What Are the Differences Between the Causes of the Great Depression and 2008 Financial Crisis?

Topics: Great Depression, Federal Reserve System, Monetary policy Pages: 5 (1664 words) Published: February 3, 2013
Differentiate the causes of the Great Depression and 2008 financial crisis
In October 2008, President Obama said that the United States is suffering the worst financial crisis since the Great Depression. As this crisis continues to develop, it has led to a global economic recession. At the beginning of the 2008 financial crisis, many people wondered: Will the current financial crisis be another Great Depression? Both the Great Depression of the 1930s and the current recession are world-wide, and governments have intervened by creating new regulations and policies regarding business and financial practices, etc. However, there still are differences between these two events, especially the causes of these two financial crises. In this paper, the Great Recession and the Great Depression will be compared though expounding the different causes related to historical background, economic nature and monetary policy.

Historical background
After WWI, the American economy developed fast and people were optimistic to that development, but unbalanced economic structure appeared gradually. Killian (2010) pointed out that America experienced an industrialization movement and there became a market economy with more competition in the early twentieth century. (p. 3) The economy and productivity increased quickly, but the citizen’s real wages did not have a big change. According to Killian (2010), people had to rely on the market economy instead of enjoying it, and a lack of employment and job opportunities made many people’s lives more difficult, especially in urban areas. (p. 3-4) Due to the increasing imbalance between economy and personal wages, the economic collapse led to a widespread depression. “Increased prosperity led to an increase in consumer spending which encouraged production. Advertising and the use of the installment plan to purchase big-ticket items spurred this increased consumption” (Killian, 2010, p. 4). People used an installment plan to purchase products and paid off their debt with almost all of their incomes. “While any significant increase in bank failures indicates banking instability, the bank failures of the 1920s suggest that other factors played a large role” (Killian, 2010, p. 6). In this historical background field, the lagged citizen’s wages and a series of bank failures led to this world-wide depression. Different to the causes of the Great Depression, today’s recession initially caused from the housing market. Killian (2010) presented, “Prosperity in the late 1990s, although not as substantial as that of the prosperity of the 1920s, led to increased consumer confidence and business investment… a housing market showing signs of weakness, the economy was headed for another recession” (p. 23). Housing prices rose continually until 2007, but the housing market turned to be slowed since 2006. However, the other industries related to real estate met same challenge as same as the declining of housing market. The saving rate was enhanced by the Federal Reserve for many times. “An increased savings rate, however, implies a decreased consumption rate” (Killian, 2010, p. 6). People spent less money to consume which led to a powerless economy. Therefore, the recession of the housing market and improper fiscal policies mainly caused the current financial crisis.

Economic nature
The Great Depression was banking crisis and liquidity crisis; the current financial crisis firstly is liquidity crisis, then credit crisis, presented Zhang (2009). A serious banking crisis happened during the early years of the Great Depression, which influenced by the FED’s improper policies and the real economy problems. Zheng (2009) stated that the collapse of the commercial banks played a decisive role on economic and financial systems during the Great Depression. In October 1930, the independent small and medium-sized banks began collapsed in a wide range with the volatility of commodity prices. Zheng (2009) thought that this...
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