Paralles Between the Great Depression and the Great Recession

Winston Churchill once said, “Those who fail to learn from history are doomed to repeat it.” Never has this been clearer than in the case of the Great Recession as compared to the Great Depression. The Great Depression was a severe worldwide economic depression which began in 1929, and most economists agree that it lasted until the start of WWII. The Great Recession was a period of economic decline, said to have been the worst since the Great Depression, and it lasted from December 2007 to June 2009. This essay will mostly focus on some of the many parallels between both economic downturns. Although both events occurred in different time periods, the Great Depression and the Great Recession are very much similar to each other.

Both the Great Depression and the Great Recession were caused by the actions of the federal government. For example, in June 1930, Congress passed the Tariff Act of 1930, better known as the Smoot-Hawley Tariff Act. It was enacted in order to help protect domestic farmers and other US businesses against heightened imports after World War I. The excessive protective measures of the Act raised US tariffs to extremely high levels, which increased the amount of strain on the global economic climate. One of the causes of the Great Recession was the government loosening regulations on banks. This led to loans being given out to people who could not afford to pay back those loans. While the intentions of Bill Clinton and George W. Bush to increase homeownership among minorities were good, it didn’t factor in the immense impact it would have later down the road. Banks gave those people who couldn’t afford prime rate mortgages subprime mortgages. They had interest rates that could be twice as high as these on prime rate loans. In The Great Recession by Stuart A. Kallen, the author states that this was done because “there was a much greater chance that people with low incomes would default on their loans.” This essentially made conditions worse for low income people and would lead to thousands of homes being foreclosed upon.

Leading up to both economic crises, credit filled bubbles grew until they would “pop”. During the so-called “Roaring Twenties”, it became possible for Americans to buy new technologies now available to them through credit. Generous lines of credit were given to people who were not able to pay upfront but could show their ability to pay in the future. Many people invested in stocks, and they were brought using credit without concern because the values of those stocks kept increasing. This ended when stock prices peaked and then dipped sharply beginning on September 3, 1929. This continued until October 29, 1929, also known as “Black Tuesday” when 16 million stocks were put up for sale with no buyers, causing the stock market to collapse. This is because when all investors sell their stocks at the same time and there are no willing buyers, the value of the market begins to significantly diminish.

In the years leading up to the Great Recession, banks were encouraged by the government to loosen their lending practices. After this happened, banks began giving mortgages to people who, in the past, might not have qualified for home loans. Kallen states, “As money became easier to obtain, home prices soared, unnaturally inflated by the easy money the banks were loaning.” This led to what is called a housing bubble. The housing bubble burst simply because so many people were unable to pay their monthly mortgage payments and defaulted on them. This resulted in either the collapse, or near collapse of the world’s largest banks. This burst leads directly to the start of the Great Recession. When the crisis began, there were conservative, Republican presidents in office. During the start of the Great Depression, Herbert Hoover was in office. While he was in office, he chose to influence the economy through voluntary coordination with businesses rather than direct government action. He opposed the idea of the government helping people individually. He also gave government aid to protect businesses from the impact of the Great Depression. These policies did little to help save a falling economy during Hoover’s term in office.

A deteriorating economy under Hoover and Bush is due in large part to a lack of action by both presidents. In both cases, their refusal to act was inspired by a laidback economic ideology and an unconditioned faith in the power of the market to self-correct. The little action taken by both leaders either lacked the force necessary to avoid an economic downturn or was aimed at helping businesses rather than individuals. Also, both Republican presidents were succeeded by Democratic presidents, who had to deal with the mess left behind from their predecessors. Presidents Roosevelt and Obama responded similarly to the economic crises of their times. They both spoke about balancing the federal budget but instead had to resort to massive spending. In the past, Warren Harding had cut spending when the nation was threatened with economic hardship. Hoover, with his half efforts to help deter the crisis, had caused budget deficits and 25 percent unemployment throughout the nation. President Roosevelt, despite some early moves to cut spending in order to control the deficit left behind by Hoover, decided that a larger amount of federal spending would trigger an economic expansion and pull the country out of its economic slump. Roosevelt began the Agricultural Adjustment Act (AAA), which paid farmers not to produce as much as they had in the past. He also expanded spending on public works and targeted large subsidies to various special interests. President Obama followed his example of targeting spending to interest groups. He signed into law a $787 billion stimulus package that sent tax dollars to various cities and voting groups across the nation. Also, the increase in federal debt under Obama and Roosevelt is similar. The national debt more than doubled in Roosevelt’s first two terms while under Obama, the national debt has almost doubled as well. Critics of both Presidents have insisted that it is impossible to spend you way out of a recession. Political cartoons from both eras show how Roosevelt and Obama faced similar criticism for their plans to fix the economic crises of their respective eras.

Certain aspects of both the Great Depression and the Great Recession are different. An interesting point to look at is how many banks foreclosed during the Great Depression as compared to the Great Recession. Between the months of January and March 1933, 9,096 banks failed. This number represented 50% of the banks in the United States. However, from December 2007 to May 2009, the United States lost 57 banks, which is 0.6% of our total banks. As you can see, there is an immense difference between the effects of the economic crises on the banks of their respective times. In addition, the unemployment rate at the height of the Great Depression was 25%. Unemployment during the Great Recession reached about 10%. This is a noticeable difference, as having a quarter of the working population go without work and remain hungry was a major influencer of civil unrest and strikes. Those same levels were not reached during the Great Recession.

The Great Depression and the Great Recession are similar to each other and are different only in a few respects. The federal government, in relatively indirect ways, influenced both economic crises. They also had similar responses to them as well, as an interesting point to make is that Republican presidents were in office when both the Great Depression and the Great Recession began, and Democrat presidents were the ones who had to fix them. However, some important differences between both events is the number of bank foreclosures and the unemployment rate. So perhaps we should ask and judge for ourselves is if those who don’t learn from history are doomed to repeat it.