Compare and Contrast Great Depression Essay Example for Free

contrast and Contrast Great Depression EssayThe 1929 stock merchandise crash and the subsequent bulky clinical low was the biggest sparing crisis that the knowledge base has experienced. The depth and length of the crisis and the suffering that it caused is legendary. Therefore when the world(a) financial crisis struck in 2007, legion(predicate) rushed to proclaim that we were ab let out to experience a nonher depression on a comparable scale, or at least what some provoke termed a enceinte recession. This bear witness pull up stakes comp atomic number 18 and contrast the two economic crises to analyse the key similarities and differences between the two. To do this, the essay go out firstly provide an outline of the conditions that led to the 1929 crash in the economy. Moving on from here the essay will then look at the indemnity responses that were implemented to tackle the crisis before analysing the conditions that precipitated the 2007 financial crisis and the policy responses, to draw out the similarities and differences of each of the crises, and to as sealed were any lessons learned during the current global crisis from the policies of the great depression era. Fin completelyy the essay will conclude with a discussion of the main layers raised by the depth psychology of both crises and a look at the future prospects for retrieval.Capitalism is a brass of economic tuition that has crises as an inherent feature. Many crises absorb occurred both before and after the 1929 stock merchandise crash, only the length and depth of the great depression has made it the point of reference for judging the severity of a financial crisis. Much debate has occurred over the causes of the great depression. While many see the late October 1929 saucy York stock market crash as the defining feature of the crisis, the reality was much more abstruse and multifaceted. As (Teichova 1990, p.8) suggests, the great depression was the deepest, all embr acing (agricultural, industrial, financial, social and political) and longest crisis with catastrophic consequences. As hale as this, although the United States led the way, this crisis was global and the rest of the world also experienced depression. So, any analytic thinking of the great depression must look at the various f exerciseors that caused and perpetuated it. The 1920s in America deplete been described as the roaring twenties. After the devastation of the first-world-war, during the 1920 to 1925 period US and foreign economies were experiencing a thrive. During that period, world mining and manufacturing output grew by nearly twenty portion (McNally 2010, p.63).However, in terms of inequality the vile were less poor but the complete weregetting richer at a graze of four to one. As well as this, four fifths of American had no savings compargond to twenty-four thousand families at the authorise who held a third of all savings combined (Canterbery 2011, p.13). Duri ng the boom, night clubty pct of all Americans aphorism their incomes spill in relative terms (McNally 2010, p.64). A factor in this was an increase in union-busting and anti-labour laws which increased income inequality. As well as this, agriculture, coal mining and textile industries were suffering from a post-war hangover which saw their favorableness scorn and in many instances wiped out. This inequality which concentrated wealth in so few reach led to a huge increase in consumer denotation which in turn sparked off ascension levels of private debt and a massive sorry burble in the form of a property boom in Florida (Canterbery 2011, pp.13-14). The mania of speculation was not confined to property and between May 1924 and the end of 1925, thither was a huge eighty percent rise in stock prices. The trend continued and as Galbraith (2009, p.16) has suggested, in early 1928, the nature of the boom changed. The mass escape into arouse believe, so much a part of the specul ative orgy, started in earnest.During 1928, the Times Industrials (a pre-cursor to the DOW) gained a huge thirty-five percent, from two-hundred and forty-five points to three-hundred and xxxi points. To maximise their gambling profits, many investors financed their purchase of stocks with borrowed money, with speculators buying one-thousand dollars of stock by putting down one-hundred dollars (Canterbery 2011, p.15). Of course, capitalist economys bubbles must always burst, and this was no exception. The US real economy was showing signs on a slowdown long before the stock market crash. However, on Wednesday October 23rd 1929, a drop in the stock market lost four months of previous gains and the following day panic selling began. This was curtly halted by a meeting of the nations biggest bankers who promised to pool their resources to halt the slide. Their efforts however were futile and on Black Tuesday October 29th the bottom fell out of the market, giving up all of the gains of the previous division (McNally 2010, p.65).Most economists agree that the great depression that ensued lasted for over ten old age. Its economic affect was striking as GNP fell from a peak of $104.4 zillion in mid-1929 to $56.6 billion in 1933. Its social impact was counterbalance more harrowing as twenty-five percent of the US civilian labour forces was unemployed by 1933, the worst point of thedepression (Canterbery 2011, p.18). There are a number of competing explanations as to why the crisis was so severe. Explanations can