The Great Depression, Reaction Paper Example

Throughout the history of the United States, there have been several periods in which has defined the nation. The impact in which there are consequences to the disorganization and the lack of good decision that have resulted in the people feeling the effects. The financial crisis in the United States might feel like much of an afterthought although occurring less than 5 years ago, but the economy as well as the rest of the world is still dealing with the aftermath. The financial crisis that hit the United States in 2008 and effected the rest of the world, closely resembles the consequences, and the characteristics of a similar time in American history known as the Great Depression.The Great Depression was a troubling time in which many felt that they would never recover from, the four years that the period lasted had a significant impact on the business world, as well as a society, and a part of history in which people were supposed to learn from.The current financial crisis has shed light on the how when compared to the Great Depression in 1929, leaders should have learned from the mistakes and prevented a catastrophic consequence that is still being felt throughout the global environment. The purpose of this purpose is to go throughout history and provide similarities and differences of the financial crises from the Great Depression, the Bull Market in the 90s, and the Financial Crisis of 2008.

The Great Depression is described as one of the worst economic downfalls in the U.S economy which effected most of the world. Before the crash of the stock market, many economists were not variably aware of the bubbles, bursts, and the recessions, but many that watch the economy speculated that it would soon decline. The Great Depression occurred in 1929, but it was a long time coming throughout the 1920s. A combination of immense unequal distribution of wealth and the stock market crash that sent the propelling into a downward spiral. Researchers still negate the ultimate reason in which caused the Great Depression, but they realize that it was due to the weakness in the structure of not only the United States economy but also in the international economy. It is too simplistic to consider the cause of the Great Depression was just due to the stock market crash in 1929, it was a process that culminated by the carelessness in which the leaders and the wealthy were recklessly investing in funds into expansion.

Started in 1901, The U.S was experiencing record profits as many reinvested in much of the funds into there were in expansion. (US History) By 1907, the stock markets created a panic in the New York Stock Exchange (NYSE) that led to stocks failing, which led to banks closing. (Investopedia) At the time, there was no Federal Reserve to place money back into the market and the loss was left to JP Morgan the investment banker to refuel Wall Street. JP Morgan was able to get other people in the rich class to put cash back into the banks, this led the government to create the Federal Reserve, and however regulations still were not enacted. By the time 1929 had rolled around, the stock market bubble was about to burst. The workers of the companies could no longer fuel the funds expansion, and the slowdown was an inevitable event. Corporations were raking in record profits, and the wages given to the workers were incrementally rising, but the widened in distribution of wealth was setting up the middle and lower class for failure. During this time, most of the wealthy saved up their money instead of putting back into the economy. In an attempt to keep up with the 1 percent, the middle class were stretching their pockets as they were purchasing household appliances on payment plans, and automobiles that were all the rage thanks to the Ford Company. The unequal distribution of wealth was evident in the income that Henry Ford reported at $14 million. While moreAmericans had the average income of the middle class was just around $750. This was supported through the increase in manufacturing output, which increased to over 32 percent, and the wages increased 8 percent. (PBS) At the same time the profits of the corporations rose over 62 percent, and the federal government contributed to the gap in wealth as the leadership catered to the wealthy class.

The structural weakness of the economic system contributed immensely as the banking industry was operating without giving guarantees to the customers, and help to create panic when there were slopes in the economy. Unlike today, there were few regulations that banking industries were placed under. The banks would often lend money to people to invest recklessly in stocks that would fail. The prices of agriculture in the 1920 were low, and the farmers were unable to create any recovery. (US History) In 1925 the value of the NYSE was estimated at $27 billion, and before the crash in 1929 it ballooned to $87 billion. The stockholders were rolling in cash as their stocks tripled in value in just four years. After this balloon, just about everyone that could spare the money was investing in stocks. Many were buying stocks on margin, “a margin purchase allows an investor to borrow money, typically as much as 75% of the purchase price, to buy a greater amount of stock.” (US History 2) Other stockbrokers and thousands of banks were recklessly funding the investors, and the borrowers were paying upwards of 20 percent in interests. Even with warnings from the Federal Reserve about the practice of borrowing and lending for the stocks, both were not obliging to the warnings. At the time the president in office, Herbert Hoover, was mitigating over the economic situation which was only a preface to what was inevitably about to come. The middle class was suffering, and unemployment was at an all-time low. The growing instability of the two classes were contributing to the oversupply of goods that the society did not demand. The middle class were not able to afford the goods while the wealthy class were not buying the more than what they wanted. Most of the economy was supported by installment plans from the middle class, and investments from the rich.

