A Comparison of the Great Depression and Our Current Financial Crisis

A comparison of the Great Depression and our current financial crisis Brandon Gilbreath HIST-410 Al Campbell

The Great Depression, an event that happened 70 years ago still conjures images of families waiting in soup lines and thousands of men looking for work. In October of 1929 the American economy came to screeching halt and would not see growth for the next three years. This was a major event that sent ripples throughout the world economy. In September of 2008, roughly 79 years later, financial crisis gripped the U.S. once again, and by default, the rest of the world. This time, the one sound investment that millions of Americans make in their lifetime, their homes, lost value. The one sure fire investment for over 60 years now became a liability. These events are two of the most significant historical events that happened in the 20th Century. As you read on, I will compare these two events to show the similarities between them. Also, in some ways I will show how this current recession could be called a depression because by some standards is worse than the depression of 1929. In the book “America’s Great Depression” it says the Wall-street collapse of September-December 1929 and the Great Depression which followed were among the most significant events of the 20th Century (Rothbard, 1972). Since the last down turn in the economy in 1920, the economy had been booming since. Many economists at the time believed the market was definitely in store for a correction. The first sign that something was amiss was in June of 1929. That was the first month of no growth in nine years, it would only be a matter of time before the stock market would reflect the change. September 3rd, the bull market effectively came to a halt (Rothbard, 1972). On October 9th, the market was falling so rapidly the ticker tape could not keep up. On October 12th, shares started to drop vertically, as people were trying to sell sell sell. And finally came Black Tuesday, October 19, 1929, where people were selling what was left of the good stocks just to maintain some liquidity. Upon research, it is easy to see that this could have been predicted. In 1929, 1,548,707 customers had accounts with America’s 29 stock exchanges (Rothbard, 1972). About 30 million families had dealings with the stock market. Investors at the time, gambling with other peoples’ money, were called speculators. About 2/3, or 600,000 of these speculators were buying stock (essentially gambling) using margins, or money that was not readily available to them at the time. So basically “speculators” were using money that wasn’t theirs to buy inflated value stocks. Not only that, but they were actually buying those stocks using a margin of the cash needed to actually buy the stock. There was a bubble that was getting bigger and bigger and a correction of epic proportions was all but inevitable. Does this sound familiar? By 1932 businesses that were once booming were still struggling. US Steel, and General Motors were some of the hardest hit. Economists say that America could have rebounded from this correction must like the correction of 1920, but, American confidence in the stock market kept us in the gray for years to come. Unemployment rose over the same period from 3.2 % to 24.9% in 1933 and 26.7% the following year. 34 million men and women were out of work. (Rothbard, 1972). However, the one saving grace, albeit unbelievable, that would jump start the economies of all the nations affected by the depression, would be war. Eventually, the preparation for WWII would be shot in the arm that the economy needs to get back going in the right direction again, from an economics perspective anyway. Hitler’s Regime was the first to do this. With his Militarization up and running unemployment falls to zero percent. It seems that the depression happened not because of too little government interaction, but maybe too much. It has been postulated that since the government injected too much inflationary credit in to the economy, it caused the bubble to burst. President Hoover was widely known as a planner, meddler, orderer, and exhorter (Rothbard, 1972). Unfortunately, it would take ten years for stock prices to return to 1929 standards. Like the Great Depression, the economic crisis of 2008 started with a bubble. This time it was Mortgage backed securities. Again, like the crash in 1929, investors were gambling with fractions of real money in order to leverage larger amounts for financial gain. This was achieved by loaning someone money for a loan, who did not necessarily qualify for a loan. These people were risky investments at best. Also, national banks were allowed to give these loans to unqualified buyers in other states. These assets to the banks are known as “Paper”. This worthless paper held a perceived value and was then traded on the open market to leverage other investments. By 2008 this was a practice that was done on a large scale thanks to de-regulation of the banking industry during the Reagan and Clinton administrations, and also the lax underwriting of mortgage companies because of fierce competition for mortgage marketshare. So just like in 1929, when these investments proved bad the banks were then forced to make good on their botched gambling of the market. All of a sudden, the bubble burst, property values declined, banks started to