Causes of the Great Depression and 2008 Financial Crisis Essay Sample

In October 2008. President Obama said that the United States is enduring the worst fiscal crisis since the Great Depression. As this crisis continues to develop. it has led to a planetary economic recession. At the beginning of the 2008 fiscal crisis. many people wondered: Will the current fiscal crisis be another Great Depression? Both the Great Depression of the 1930s and the current recession are global. and authoritiess have intervened by making new ordinances and policies sing concern and fiscal patterns. etc. However. there still are differences between these two events. particularly the causes of these two fiscal crises. In this paper. the Great Recession and the Great Depression will be compared though elaborating the different causes related to historical background. economic nature and pecuniary policy.

Historical background
After WWI. the American economic system developed fast and people were optimistic to that development. but imbalanced economic construction appeared bit by bit. Killian ( 2010 ) pointed out that America experienced an industrialisation motion and there became a market economic system with more competition in the early 20th century. ( p. 3 ) The economic system and productiveness increased rapidly. but the citizen’s existent rewards did non hold a large alteration. Harmonizing to Killian ( 2010 ) . people had to trust on the market economic system alternatively of basking it. and a deficiency of employment and occupation chances made many people’s lives more hard. particularly in urban countries. ( p. 3-4 ) Due to the increasing instability between economic system and personal rewards. the economic prostration led to a widespread depression. “Increased prosperity led to an addition in consumer disbursement which encouraged production. Ad and the usage of the installment program to buy high-ticket points spurred this increased consumption” ( Killian. 2010. p. 4 ) . Peoples used an installment program to buy merchandises and paid off their debt with about all of their incomes.

“While any important addition in bank failures indicates banking instability. the bank failures of the 1920s suggest that other factors played a big role” ( Killian. 2010. p. 6 ) . In this historical background field. the lagged citizen’s rewards and a series of bank failures led to this global depression. Different to the causes of the Great Depression. today’s recession ab initio caused from the lodging market. Killian ( 2010 ) presented. “Prosperity in the late ninetiess. although non every bit significant as that of the prosperity of the 1920s. led to increased consumer assurance and concern investment… a lodging market demoing marks of failing. the economic system was headed for another recession” ( p. 23 ) . Housing monetary values rose continually until 2007. but the lodging market turned to be slowed since 2006. However. the other industries related to existent estate met same challenge every bit same as the worsening of lodging market. The salvaging rate was enhanced by the Federal Reserve for many times. “An increased nest eggs rate. nevertheless. implies a reduced ingestion rate” ( Killian. 2010. p. 6 ) . People spent less money to devour which led to a powerless economic system. Therefore. the recession of the lodging market and improper financial policies chiefly caused the current fiscal crisis.

Economic nature
The Great Depression was banking crisis and liquidness crisis ; the current fiscal crisis foremost is liquidity crisis. so recognition crisis. presented Zhang ( 2009 ) . A serious banking crisis happened during the early old ages of the Great Depression. which influenced by the FED’s improper policies and the existent economic system jobs. Zheng ( 2009 ) stated that the prostration of the commercial Bankss played a decisive function on economic and fiscal systems during the Great Depression. In October 1930. the independent little and moderate-sized Bankss began collapsed in a broad scope with the volatility of trade good monetary values. Zheng ( 2009 ) thought that this unit of ammunition of crises was non the most destructive. nevertheless. the Fed’s biggest policy failure straight led to the 2nd unit of ammunition of the banking crisis from March 1931 to June.

As Zheng ( 2009 ) reported. in early 1931. there was no timely and appropriate enlargement policy from the Federal Reserve System. and the barbarous rhythm of go oning deflation forced plus monetary values to worsen. A new unit of ammunition of bank failures occurred. Zheng ( 2009 ) stated that the addition of involvement rates and the escape of gold brought more bank failures and the greater diminution of economic activities. The uninterrupted development of deflation turned into a Great Depression in the autumn of 1931. Zheng ( 2009 ) said that Federal Reserve Bank was powerless in deciding the banking crisis. doing the banking system suffered a new unit of ammunition of failure in the 4th season of 1931. and eventually resulted into the 1933’s “bank holiday” . Zheng ( 2009 ) concluded that the of import causes of the Great Depression were the existent economic system crisis. the diminution in entire demand and the overrun in 1920s. All of these grounds influenced banking system reciprocally which led to the comprehensive economic depression.

