A Comparative Study of the Great Depression and the Current Global Financial Crisis



A Comparative Study of the Great Depression and the Current Global Financial Crisis

Introduction

There is already a plethora of work comprising of invaluable comments and research from famous economists and authors, comparing and contrasting the current Global Financial Crisis (2008) with the Great Depression of 1930's. However, it should be noted that the majority of efforts comprise of explaining the causes and impacts of the recessions with the help of technical graphs and difficult to understand economics terminology. Even though this extensive research and economic statistics provides an invaluable source of information, it is often difficult for the average individual to understand the essence of the papers. The aim of this paper is to present the comparison of the two important turning points in human history, with an easier to understand and comprehensible nature.

It is quite disappointing to assess the views and comments of individuals, who ingenuously restrict the scale of devastation unleashed by the two crises to the United States. This, however, responds to limiting the crises to a specific country and resembles a misleading picture. Even though, both the crises originated in the United States, the effects eventually were experienced on a global scale through the capital flows, trade flows, and commodity prices. However, due to the seamless interconnectedness of the financial, monetary and economic structures of different countries; the United States cannot be solely held responsible for their experiences.

Discussion

Before proceeding with the comparison on the two recessions, it is essential to shed some light on the nature, origins and causes of the two crises.

Overview of the Great Depression

The Great Depression, preceding the Second World War in 1929 and lasting approximately until 1939; is the longest and the most severe recession experienced by mankind. Although United States of America is marked as the place of origination; it affected nearly every country on the globe through exponential fall in output, pervasive unemployment, and unrestrained deflation. The Great Depression not only inflicted economic and financial consequences, it also affected social and cultural lives negatively. As of today, The Great Depression is often used as a benchmark to discuss and compare forthcoming recessions.

Severity of the Crisis

The severity and timing of the crisis varied considerably across different regions; falling consumer demand, imprudent policies and financial panics aggravated the severity of the crisis in United States and Europe. The gold standard, which maintained interconnectedness of the financial and economic systems of various countries through a fixed currency exchange system, affected countries like Japan and Latin America, but to a milder extent.

Causes of the Depression

It should be noted that there not a single factor which can be quoted as responsible for the depression, in fact a multitude of factors combined together to cause the depression. Nevertheless, the fundamental factor, often cited as the most important cause was a significant decline in aggregate demand. This translated into declining production, as manufacturers were left to deal with rising inventories and thus compelled to lay ...