go under and the market was correcting itself all over again. In “A Tale of two Depressions” there is evidence from that suggests that this current economic crisis is worse than the depression that we had in 1929. When you look at factors such as global market growth, global stock trade prices, global stock trade volume, and grown of GDP, we were doing worse but orders of magnitude in all of these categories as of 2009 (Eichengreen, B. and K.H. O’Rourke 2009). A Second similarity that the current crisis has to the Great Depression is unemployment. As of today, unemployment is down to 7.8% from a high of 10.8% according the U.S. Bureau of Labor Statistics (2012). Although, I think the numbers could easily be double those figures. In the Great Depression the unemployment rate seemed much higher and peaked at 26.7%. I remember I was working as an Engineering Technician in Vernon Hills, IL in August 2008. Everything was still fine back then, and it was still very easy to get a job. I was making a decent wage and working full-time, however, I was a temporary employee, so in August of 2008, like many other Americans, I lost my job. The next few years I worked as a bouncer in bars to try and make ends meet while trying to finish my degree. I can’t really imagine how it would have been in 1929. Another similarity our recession, or depression at this point to the Great Depression is the people’s confidence in the market. In 1929, it was a stock market bubble, and in this era, it’s a real estate bubble. Even with prices at record lows, people are still not buying homes. Many people found themselves upside down in their mortgages and chose to walk away from their houses to get out from underneath the debt (Eichengreen, B. and K.H. O’Rourke 2009). They had already lost all of the equity in their property, I guess why stress over the debt at this point. It is amazing that the irresponsible actions of a few have resulted in millions of Americans losing their homes, jobs, and way of life. The Great Depression and our second depression share a lot of similarities in the basic structure of its formation and the longevity of its legacy. The American people are torn from war and financial instability. We are a nation that is sick and tired of the inequalities that serve as the catalyst for class warfare in the search for solvency. It is crises like these that grassroots movements like the Occupy movement are born. In an effort to navigate obfuscation and circumvent the status quo, the American people are starting to become educated and stand up for their rights that are being taken away every day by lawmakers that cater to corporate lobbying to line their own pockets. Until there is sensible regulation in the banking industry, the culture of greed and excess will manifest itself into the ugly monster known as “depression” or “market correction” for centuries to come; of course that is assuming that humans will last that long. There are many parallels separated by mere generations. History repeats itself every 50 or so years, simply because all of the wise people die I guess. The history is not enough for some wicked men. They have to see what damage they can inflict themselves. From all the heinous dictators in Africa to billionaires that caused the financial crisis in 2008, there seems to be a common denominator for these megalomaniac douche bags that have to have everything and don’t care who they have to step over to get it. From Hitler to Yasser Arafat, there is no limit to the egregious things that we will do to our fellow man in the pursuit of wealth and power. It sickens me that things are this way; it sickens me that in some places in the world, the government actually looks after its people instead of feeding the machine that oppresses the masses under the inevitability of death and taxes. But not in many places, just a few. Studying history makes me understand the horrible capacity that humans have and makes me wonder what happened to the good in people who rise to power. The similarities that exist between the great depression and our current economic situation are scary. How are these things allowed to happen? It’s all so crazy that sometimes it makes you want to throw up your arms in disbelief and just immigrate to a different country sometimes. But then you realize that it is the Human variable to the component, and that it doesn’t really matter where you are, things like this are going to happen regardless. It is said that “Those who don’t learn from history are doomed to repeat it,” but sadly, through my studies in History 410 I’ve come to realize that this old adage does not hold water.

References Eichengreen, B. and K.H. O’Rourke. (2009). “A Tale of Two Depressions.” In progress. Rothbard, M. N. (1972). “America’s Great Depression.” Retrieved from http://books.google.com/books NA. (2012) “U.S. Bureau of Labor Statistics.” Retreived from http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&idim=country:US&fdim_y=seasonality:S&dl=en&hl=en&q=current+unemployment+rate

References: Eichengreen, B. and K.H. O’Rourke. (2009). “A Tale of Two Depressions.” In progress. Rothbard, M. N. (1972). “America’s Great Depression.” Retrieved from http://books.google.com/books NA. (2012) “U.S. Bureau of Labor Statistics.” Retreived from http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&idim=country:US&fdim_y=seasonality:S&dl=en&hl=en&q=current+unemployment+rate