In recent decennaries. people excessively relied on practical economic system. and easy lose assurance when serious fiscal jobs happened. Zheng ( 2009 ) thought that the current fiscal crisis is a liquidness crisis foremost. First. the behaviour of fiscal establishments has changed the people’s motive of keeping currency. because of alterations in the construction of the demand for money. Second. the determiners of the demand for money have become more complex and unsure. which has reduced the stableness of money demand. Third. the money supply subjects to the domination of internal factors of the economic system more than commanding by the cardinal bank. which badly weakened the cardinal bank’s control of money supply capacity and grade of control. After the liquidness crisis. the market began a serious loaning and recognition crunch. The prostration of big fiscal establishments. particularly Fannie Mae and Freddie Mac which were stealthily guaranteed by authorities. made people disquieted about credit-based system every bit good as the country’s recognition.

Based on the above analysis. the difference can be merely clarified: The Great Depression originally caused in existent economic system field and so fiscal field ; today’s crisis can be seen as a recognition crisis because of the people’s overly dependance on practical economic system.

Monetary policies
The international gold criterion pecuniary system played a cardinal function in the Great Depression. said Hang ( 2011 ) . In 1929. the United States was seeking to chill the overheated economic system by fastening pecuniary policy. and France merely completed a period of rising prices and restored the gilded criterion. The two states experienced monolithic capital influxs. the ensuing international payments surplus made the two states absorb gold from the universe at an dismaying rate. In 1932. the two states held more than 70 % of the world’s gold. The other states which used the gilded criterion could merely sell domestic assets to salvage the worsening gold militias. Hang ( 2011 ) thought that this formed planetary pecuniary tightening. and made the universe economic system into the Great Depression with the impact of Wall Street stock market clang. “During the Great Depression. pecuniary policy needed to be strong. decisive and utmost ; alternatively. it was weak. fearful and passive” ( Killian. 2010 ) . Hang ( 2011 ) stated that many states attempted to protect their gold militias to guarantee the country’s gold criterion. which made them reluctant to supply liquidness to Bankss for continued operation.

Hang ( 2011 ) concluded that the gilded criterion international pecuniary system was the chief factor for distributing economic prostration. because it prevented authoritiess to follow an independent pecuniary policy. peculiarly the expansionary policy. The constitution of merely cardinal place of U. S. dollar in international currency system caused jobs combined with the old financial policies and national policies. IMF passed the Jamaica Agreement in 1976. announced the non-monetarilization of gold. and began drifting exchange rate government. Harmonizing to Hang ( 2011 ) . although the dollar no longer bear the duties of interchanging gold. the cardinal place of the U. S. dollar in the international pecuniary system has non changed. Hang ( 2011 ) mentioned. as modesty currency. the U. S. dollar could be issued without any limitations. and the United States dumped the U. S. dollar to the universe. but the refund could non be guaranteed because of the floating exchange rate. After the Internet bubble explosion in 2001. the U. S. authorities took the policies of the “twin deficits” and issued a big figure of currency to advance economic growing.

After “9•11” . the United States continually increased financial disbursement for military enlargement. doing a crisp rise of the budget shortage. Harmonizing to Hang ( 2011 ) . on the one manus. the U. S. authorities outputted large-scale U. S. dollars to the universe through paying the trade shortage ; on the other manus. the authorities steadily inputted dollars to the domestic through financial shortages. Hang ( 2011 ) thought that the large-scale return of the U. S. dollar pushed up plus monetary values further and promoted the inordinate ingestion of United States subjects. It is clear to see that both economic depressions were related to pecuniary policies closely. However. they were caused by different policies in different pecuniary policy environment. In the Great Depression. all the states were prefer to follow aureate criterion as pecuniary policy cellar. but when the fiscal crisis happened. aureate criterion had already been canceled.

As mentioned above. the Great Depression and today’s fiscal crisis experienced different historical background. had different economic nature. and were influenced by different pecuniary policies. It is revealed that the followers could be considered: Strengthening fiscal supervising to forestall guess activities. equilibrating the development of different economic constructions to steadily develop the economic system. and heightening international cooperation to cut down hazard. to forestall a following economic crisis.

Mentions

Hang. P. ( 2011. August 08 ) . Similar crises: Two depressions with same causes. Retrieved from hypertext transfer protocol: //article. m4. cn/history/1119965. shtml Killian T. N. ( 2010 ) . Teaching points in comparing the Great Depression to the 2008-2009 recession in the United States. Retrieved July 29. 2012. from hypertext transfer protocol: //digital. library. unt. edu/ark: /67531/metadc28442/m2/1/high_res_d/thesis. pdf Zheng. L. ( 2009 ) . Historical comparing between new fiscal crisis and the great depression in United States. International economic reappraisal. 1st of 2009 ( ISSN1007-0974 ) . Retrieved from hypertext transfer protocol: //www. doc88. com/p-7178391 7105. hypertext markup language