be grouped into the two categories of monetarist and non-monetarist. For example, in a mixture of the two Ben Bernanke (1983) suggests that in that respect were three interlinked factors that propagated the great depression. The first was the failure of financial institutions, in particular commercial banks. The share of failing banks in 1930 was 5.6% jumping to 12.9% in 1933 and this left a situation whereby in 1933 there were fractional the number of banks that had been operating in 1929 (Ibid, p.259).Bernanke goes on to cite s shed light ons and bankruptcies as key, with the ratio of debt service to national income dismissal from nine percent in 1929 to nearly twenty percent in 1933. This was pervasive across all empyreans with home mortgages farm mortgages, personal debtors and even state governments defaulting on their obligations (Ibid, p.260). However, key to Bernankes view was the correlativity of the financial crisis with macroeconomic factors. The crux of this view was that the financial crisis affected the macro-economy by reducing the quality of certain financial services, primarily realization intermediation (Ibid, p.263). In line with the monetarist view, it could also be argued that the Federal make did not help matters. Its policy at the time was only to increase the credit base in line with requirements of trade, which basically meant that as businesses were afraid to borrow, the Federal Reserve did not increase the money supply. close to similar to the monetarist elements of Bernankes analysis is that of Friedman and Schwartz (1971,pp. 359-60) who argue that the crisis that originated in the United States was a domestic construct which was drawn-out and deepened by a failed policy of failing to cut the discount rate, which meant a failure to provide credit and expand the currency. Kindleberger (1986a) taking a similar monetarist position but focusing more on international factors suggests that the world depression stemmed from reparations and war debt, the overvaluation of the pound, the return to the gold standard in Britain and an undervalued French franc. These factors were aggravated by a fall in commodities and a rise in stocks in sassy York. From a non-monetarist perspective US government actions were no interrupt, with the introduction of the Smoot-Hawley Tariff in mid-1930, sparking of a wrap of protectionist tariffs around the world and a trade war which saw world tra de figures nosedive (Canterbery 2011, p.19).Thedeflationary process was exacerbated by the huge levels of unemployment, which combined with different factors to initiate the multiplier/accelerator interaction, reinforced by wage-cut enforced under-consumption as wages fell for manufacturing production workers by at least thirty-one percent between 1929 and 1933, as well as debt deflation and international interactions (Devine 1994, p.166). While this was happening, consumer prices only fell twenty percent during the 1929-33 period. This, as Devine points out helps to explain that falling consumption was a major factor in the go under in GNP during this time, more so than previous or subsequent recessions (Ibid). There are others such(prenominal) as Temin (1976) who suggests that monetarist explanations are wrong, and it was consumption and spending that declined first, therefore leading to a tightening of the money supply. Therefore, it was not monetary factors alone that caused t he depression.Taking a variant approach to explaining the depth and length of the depression, Kindleberger cites the lack of a lender of last resort as the major factor preventing any form of fast recuperation (Kindleberger 1986b, p.4). This he suggests was due to Britains inability after the First introduction War, and the United States unwillingness to act in that regard. What each of these arguments above show is there is still no consensus on the policy responses that would have prevented such a deep depression occurring. Such a lack of a consensus has also been a feature of the current global crisis. Since the global financial crisis broke out, many have rushed to make comparisons between it and the great depression. However, before one makes these comparisons, an analysis of the fundamental differences in the nature of the capitalist dust between now and then must be undertaken.After the World War boom in output and the post-war move to Keynesian economics, which essential ly saved capitalism from self-implosion, the emergence of neoliberal capitalism in the latter 1970s in the form of Reaganism in the US and Thatcherism in Britain ushered in a spic-and-span era of capitalist development that was distinctly different from its previous incarnations. This period of capitalist modification saw the creation of the era of what Canterbury has termed casino capitalism (Canterbery 2011, pp.83-121). He suggests that this era began with three powerful forces converging. These were monetarism, which Milton Friedman advised Regan would run down inflation with minimal effect on employment or production, the influence of theneo-Austrians who sought to degrade state influence over entrepreneurs through and through deregulation and finally, the pervasive idea that less taxes on the rich produced the trickle-down effect (Ibid, p.83).Regans policies during this era, continued under the Clinton administration gave huge power over to Wall St through deregulation, and contributed to a huge shift from production to financial services. As the financial sector grew its asset