurgence of interest in the usage of discretionary increases in spending by the government. It was evident that the temporary tax cuts only stimulated the economy to a smaller extent. This was because a greater part of what was realized was not spent. Instead, it was saved. In response to the Great Recession, both government and Fed came up with measures to lower the federal funds rate target. They also purchased long-term securities to help lower other interest rates. Another related approach was the provision of business and consumer related loans (“A brief history of microeconomic thought and policy,” n. d.).
You can ask us “write my descriptive essay” on this or any other topic at 123HelpMe.org. Don’t waste your time, order now!
In conclusion, both crises were preceded by an extended period of growth in the world economy. Equally, because of the easy credit flow, there were speculative bubbles. This gave rise to stock market and property based excess. Lastly, both of the crises experienced a staggering decrease in the industrial production as well as increased employment opportunities. Equally, there was a change in the nature of capitalism system to financial capitalism from productive industrialization. Finally, there was much improvement in the way various countries reacted to the crises in terms of policy. For instance, the United States of America preferred intervention by central bank and Keynesianism to the Laissez-faire policy which was dominant during the Great Depression. It can also be argued the Great Depression confirms Keynesian ideas since it all started with a sharp reduction in aggregate demand. It was sustained by the recessionary gap.