Causes for the Great Depression Compared to Causes for the Great Recession: Analytical Essay on Dust Bowl

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The Great Depression was the worst economic depression in US history during the late 1920s and early 1930’s, this was the most severe economic downturn in history. This also affected many countries all over the world. It resulted in steep declines in industrial production and in deflation, mass unemployment and banking panics. Poverty and homelessness rates increased rapidly. The industrial production fell almost 47 percent, and GDP also declined by 30 percent. The stock market crashed on Black Tuesday, which was the fourth and last day of the stock market crash in 1929. After the crash, stock prices continued to fall. This was one of the major causes that lead to the Great Depression. During this time stockholders lost more than $40 billion dollars, and it was difficult for the stock market to recover. Bank failures were another reason to this major downfall. Thousands of banks failed, and many people lost their savings due to the failure of the banks.

Many people have argued that the Federal Reserve was the main reason of the downfall in 1929, because they did not give aid to banks and thousands of smaller ones collapsed. This was because the Federal Reserve failed to create enough cash as the money supply tightened, which increased money supply throughout the entire decade. American citizens were left in bad conditions, with poor jobs and low wages. Many no longer had savings and a severe drought struck the Southern Plains, causing the Dust Bowl. This caused many U.S. farmers to no longer have usable land for farming, in addition to being hurt by the tariffs and the trade decline. The drought and erosion of the Dust Bowl affected 100,000,000 acres, in Texas, New Mexico, Oklahoma, and Colorado. By 1934, farmers had sold ten percent of all their farms, which half of those sales were caused by the depression and drought. The Dust Bowl forced thousands of poor families to abandon their farms, since they were unable to pay mortgages or grow crops, as a result loss reached $25 million per day by 1936 and by 1937 many farmers were on federal emergency relief. After the Dust Bowl government got more involved and focused on land management and soil conservation to identify what areas that needed attention to prevent another drought.

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During the Dust Bowl period, severe dust storms, called “black blizzards” swept the Great Plains. Clouds of dust would darken the sky, and in many places, the dust drifted like snow and residents had to clear it with shovels. Some people developed “dust pneumonia” and experienced chest pain and difficulty breathing, and many died from the condition. President Roosevelt ordered his administration to plant trees from Canada to Texas as windbreakers to break the wind, hold water in the soil, and hold the soil in place. The administration also began educating for on soil conservation and anti-erosion techniques, including crop rotation, strip farming, contour plowing, terracing, and other improved farming practices. By 1937, the federal government began a campaign to encourage farmers in the Dust Bowl to adopt planting and plowing methods that conserve the soil. The government also paid farmers a dollar an acre to practice the new methods. After almost ten years, the drought ended when regular rainfall returned to the region.

The second largest economic downturn in US history was the Great Recession which was between 2007-2009. The Great Recession was most seen in the United States and Western Europe, as a result of the subprime mortgage crisis. The crisis led to increases in home mortgage foreclosures worldwide and caused millions of people to lose their life savings, their jobs and their homes. This was the longest period of economic decline since the Great Depression. The Great Recession began with the bursting of an eight trillion-dollar housing bubble. The loss of consumption and the financial market triggered by the bursting bubble led to a collapse in business investment. The U.S labor market lost 8.4 million jobs, which was the most dramatic employment since the Great Depression. It took nearly 2 years for economy to grow even though its growth was not strong enough to create the jobs needed to keep pace with normal population growth. In the beginning of 2009 over 230,000 U.S. businesses closed, and more than 450 banks failed across the country. Bank failure was a major issue during the Great Depression and the Great Recession. Bank failures not only affected the economy but the people who had their savings in banks. After the Great Recession, 16 million homes foreclosed in the U.S with nearly 3 million foreclosures each year.

Laws implemented during and after each crisis

During the Great Depression Roosevelt entered office, with a plan dealing with the Great Depression. The New Deal was introduced as a result of this crisis. The new deal was a series of programs that were aimed to help restore prosperity to Americans. Roosevelt’s goal was to stabilize the economy and provide jobs and relief to those who were suffering because of the downfall of the Great Depression. Unemployment levels in some cities reached high levels. By 1933, Ohio had reached 80 percent and Massachusetts 90 percent of unemployment. As a result of this Roosevelt declared a “four day” bank holiday to stop people from withdrawing their money from banks. Congress also passed the Emergency Banking Act, which reorganized the banks and closed the ones that were at risk of bankruptcy. Three days later, the president urged everyone to put their savings back in banks to start them running again, and by the end of the month many banks were reopened successfully. During Roosevelt’s first 100 days in office he passed the Glass-Steagall Act, which was part of the Banking Act of 1933, a banking legislation that separated Wall Street from Main Street. This bill offered protection to people who entrust their savings to commercial banks. Millions of Americans lost their jobs in the Great Depression and lost their life savings after more than 4,000 U.S. banks shut down between 1929 and 1933, leaving depositors with nearly $400 million in losses. This bill also prohibited bankers from using depositors’ money to pursue high-risk investments. Later, congress passed a bill that paid farmers who produced things like wheat, dairy products, tobacco and corn, to leave their fields unplowed in order to end agricultural surpluses and boost prices.