base, it became a much bigger part of the national economy. This can be seen in the fact that between 1978 and 2005, the financial sector grew from 3.5 percent to 5.9 percent of the US economy in GDP terms. To put this in perspective, from the mid-thirties to around 1980 the rate of growth for the financial sector was roughly the same as that of the non-financial sector. However, from 1980 to 2005 financial sector profits grew by eight-hundred percent, compared with two-hundred and fifty percent for the non-financial sector (Ibid, pp.116-117).This form of capitalism, where value and profit are not produced but the result of speculation is a form that gives huge power to unelected rating agencies and bankers to set the agenda, which even governments and international institutions find difficult to alter. It was under this system of capitalism that the global financial crisis eme rged. Many different arguments for the causes of the global crisis exist and whilst it can be difficult to pin down the exact causality because of its global nature, there is agreement on a number of factors. Just like its sister crisis the great depression, before the global crisis struck, the global economy went through a boom period with the world economy exploitation at a faster rate between 2001 and 2007 than in any other period in the historical thirty years (Wade 2008, p.23). Most agree that the crisis was sparked by the subprime mortgage bubble collapse in the United States. However this spark was not the sole cause of the crisis. Just like the great depression, the factors that caused the crisis were numerous. Although signs of an appear crisis first appeared in 2006-7, it was not until 2008 when banks such as Lehman Brothers were exit to the wall and financial assets were crashing that the full bound of the crisis was realised. As a result, flows of credit dried up an d economies the world over started to suffer.However, this crisis was not solely a monetary crisis and had deeper dynamics at play. In particular, the financialisation of capitalism being built upon debts as a subject matter of making profit (McNally 2010, p.86). The subprimemortgage crisis is illustrative of this. For example, in the year 2000 there was $130 billion of subprime modify in the US, backed up with $55 billion of mortgage bonds. Yet by 2005, those figures had jumped to $625 billion in subprime loans backed by $500 billion in securitised bonds (Ibid, p.103). The speculative orgy, as Galbraith termed it speaking on the 1929 crash, was back with a bang. What exacerbated the orgy more was the creating of innovative financial instruments in the form of credit default swaps (CDS) and other debt securities. For example, by 2006 the CDS on mortgage bonds was eight times the value of the bonds themselves, so when the crisis hit, that wealth was wiped out (Ibid, p.103).The Euro pean context experienced similar problems as contagion spread throughout the world economy. change imbalances within the Eurozone created by the power of the German economy, in particular its exports produced vast wealth within Germany, generating credit that was more than was required for domestic postulate. The result was an outflow of cheap and easy credit to peripheral European states. This in turn with low interest rates created the basis for a speculative property bubble in places such as Ireland and Spain, and a rise in consumer debt across Europe (Avellaneda and Hardiman 2010, pp.4-5). This, coupled with the ECB having light regulatory practices and liquidity responsibilities, and the fact that the Euro project created an quasi-federal state with a centralised monetary and exchange rate policy, but had no financial control over individual states led to a disaster of structural design in the Euro which prevented adequate policy responses from individual states, who instea d were burdened with a one coat fits all, centralised Franco / German led response. It is clear that the immediate causes of the crisis were centred on excessive debt leverage or careless lending (Wade 2008, p.27). Much of this debt leveraging was in the form of the complexly structured credit securities, like the CDS, and when market panic set in following the collapse of Lehman, and this huge default risk pushed investors towards the tipping point.However, as Bernanke (2010) has pointed out, many factors were at play. Although the most prominent was the prospect of losses on the subprime market when the housing bubble burst, the system vulnerabilities as well as shortfalls in government responses explain the severity of the crisis. For example, the sudden stop in June 2007 of syndicated lending of asset backed securities to large borrowers. Other factors included theoverreliance of banks on short-term wholesale funding, deficiencies in private sector risk management, an over-rel iance on ratings agencies, excessive leverage on the part of households, businesses and financial firms, statutory gaps in regulation on special purpose vehicles and a failure of existing regulatory procedures ecumenic (Bernanke 2010). Although causality had similarities between the United States and Europe, the policy responses to deal with the crisis have been markedly different. Quite early into the crisis, by chance learning from past mistakes from the great depression, the US government approved various Keynesian inspired fiscal stimuli and financial and auto sector bailouts. In particular, the Troubled Asset Relief Program (TARP), a $700 billion rescue