RUNGWATTHANASOPHON 1

Daran Rungwatthanasophon

Ms. Orana Meenongwha

English 10/10:04

May 25, 2017

The Differences and Similarities Between The Great Depression and The Great Recession

Introduction

There were numerous periods in developed and developing countries that eventually

reached to the Great Depression and the Great Recession. Many people are probably confused

what the difference and similarities between recession and depression. In general, cycle of

economic conditions is divided into four periods which are prosperity, recovery, recession, and

depression. Recovery and prosperity are basically the terms which tell the good growth of

economic. The recession and depression are both the signal words of economic crisis. However,

people still consider that recession and depression have the identical definition which is the

worst period of economic condition. Many analysts prefer to draw a couple of graph to identify

between depression and recession and notice the relation. There are many circumstances that

stimulate the condition of economic to decline. For example, in some countries, due to poor

management of government, it will defiantly cause everything to decline and reach to

bankruptcy. If those countries are unable to recover their economic condition, sometimes they

have to be provided some large amount of money from IMF(International Monetary Fund) and

pay it back later. Regarding to the Austrian business cycle theory, one of the most popular

business cycle theories, people believe that it is conventional for economic condition to boom
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and bust. If the economy grows too rapid, then the inflation will emerge which is the higher of

purchasing power from the increase of price level for goods and services. Hence, this research

will explain and identify the similarities and dissimilarities between the Great Depression and

the Great Recession and provide some information from the historical events as the examples for

better understanding.

Differences

To the economic cycle, conditions are divided into four different periods which are

prosperity, recovery, depression, and recession. The Great Depression basically defines as a long

calamity of economic conditions or activity; however the definition of the Great Recession is not

same. The Great Recession typically means the sharp decline in economic activity or going

down from the prosperity period. These two occured and were recorded in history in order to

provide lessons to next generation. For instance, the Great Depression and the Great Recession

not only have different definitions but also different causes. This passage will be beginning with

the causes by giving examples from the past of the Great Depression in US. The first cause is the

severe crash of the stock market due to a result of various economic imbalances and the rapid

growth of bank credit. For example,the stock market bust and two month after October most of

the stockholders lost more than $40 billion dollars(Depression, 2017). Although many people

attempted to regain their losses, the economic condition eventually reached the Great Depression

by the end of 1930. For the next dissimilar cause, it is the trade policy in that country. Some

countries does not even trade with others and some even sanction; hence the less trade will

negatively affect to the country and its balance of payment. As an example, as businesses began

failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American
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companies. This would charge a very high tax on imported things. From using this method, it

discouraged foreign countries to have trade with America. On the other hand, the main cause of

the Great Recession is the housing bubble burst. It simply begins when the large increasing in

demand despite the limit in supply. However, at some point, once the demand starts to decrease

and the supply increases simultaneously, this will result in a large drop of economy(Staff,2017).

This problem occured in December 2007 and was considered to be the largest downturn in

economy. The higher interest rate is also the another cause of the Great Recession. Since the

interest rate increases, it affects people in the society to have more savings, encouraging them to

spend more money on goods and services. This led to hyperinflation, the increase of price levels,

causing to lessen the value of the money. Hence, the economy begins to drop rather than

growing and the percentage of goods and services that can be purchased with the same amount

of money decreases (What is Economic Recession?, 2017).

Similarities

Although there are some different causes and the Great Depression and the Great

Recession occured in different periods, some of their origins are relevant. The first similar cause

of these two is the bank failure. Basically, many banks are running out of money and not able let

people to loan their money because of no insurance of deposit since the beginning and the lost

significant sums of money. Hence, from this act, banks decide to reduce loans and mortgages in

order to avoid bankruptcy, affecting people to not have sufficient money to use in daily life.

Sometimes, bank failure occurs when large number of people withdraw money or borrow money

simultaneously. For example of during 1930, over 9,000 banks failed. Banks deposits were

uninsured and thus as banks failed people simply lost their savings. Surviving banks were also
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unsure of the economic situation and concerned for their own survival, so they stopped willing

to create new loans for people. Moreover, some banks did not even have money to pay those

people, so government had to interfere and pay for people instead. The consequence from this

led to the fall in confidence in investment and spending. Similar to the Great Recession, in 2008,

the scale of bank losses rapidly started to increase and it became more difficult for them to

borrow money on money markets. This caused banks to reduce loans and mortgages. Because

banks were losing money, it became very difficult to get liquidity. In several countries, such as

UK, Ireland and US, major banks had to be bailed out by the government by paying money back

to their citizens instead ("The great recession 2008-13 | Economics Help", 2017). For the next

identical cause, it is the diminishing of spending from people which will be relating to the rising

of unemployment. Because of the emergence of many bad situations in society such as the crash

of stock market, low interest rate, bank failures, etc, it no longer promotes people to buy goods

and services. Thus, once the spending reduces, the real GDP will begin to recess and the

unemployment rate will increase. For example, during, the Great Depression, people from all

classes decided to stop purchasing items with the stock market crash and the fears of further

economic condition. This led to a reduction in the number of items produced and a reduction in

the workforce. As people lost their jobs, they were unable to keep paying for those items that

they had bought through instalment and therefore, their items were soon taken (Staff, 2017). As a

consequence, the unemployment rate rose above 20% and the real GDP went downward which

is similar to the Great Recession period. This has proven that the bank failure and the reduce of

consumer spending can originate these two serve conditions.

