The Great Depression: Then and Now

As the economy began to falter in December 2007 (the official start of today’s recession) and went into a freefall in September 2008, many Americans’ thoughts turned to the Great Depression.

Comparing the Great Depression to what’s happening today, many similarities and differences can be noted.

Similarities Between The Great Depression And Today
Some of the eerie similarities between the Great Depression and today’s economic crisis include:

Speculation: Speculation on stock led to the historic stock market crash in 1929 that brought on the Great Depression. Speculation on housing prices in 2003-2007 brought on the current recession. As of April 2008, the top 26 cities with the highest foreclosure rates in the country were all located in just four states: California, Arizona, Nevada, and Florida. For years, these states enjoyed double-digit increases in housing prices, leading to a housing bubble that was bound to burst.

Buying on margin: With little regulations on stock market purchases, in the months and years leading up to the Great Depression, investors were able to buy stocks on margin, with the only requirement that they put 10% down. In other words, they could buy $100 worth of stock for a $10 investment, and if that stock went up by a mere 10%, they’d doubled their investment. This leveraging led to wild speculation, with people cashing in their life savings to funnel money into the stock market, which led to artificially high prices. Stock market regulations were put in place during the Great Depression to prevent the same catastrophe from repeating in the financial markets, but seventy years later, Americans aimed a similar greed toward the housing market. Millions of people bought homes they couldn’t afford, with money they didn’t have, taking out 100% or 110% loans.

Bank crisis: During the Great Depression, banks failed because Americans panicked and withdrew all of their money, virtually overnight, after the stock market crashed in October 1929. This time around, the banks are failing again, because of their own suspect lending practices, when seemingly all credit standards were thrown out the window as lenders rode the wave of the housing market boom.

Loss of consumer confidence: History proves, through the Great Depression, that when average Americans get scared, they stop spending money. Our parents and grandparents became frugal in the 1930s, and we’re following suit today.

High unemployment rates: The Great Depression saw the U.S. unemployment rate soar to 25% in 1933, and in 2008 and 2009, millions of jobs have again been lost. As of April 2009, the U.S. unemployment rate was 8.5%, with eight states in the nation reporting rates higher than 10%. If the amount of people who stopped looking for work and/or settled for part-time work are included in the U.S. unemployment calculations, the true rates climb to 15%.

Government intervention: While Herbert Hoover largely ignored the causes and effects of the Great Depression, Franklin D. Roosevelt took immediate charge when he was elected and sworn into office in March 1933. He introduced a variety of regulations to prevent financial catastrophes from recurring, he strove to assuage the fears of the American public, and he invested billions of dollars in federal funding toward job creation. President Barack Obama is following in Roosevelt’s footsteps, except that his “New Deal” programs are costing American taxpayers trillions of dollars, not billions.

Differences Between The Great Depression And Today
There are marked differences between circumstances of the Great Depression and the economic crisis today.

Quick Response: Essentially, the stock market crash of 1929 was followed by almost four years of lethargy on the part of the federal government. This time around, the action has been swift and sweeping. More than a dozen economic stimulus packages were introduced in 2008 and 2009, all designed to jumpstart the economy and/or save and create jobs.

Dust Bowl in the 1930s: Drought conditions in the 1930s brought farmers in the Plains to their knees when millions of acres of farmland were rendered useless. This environmental catastrophe contributed to the failure of banks during the Great Depression (many of which had outstanding farm loans that went bad) and led to high unemployment rates as farmers lost their livelihood. So far, America hasn’t experienced a comparable natural disaster.

World War II: The Great Depression finally came to an end, not because of Franklin D. Roosevelt’s New Deal or the massive growth of federal government programs and intervention, but because of World War II. American exports increased as Europe ordered munitions, ammunitions, and supplies for the war, and that, combined with America’s war efforts, put millions of workers back in factories.

FDIC: The Federal Deposit Insurance Corporation was created in 1934, for the exact circumstances that we’re facing today. The federal government insures every individual bank account up to $100,000, and in the fall of 2008, that level was raised to $250,000 to reassure concerned Americans. There hasn’t been a marked run on banks during this recession, and only a handful of banks have failed across the country.