fund for the banking sector which bought toxic loans at chastend rates (Nguyen and Enomoto 2011). This policy has been seen to be a relative success with an estimated final cost of $32 billion to the United States taxpayer (Congressional Budget Office 2012).In contrast to this, the European solution has been overwhelmingly au sterity based, and the cost of the crisis being mainly burdened by the taxpayers of Europe. In particular, the Irish taxpayers bill for the bailout of one bank, Anglo Irish will cost the taxpayer more than the do final cost of the TARP program in the United States. In this regard, it does not seem that lessons from the great depression have been learned in a European context. When we look to the rates of unemployment over the past number of years, it seems like the American policy of stimulus may be working slightly better than the European austerity agenda. For example, in the US unemployment rose sharply after the onset of the financial crisis going from 4.6 percent in 2007, to 7.2 percent in 2008, 9.3 percent in 2009 and 9.7 percent in 2010.However, in 2011 there has been a decline in unemployment to 9 percent (Index Mundi 2012). The European Union (twenty seven members) on the other hand has seen its unemployment rate grow from 8.3 percent in 2006, to 9 percent in 2009 and 9.7 percent in 2011(United Nations Economic Commission for Europe 2012) to a current figure of 11.7 percent (Eurostat 2012). So, how does the global crisis match up to the great depression? It is obvious that there are a number of similarities between the two crises. For example, with both crises there was an extended period of economic growth preceding the crashes. Each of the crisis periods also saw speculative bubbles based on the flow of easy creditwhich fuelled both property based and stock market excess. Both crises also saw staggering drops in Industrial production and increases in unemployment. However, there are also key differences between the great depression and the global crisis. Primarily, the nature of the capitalist system has changed fundamentally from productive industrialisation to financial capitalisation.The policy responses of governments have also showed that lessons have been learned, especially in the American case, where Keynesianism and central bank interventi on has been preferred to the Laissez-faire attitude during the great depression. In a European context, the decision to make taxpayers foot the bill for the losses of financial speculators marks a departure from the policies of the great depression where speculators suffered heavy losses. There are of course other key differences between the two crises in-so-far as although initially the global crisis seemed every bit as bad, if not worse than the great depression, there are now signs that this may not be the case. For example, by measuring from the peaks in industrial production the decline in industrial production in the nine month period from April 2008 was at least as severe as in the nine months following the June 1929 peak (Eichengreen and ORourke 2009). Similarly, in that initial nine month period, global stock markets were falling even faster than in the Great Depression and World trade was also falling much faster than in 1929-30 (Ibid). However the authors of this study ha ve rewrite their analysis for 2012 and it paints an altogether different picture.The levels of industrial production had shown shoots of recovery over the past couple of years but growth of global industrial output now appears to be slowing. The upturn had been promising, but this follows months when production was essentially stagnant. Notably in the Eurozone, industrial production declined (Eichengreen and ORourke 2012). Since initial early forecasts, global trade had showed signs of recovery unless trade is now also fluctuating without direction, at levels barely higher than those of April 2008 (Ibid). As the authors also point out, while equity markets have recovered to a large degree compared with their initial drop, it is worth sight that world equity markets remain considerably below pre-crisis levels (Ibid).The somewhat gloomy outlook is confirmed by the latest United Nations World Economic Situation and Prospects pre-release document which states Four years after the sm ash of the global financial crisis, the world economyis still struggling to recover. During 2012, global economic growth has shortened further. A growing number of developed economies have fallen into a double-dip recession. Those in severe self-governing debt distress moved even deeper into recession, caught in the downward spiralling dynamics from high unemployment, weak aggregate demand compounded by fiscal austerity, high public debt burdens, and financial sector fragility (United Nations 2012, p.1).So, although there are signs that the global crisis may not be as severe as the great depression, recent economic forecasts do not suggest that there will be a clear path to recovery in the near future. Capitalism has been proven to be susceptible to crises and cycles of boom and bust. The two cases here have been the most high profile of those crises. It does seem that some of the lessons of the great depression have been learned to reduce the severity of the global crisis. Howeve r, only time will tell if these lessons will ultimately stop a double dip global recession and if lessons can be learned from the global crisis for the inevitable neighboring financial crisis that will come down the line.