The economy was suffering after the effects of World War I where uncertainty and hardship ran rampart in parts of the country. During the 1920s money and the wealth was distributed disproportionally among the classes, where the rich were represented overwhelming with the thought of the Roaring Twenties. Coolidge Prosperity was a short period in which the top 1% had a combined wealth the lower 42% of the nation, and the top 1% controlled over 30 % of the savings in the banks. (Brookings Institute 2011) Like a reflection of the presidency during the 1990s, Coolidge favored large businesses and the rich whom he encouraged to invest in them. This was evident by the Revenue Act of 1926, which reduced the inheritance taxes and the federal income dramatically. This was supported by the republican backed government, Supreme Court, and other members in Coolidge cabinet that contributed to the growing gap in the wealth of the social classes.

What inevitably started the Great Depression happened on October 29, 1929, known as Black Tuesday. Testing the limits of the stock market, the economy received the consequences as a massive sell of the stocks began. The success of the stocks were placing more investors to pay more for the share, and the traders were selling off the price expecting the values of the securities to fail. As everyone began to sell their stocks, the value of the market began to shrink. The sell a thon in the morning prompting once again, JP Morgan and other investors to pool money together in order to buy back the stocks, in hoping to reverse the trend. However, the fall was inevitable. According to PBS, approximately 16 million shares were not only exchanged for smaller values, but other stocks were not able to sell at all. Panic ensured, and it set off a catastrophic chain reaction in which would last for nearly a decade.

Although it was officially the fourth day of the market crash it was the most critical as within hours the NYSE lost all the gains for the entire year, and the Dow Jones reported an 11 percent loss. The losses in shares were calculated in present at almost 185 billion in 2013 dollars. The drop in the market was 10 times the federal budget, and by November 13, 1929 the stock was at its lowest point where over 100 billion dollars were lost from the economy (today a trillion dollars). At the time, the Federal Reserve was not equipped to handle the massive loss and did a disservice as it raised the interest rates and curtailed the amount of money in circulation.

Once the market crashed the Federal Reserve helped plunge the American economy further in debt, and into a deep depression. (Investopedia) As the market crashed, the banks failed too. Debtorswere not able to collect on the credit that the borrowers took out. This not only effected the economy in the United States bus also internationally as the banks of Austria and Germany were heavily dependent on the loans from the U.S The Great Depression helped to countries into the German-Austria collapse that caused the governments to go bankrupt, and spread financial panic throughout Europe. People were withdrawing all their money from the banks, but the banks were only able to give some 10 cents of every dollar. The Federal Reserve further complicating the problem, increased the value of the dollar which reduced the liquidity of businesses. Business then started to lay workers off, which significantly increased unemployment to over 25 percent. This led to a vicious downward slope in the economy, as the amount of purchasing decline dramatically. A reduction in not only the value of goods, wages, jobs, and goods declined. The matter was made worse by the Great Plains suffering unprecedented dust storms and droughts that destroyed everything in their paths, leaving farmers without any resources. Herbert Hoover made things worse by signing the Hawley-Smoot Tariff, cutting federal spending, and increasing taxes. He also signed legislation that funded loans to the banks, major corporations, and the state government much like the major bailout in 2009. (US History 4) He did nothing help the American people, “Hoover believed that government aid would stifle the initiative and create dependency where individual effort was needed.” (US History 4) The election of President Roosevelt created new jobs, new deals, and change to not only the banking industry but also the American people. While the New Deals and other legislation were influential in helping to change the economy, what ultimately got the US economy out of the Great Depression was World War II.

