Great Depression versus Current Recession

Questions to answer:

1.   How did the Great Depression start?

The Great Depression started when the New York Stock Market crashed on October 29, 1929.  Previously before the stock market crash, the Roaring Twenties (1920s) was a very productive and prosperous decade.  Prices in stocks kept increasing and people constantly put their money in investments even though it was really risky.  They were too confident and believed that the successful of the New York Stock Market will never end.  Many people wanted to buy stocks but not everyone had the money to buy them.  So, “buying on margin” was very popular in the 1920s.  People only paid 10-20 percent of the price of the stock.  The only risk of doing this is if the price of the stock fell lower than the amount borrowed, the buyer has to pay back the loan immediately.  If buyers do not pay back the loan immediately, people will run into debt issues and that is how a stock market starts to crash and prices start to drop.  This was the case in 1929.  People hurried and put their money on the stock market and banks placed customer’s money on the market too.  People were too confident in the stock market and forgot about the risks to it.  As a result, stock prices started to drop; people who bought on margin did not have the money to pay back to the brokers.  As a result, the stock market crashed and this initiated the 12 year depression.

2.      How did the current recession start?

The current recession started back in September 2008 where there were many American financial corporations which filed bankruptcy.  Much of the American economy involves making loans with other companies, and general loans and mortgages on houses and cars.  People were buying many of these expensive items even though they did not have the money to buy them in the first place.  Banks could be at fault for initiating the recession because they approved loans even though the people did not have the income to pay off the mortgage.  This caused a chain reaction throughout the United States as mortgages of houses were no longer profitable.  People could no longer afford mortgages which caused a decrease in price of the houses.  With a decrease in price of houses than its original prices, investors and individuals could no longer put their houses on the market to make a profit.  Many banks ran into bankruptcy in 2008 because many people were unable to pay off their mortgages.  Loans are a major income for banks.  If their loans are not paid back by individuals, the bank cannot lend money to other people and businesses.  The bank suffers the loss if the mortgage is not paid back.  Before you know it, there were many occasions where many people were having trouble paying off their loans.  Many banks suffered the loss and they soon went into bankruptcy as they suffered the loss.  Many banks had no other choice but to turn to the government and ask for a bailout to prevent bankruptcy.  Later on the crisis of bad credit started spreading to other countries which eventually led to a global recession.

3.     How did the government take part following the event?  Were / are they successful attempts?

During the current recession, the U.S. government gave many bailouts to many major industrial companies and major banks that were about to fall into bankruptcy.  Government bailouts were mostly given out to the “Big Three” (Chrysler, General Motors, and Ford) Company.  In December 2008, Bush agreed with an emergency bailout worth $17.4 billion.  That money was going to be distributed to companies on the verge on bankruptcy during the months of January and February of 2009.  Also the U.S. government and the Canadian government decided to cut their interest rates in order to increase demand from consumers.  People started to buy goods and the economy began to recover and right now today, the economy is still recovering from the financial crisis in 2008.

In 1930 during the Great Depression, market prices started to fall.  Sales decreased and many industries and manufacturing companies had to slow down on production.  The decrease in production led to layoffs in factories, which meant less income for families, and less spending on consumer goods.  As a result demand for goods decreased in the Great Depression.  Many people were unemployed during the Great Depression.  The government had to give relief payments (called “pogey”) to the people who had no source of income.  At the beginning of the 1930s depression, the government was Mackenzie King.  King believed that the economy would recover on its own.  When Canadians turned to him for financial aid, King had no intention of giving any money to them.   King failed to understand the issue of unemployment and it cost him the election of 1930.  In 1930, R.B. Bennett came into power.  The first action he took was that he gave the provinces $20 million for work-creation programs.  He believed spending would improve the economy but as a result it did not benefit the economy.  Then Bennett decided to raise tariff rates by 50% to protect Canadian industries.  In the long term run, this did more harm than good.  Instead, this erected trade barriers against Canada.  Also, Bennett established work camps for the unemployed to encourage people to work and he tried to improve the economy.  However as a result, the economy did not improve from the government actions.

4.   What factors are present now that were not present during the Great Depression?  (i.e. banking, online resources, etc.)