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The solutions that countries used to solve these two conditions

In past and present, many countries have always been facing against these two worst

conditions in their economy situations. Some even enable to learn from the mistakes and create

their solutions to solve and recover from the crisis. Nevertheless, to solve or avoid these

conditions, government and banks are the main roles. If a government stays still, not attempting

to find the solution and remaining surplus amount of money with out spending and banks have

too much reserve requirement, the countrys economic will surely go downward. For the Great

Depression, the president of America, Franklin Roosevelt(FDR), had shown his new idea to

recover from the Great Depression by coming up with his new program known as new idea.

According to John Maynard Keyness theory, this inspired FDR to believe that a while of

governments deficit spending will enable to recover from a bad condition. He initially began to

pay large amount of money in order to increase more money in the system. For example, he

decided to create more new projects such as building infrastructures for citizens to be hired and

to reduce the unemployment rate. Next, FDR regulated the bank acts and passed the Glass-

Steagall Banking Reform Act to protect the saving deposits which created the Federal Deposit

Insurance Corporation. This will ensure that all deposits from citizens will be surely return. He

subsequently attempted to revive the whole economic, creating another act to reform and

improve industrial income. This act will limit the productivity of consumer goods and drive the

higher price for higher income of industries. On the other hand, during the Great Recession,

many developed and developing countries have come up with some new solutions. They firstly

adjusted on the Fiscal Policy increasing the government spending by creating new projects for

unemployed people such as building more infrastructure. This will allow people to have more

opportunities to earn more money then leading to higher consumer spending. In the meantime,
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the government must lower tax so people will have more income after tax. Next, for the money

supply, the government increased the money supply by buying more bonds in order to increase

the money supply in the system. Moreover, the central bank can reduce the reserve requirement

for commercial bank to able to lend more. The discount rate also must be decreased by the

discount rate so the central bank can charge lower rate when the commercial banks borrow

money. The government must reduce the interest rate to motivate people to invest more. In the

end, the tariff should be cancelled since it was no longer beneficial the country although it

protected and stimulated the countrys GDP. Hence, it not only succeeds but also destroys the

relationship with other countries.

Conclusion

To conclude, this research paper has indicated the different and similar of causes

between the Great Depression and the Great Recession. The last main body then finished ,telling

the solutions to recover the economic condition from these two bad conditions. Regarding to

initial body, it mainly discusses the dissimilar causes of the Great Depression and the Great

Recession. The Great Depression was to happen in 1929 because of the severe crash of the stock

market and the trade policy that government decided to have tariff on trade to promote the gross

domestic product. Mean while, the Great Recession recently occured in 2008 having some of

the different causes. The first is housing bubble which simply begins when the large increasing

in demand despite the limit in supply. At some point once the demand starts to decrease and the

supply increases simultaneously, this will result in a large drop of economy. The rising of interest

rate was also another dissimilar cause of the Great Recession. It encouraged to people to spend

too much, causing the price level to lead to hyperinflation. On the next body, the paragraph tells
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the relevant of causes of these two conditions. The bank failure was one of the main issues of

occurring these two conditions. Many banks are running out of money and not able let people to

loan their money because of no insurance of deposit since the beginning and the lost significant

sums of money. This also led to reduce in consumer spending, affecting the rising of

unemployment rate. Hence, the real GDP no longer increased and the unemployment rate rose

above 20%. On the last body, the paragraph points to the solutions that government used to fix

the countrys problems. For the Great Depression, President FDR came up with his new idea,

focusing on the deficit spending of the country. More people began to be hired and get paid by

the government, causing to reduce the unemployment rate. Then, he released an act which

created an insurance to ensure that all deposits will be return. He also adjust the price of product

to promote better competition and higher income. For the Great Recession, countries initially

adjusted the fiscal policy by putting more money into the system and lowering the tax. Next,

according to monetary policy, the government tended to buy more bonds and reduce the reserve

requirement. The discount rate also decreased to be beneficial for commercial bank. Lastly, the

government decide to abolish tariff idea for recovery the relationship with other partner

countries. Overall, the research has been showing the differences, dissimilarities and the

solutions of the Great Depression and the Great Recession.

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References

Depression, T. (2017). The Great Depression - Facts & Summary - HISTORY.com.

HISTORY.com. Retrieved 25 April 2017, from
http://www.history.com/topics/great-depression

Staff, I. (2017). Housing Bubble. Investopedia. Retrieved 25 April 2017, from

http://www.investopedia.com/terms/h/housing_bubble.asp

What is Economic Recession? - Definition, Causes & Effects - Video & Lesson Transcript |
Study.com. (2017). Study.com. Retrieved 26 April 2017, from
http://study.com/academy/lesson/what-is-economic-recession-definition-causes-
effects.html

Staff, I. (2017). Deficit Spending. Investopedia. Retrieved 3 May 2017, from http://

www.investopedia.com/terms/d/deficit-spending.asp

The great recession 2008-13 | Economics Help. (2017). Economicshelp.org. Retrieved 3 May
2017, from http://www.economicshelp.org/blog/7501/economics/the-great-recession
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Appendix