While experts and economist carefully combed through the details in establishing the direct blame for the Great Depression, many made it a point for the US and other countries to learn from the mistakes that people made in contributing to the Great Depression.A lesson that US had and has yet to learn. During the 1990s saw the prosperity in once again the stock markets.Starting after World War II, the economy soon moved to Keynesian economics which saw the emergence of liberal capitalism that was reflected during the Reagan era. Reagan helped to bring down inflation, deregulation, and fewer taxes that would help to spur economic spending. (Canterbery 83) The policies of Reagan continued throughout the Clinton administration that saw a massive shift in production to financial services. The financial sector increased and was a large part of the economy. The policies and the boom in the stock market during the 90s helped to contribute to the carelessness and recklessness of industries and the American people in the following decade.

In comparison, the financial crisis in 2008 was a culmination of some of the same problems that plagued the start of the Great Depression. The start of the financial crisis was due in part the housing market. During Bush administration, he signed legislation that would further the economic prosperity of members in the society to be homeowners, and increase luxury spending. Since the beginning of 2000, American people were living beyond their means, much like the middle class in the 1920s, people were purchasinggrandiose name goods on credit and installment plans. The mortgage and banking industries contributed by creating a large level of risks as they were giving out loans to individuals who did not have the means to pay them. By offering higher than usual interest rates that help to spread the effects of bankruptcy and foreclosure. The economy was growing substantially throughout the beginning of 2000 than it was in the past 30 years. (Wade 23) Signs of a financial crisis brewing were seen in 2006, but it was further exasperated by the failure of the stock markets and the crashing of the financial assets.

The subprime mortgage was booming, and the banks were creating financial instruments such as credit default swaps (CDS) and other securities that were able back the market. The burst of the housing bubble was further complicated once again by the inadequacies of the government to respond effectively in helping to curb the blow of the crash. The banks were given too much reliance on funding of the loans and shed light on the deficiencies and the inaccuracies of the rating agencies.Much like during the time of the Great Depression that was a lack of regulation to curtail the practice and on the special purpose vehicles that affected the global economy. (Bernanke) During the time before the financial crash much banking and investment institutions failed the left over 150 banks in a critical state. (Calbreath 2008) Unlike before the Great Depression, no leading financial institutions had failed but after the Great Depression over 9000 banks failed. The burst in the housing bubble, the failure of the stock market, and the spur of economy left many without jobs. The unemployment rate rose sharply, unlike the Great Depression, it saw unemployment at almost 25 percent.

During the 1920s the unequal distribution of wealth the top percent of Americans owning close to 40 percent of the nation’s wealth, whereas in 2008, the 1 percent only owned close to 11 percent. (Calbreath) More similarly is the effect on the stock market were Dow fell over 40 percent, where most of the investors saw their 401 k plans invested in stocks. The easy flow of money thanks in part to the creation of consumer credit helped the middle class purchase high priced goods on credit. Money was freely spent on appliances, homes, and automobiles. Once the crash happened, just like in the Great Depression the Federal Reserve tightened the reins on the money flow. The ease of money is in part to blame for the overvaluation of the housing market, and the funding of non-productive projects. Unlike the presidency of Hoover, Bush funded the $700 billion bail out to provide stimulus checks, and bailout the financial institutions to keep the financial system going. (Meyer) Congress extended unemployment insurance, most of foreclosures and bankruptcies of leading corporations were seized by the government, and they increased the FDIC deposit to $250,000. (Calbreath) Despite the bailout, the financial crisis affected the global landscape.

During 2007, the housing market was beginning to crack as prices began to decrease, and homeowners were left with rising mortgage payments where they could no longer borrow against to finance other expenses. Just earlier in the decade there was aggressive spending and investment into the housing market and in the insurers. The increase in borrowers with low credit ratings (subprime) were being allowed to obtain mortgages and loans from a result of government legislation, and unreliable assessments from the lenders. During the aftermath of the bubble burst, nearly 170 banks failed, and banks stopped lending to almost all customers. The credit agencies downgraded many financial institutions, and interbank market rates increased. One of the largest investment banks in the United States, Bear Sterns collapsed. The two largest mortgage institutions, Freddie Mac and Fannie Mae had to be taken over by the government. The central banks were left with no other options but to supply liquidity to financial institutions at longer maturity rates, and cut policy rates. (PBS) It was essential when the Lehman Brothers bank failed that widespread panic from consumers and the international banks grew. Businesses however not being able to borrow or find credit to pay employees had to close or layoff the workers. The international community also felt the brunt of the financial crisis as countries with emerging economies suffered tremendously.