During the time of the Great Depression, there were fewer restrictions on issuing loans.  Banks try to regulate who should receive loans and who should not receive loans.  For example, banks ask for your personal finance information such as the amount of income earned and your history of using credit.  If you have a bad credit, the bank may reject you for issuing a loan.  During the 1930s when the Great Depression started, banks were not as regulated as today.  Since they did not have Internet back in the 1930s, they could not check your personal history of credit and other financial data.  As you can see Internet plays a huge factor in our current recession and the Great Depression.  With the Internet, banks can check the information of a specific person in a matter of seconds.  However during the 1930s it would be very difficult for bankers to check out financial data without any kind of advanced technology.

5.     How did these two affect United States’ GDP?

GDP refers to the value of goods and services produced in a country in a given year.  Stock market prices also fell as demand was low.  There were more goods being produced than sold.  Businesses had to cut back on their production because sales were coming in slowly.  This decreased GDP because fewer goods were being produced.  Businesses had to lay off many people due to slow sales and as a result many people were unemployed during the Great Depression.  The unemployment rate increased from 3% to 25%.  Many people had their wages fall by 42%.  With such a high unemployment rate (25%), there are less goods and services being produced.  Global trade started to slow down as more goods were being produced than being sold.  As a result, GDP was cut in half from $103 billion to $55 billion. 

During the current recession, businesses stopped expanding, unemployment increases, and housing prices decline.  It all started off with the decline in housing prices in the U.S. market.  In the first quarter of 2008, the GDP dropped 3.8%.  At the beginning of 2008 the GDP was $14.72 trillion but at the beginning of 2009, the GDP decreased to $14.33 trillion.  During the recession many people in the United States were laid off which increased unemployment rate.   There was a low demand for goods during the recession so production was cut back and GDP slowed down during 2008 when the current recession occurred.  Global trade slowed down as goods were being produced faster than they were being sold.   

6.      6.     Reflection:  In your own words, tell me which one has made more of an impact on the world.

In my opinion, I believe that the Great Depression made more of an impact on the world than the current recession because during the Great Depression, unemployment rate reached up to 25%.  In the current recession, the unemployment rate only reached up to 9.4%.  The unemployment rate was approximately 2.5 times higher than the unemployment rate during the current recession.  In the Great Depression when there is an unemployment rate of up to 25%, the GDP will significantly decrease since 1 out of 4 people are unemployed.  Many people had to rely on government relief during the 1930s to buy food.  The government relief was never enough to cover all their basic needs for life.  As a result many people were homeless and they traveled from one place to another to find jobs but were unsuccessful.  During those times, people were desperate to survive as they needed more financial help from the government but the government ignored their requests and the government did not come up with a solution to fix the unemployment issue.  In today’s society when we have a recession, like the one we are still recovering from, the government offers more assistance than back in the old days.  The government provided bailouts to government in the verge of going into bankruptcy and the government would help the people in financial need.  The government in today’s society cares more about the citizens then the government in the 1930s.  Also in today’s society we have more advanced technology than the 1930s.  In today’s banking systems, we can control and manage transactions easily in a matter of seconds where in the 1930s there was no Internet and computers.  So recording transactions was impossible with so much people during the Great Depression.  Also computers help us solve problems much faster than humans.  If there is a problem in the banking system in the modern day, we can refer to the computer and detect the error in a few minutes.  If there was a problem in the banking system during the 1930s, it would take longer for people to find out the problem and the problem will cause the whole system to malfunction.  Overall I just have to say that the Great Depression was a worse experience than our current recession due to their lack of technology back in the days.

Marking:

·        Please use 5 resources for your references.

·        Insight of reflection

·        600 words

References:

1.       1.        http://en.wikipedia.org/wiki/Stock_market_crash
2.      http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
3.      http://history1900s.about.com/od/1920s/a/stockcrash1929.htm
4.      http://www.suite101.com/content/the-start-of-the-global-financial-crisis-2008-a88065
5.      http://cashmoneylife.com/economic-financial-crisis-2008-causes/
6.      http://www.guardian.co.uk/business/2008/oct/13/creditcrunch-marketturmoil1
7.      http://www.econbrowser.com/archives/2009/01/oh_yes_its_a_re.html
8.      https://www.cia.gov/library/publications/the-world-factbook/geos/us.html