Introduction
The main differences between the Great Depression and the Great Recession are their duration and the depth of their effects. The cause of the Great Depression, which occurred in 1929-1930, was a crucial fall in stock indices. The impact of this event was long-lasting, covering both the US and the global economy.
All in all, the effect of the Great Depression had been felt for almost a decade. Meanwhile, the Great Recession, which started as the Financial Crisis of 2007-2009, was provoked by a subprime mortgage crisis, which burst the US housing bubble. Based on the severity, duration, and recovery from both events, one can conclude that the Great Depression had a greater impact than the Great Recession.
Causes and Severity
Both the Great Depression and the Great Recession struck people unexpectedly and left them unprepared for what would follow. As John Maynard Keynes mentioned, “[p]ractical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist” (as cited in Temin, 2010, p. 115). In the case of the Great Depression, the severity of the problem was more colossal than that of the 2007-2009 Crisis.
The primary reason for the Great Depression’s development was excessive speculation resulting from the doubling of prices (Mishkin & Eakins, 2018). In an attempt to curb speculation, Federal Reserve officials tried to tighten the monetary policy to increase interest rates and eliminate the rise in stock prices (Mishkin & Eakins, 2018).
As Temin (2010) notes, the post-World War I US policymakers relied on restoring the gold standard of fixing the exchange rate while expecting that all others would remain flexible. The expectations did not justify themselves, with the Great Depression leading to a full-fledged panic and a sharp fall of the stock market, resulting in the failure of more than one-third of US commercial banks.
The further development of the Great Depression involved unsettling business conditions and moral hazard issues. The credit spread phenomenon, which manifested in the interest rate difference on completely safe assets and loans to businesses and households, led to more problems in the financial sector. The Great Depression led to “millions upon millions” of people out of work and, ultimately, to the rise of fascism and World War II (Mishkin & Eakins, 2018, p. 214).
Meanwhile, the causes of the 2007-2009 Financial Crisis were primarily concerned with financial innovation mismanagement and brought about less severe consequences for the population. The Great Recession impacted the mortgage and housing business more than people’s employment (Mishkin & Eakins, 2018). Thus, the Great Depression’s causes and severity were more profound than the Great Recession’s.
Spread and Duration
The effect of the spread of the crisis and the length through which it continued was also more significant in the Great Depression than in the 2007-2009 Financial Crisis. Although both events led to a decline in economic activity, it was more pronounced in the 1920s-1930s than in the 2000s. During the Great Depression, several countries’ attempts to adhere to the gold standard brought about economic decline. Hence, in the US, Germany, England, and other states, policies to maintain the currency’s value put the banks at risk (Termin, 2010). Bank failures were the outcome, not the cause, of the Great Depression, which lasted for a decade.
As for the Crisis of 2007-2009, its aftermath was reflected in the deterioration of balance sheets and the failure of numerous high-profile companies (Mishkin & Eakins, 2018). However, the Recession lasted only for several years, and its effect did not spread over as many countries as the Depression did.
Recovery
Finally, the way the country recovered from both events makes it clear that the Great Depression’s effect was more damaging than that of the Recession. The excruciatingly high unemployment rate of the 1930s was difficult to deal with and could not be overcome for many years. Debt deflation was another long-lasting outcome of the Great Depression (Mishkin & Eakins, 2018).
Although the Financial Crisis of 2007-2009 also involved unemployment, it was much easier to cope with it due to numerous new professions and job opportunities emerging. However, in the 1930s, finding either a niche in existing professions or a prospect of new ones was next to impossible. Thus, the US and other countries took longer to repair the damage from the Depression than the Recession.
Conclusion
Both the Great Depression and the Recession considerably affected the world’s economy. Although it is impossible to avoid mistakes, at least the Federal Reserve learned from the first one. Thus, it was able to alleviate the effects of the second one more effectively. The duration of the Great Depression and the economy’s contraction was much longer than that of the Recession. While in the 1930s, the Fed Reserve’s decisions slowed down the country’s economic activities, in the 2000s, its actions helped revive its economy.
References
Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.). Pearson.
Temin, P. (2010). The Great Recession & the Great Depression. Dædalus, 139(4), 115-124. Web.