Much like with the election of Roosevelt brought change, same as with the election of President Obama. He signed the American Recovery and Reinvestment Act that provided the government with the stimulus needed to create new jobs, help invest back into the economy and provide long term growth. The legislation provided over $288 billion in tax relief, giving $224 billion to entitlement programs, and $275 billion in grants, loans, and other contract used for public services. By 2009, the economy had slowly recovered, as the fiscal policy in place helped stabilize the economy and create stimulus measures. The demand in China helped to stimulate growth in the economy. Global trade has increased, as well function of the financial markets. Countries such as Greece, Italy, Spain, Ireland, and Portugal that were hit hard had to receive help from the EU and the IMF to keep the governments from collapsing. The factors that led to the global financial crisis started from the trickledown effect of the high inflation during the 70s and 80s, which decreased as the GDP grew. The weak infrastructure of the regulatory framework contributed as they provided incorrect credit evaluation, lack of financial supervision, and banking system given free reins to new financial instruments in the USA and other countries. The low inflation in the 90s also contributed as it kept interest rates drastically low. The focus on deflation influenced the monetary policy that provided the way for weak infrastructure.

While there are many similarities between the Great Depression and the Financial Crisis of 2008, there are several differences. Similarities can be seen in the unregulated financial markets, the failure of the government to intervene in the banking industries, and the crash of the Wall Street markets. The financial missteps have resulted in high unemployment, bankruptcies, foreclosure, social and economic effects that influence deep structural problems that have made recovery difficult. However the differences in both periods are that the Great Depression happened at a time in which the American economy and people were unprepared for. This resulted in the critical and seriousness of the effects that left many destitute. It was not until after the New Deals presented by Roosevelt was a safety net created to ensure if something were to happen again that there would be procedures, and protocols in place. While the Great Depression was made worse by the crash of the stock market, the Financial Crisis of 2008 was worsened by the burst in the housing bubble which created a domino effect to plunge the US economy into a recession. While the economy slowly recovered at a faster rate than the Great Depression, it seems that they lessons taught in both periods are doomed to repeat themselves. On the global sphere, many developing nations that suffered during the financial crisis has revolted back into recession, and other developed countries are still finding difficulty in stabilizing their economy. While the financial crisis experienced today is not where as serious as the effects that resulted from the Great Depression, the causes seemed to be just the same. In order to prevent future financial crisis regulation and changes need to be made to the financial system, monetary policies, and the banking industry.

Works Cited

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Bernanke, B. “Nonmonetary Effects of the Financial Crises in the Propagation of the Great Depression.”American Economic Review (June 1983), pp. 257-76. Print

Bernanke, B.S. “Causes of the recent financial and economic crisis.” Statement by Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve, before the Financial Crisis Inquiry Commission, Washington DC. Print. 2010.

Calbreath, D. “Run-up to Great Depression and today’s recession have some eerie similarities, but many important differences.” Signs on San Diego. 5 Oct 2008. Web. 25 Nov 2013. Accessed at http://www.signonsandiego.com/news/business/20081005-9999-lz1n5dean.html

Canterbery, E.R. The Global Great Recession.World Scientific Publishing CompanyIncorporate. 2011. Book.

“Inside Job.” PBS. 2011.Film.

“The Great Depression.”US History. N.d. Web. 26 Nov. 2013. Accessed at http://www.ushistory.org/us/48.asp

“The Great Depression: Seven Part Series.” PBS. 1993. Film

Meyer G. “Is Today’s Economic Crisis Another Great Depression?” 4 Nov 2008. Web 25 Nov 2013. Accessed at http://www.news10.net/money/story.aspx?storyid=50073&catid=91

Wade, R. “The First-World debt crisis of 2007-2010 in global perspective.” Challenge, 51(4), pp.23-54. 2008. Print.

“What Caused the Great Depression?” Investopedia. 26 Feb 2009. Web. 26 Nov 2013. Accessed at http://www.investopedia.com/articles/economics/08/cause-of-great-depression.asp