The Smoot-Hawley Tariff law was introduced after the stock market crashed. This act was meant to protect America’s farmers from overseas competition by putting in a protection policy. The tariffs were unpopular and were retaliated against. Many countries increased their tariffs and trade between countries dropped. It was believed this act did only hurt the economy, but it made the Great Depression worse. Also, during President Franklin D. Roosevelt's first 100 days in office, his administration initiated programs to conserve soil and restore the ecological balance of the nation. The worst dust storm occurred on April of 1934, later named “Black Sunday”. A few weeks later, President Roosevelt passed the Soil Conservation Act, which taught farmers how to plant in a more sustainable way. The government also had to stabilize prices, so they paid farmers and ordered more than six million pigs to be slaughtered. They paid to have the meat packed and distributed to the poor and as a result, the Federal Surplus Relief Corporation (FSRC) bill was passed to regulate crop and other surpluses to keep prices stable.

In February 2008, President George W. Bush signed the Economic Stimulus Act into law. This law was designed to generate new home sales and provide a boost to the economy. After the Great Recession, President Obama sign into law The Dodd–Frank Wall Street Reform and Consumer Protection Act, it was designed to restore some of the U.S. government’s power over the financial industry. This law enabled the federal government to gain control of banks considered to be on the edge of financial collapse and by applying various consumer protections designed to protect investments and prevent banks from providing high-interest loans to borrowers who will have difficulty paying.

The American Recovery and Reinvestment Act (ARRA) of 2009 was a stimulus package signed into law by President Obama, this las helped avoid the feared second Great Depression. This was developed after the Great Recession economic crisis. This law was created to save existing jobs and create new ones as soon as possible. It was also passed to provide relief to those who were affecting during this time. The stimulus package was estimated to cost $787 billion. The ARRA had three spending categories which were, to cut taxes by $288 billion, it spent $224 billion in extended unemployment benefits, education, and health care and it also created jobs by allocating $275 billion in federal contracts, grants, and loans. The economic stimulus package ended the Great Recession by stimulating consumer spending. It also was also designed to bring confidence needed to boost economic growth, and to restore trust in the financial services industry. In a 2009 report, it was mentioned that the ARRA would stimulate gross domestic product by 1.4 percent to almost 3.8 percent by the end of 2009. The stimulus package was successful in 2009, the economy kept growing from 1.5 percent and 4.5 percent. This package was the biggest improvements of this time and was the key to maintain economy strong. In was predicted that ARRA would increase employment by 7 million full-time jobs by the end of 2012. By 2015, it was estimated that the stimulus created between 2 million and 10.9 million jobs available for everyone.

What effects did each event have on lending to the individual consumer (i.e. what happened to the supply of funds at banks available to lend; what happened to interest rates, what happened to the requirements to take out loans at a bank?

Over the Great Recession, the net worth of American households and non-profits declined by more than 20 percent, with the economy being unsteady. The U.S. Federal Reserve began acting by reducing the national target interest rate. Interest rates were at 5.25 percent in September 2007 and by the end of 2008, the U.S Federal Reserve had reduced the target interest rate to zero percent for the first time, to encourage borrowing and by extension, capital investment. Many banks were also being sold to Bank of America to avoid bankruptcy. After many banks were at risk at failing, they became more aware of the markets they served. Competitor non-bank lenders were taking high risks to cut the rewards of the nontraditional loan products they offered to different groups of consumers. Market share and earnings pressures were high, forcing many commercial banks to increase their customer bases and adopt new marketing strategies and revise their lending processes to accept more risk. Bank lending increased slowly after the Great Recession. This growth resulted from improved bank industry conditions, looser lending standards, and increased loan demand.

During the Great Depression, consumer spending declined 18 percent, manufacturing output dropped 54 percent, and construction spending dropped 78 percent and 80 percent of production capacity in the automobile industry came to a stop (“Great Depression: American Social Policy,” 2018). During this time, it became very difficult to lend because of the banks collapsed after the stock market crashed. Banks were unable to collect loans. Many people believed this was the main reasons of the Great Depression. Bank failures increased rapidly and almost every town had a failing bank, and who ever had their money in that bank, they had also lost it all. Loan values fell more than 58 percent and continued to decline at a rapid pace. The Great Depression had devastating effects in many countries. Personal income, tax revenue, profits and prices dropped. As the stock market collapsed, investors who did not have funds to invest in stocks borrowed from banks to do so, by using the purchased stock as collateral. Purchasing stock with borrowed funds became common during this time. Many banks also required higher margins, and others didn’t, which exposed themselves to higher risks. Rules were also passed to prevent the Federal Reserve from making loans to banks to keep them liquid and solvent (Beck 5). After the market crashed the Federal Deposit Insurance Corporation prohibited banks from underwriting securities. This allowed the Federal Reserve to set margin requirements for loans secured by purchased securities. After WWII, the consumer lending market was still small.

Your opinion: Have we learned any lessons from these events? If so, what are those lessons we have learned? Support your answer

The Great Recession and The Great Depression were horrible economic events, and because of this I think it was important for banks to be prepared in case this was to happen again in the future. The government also acted after these events happened. Laws were passed to protect banks and the savings of people. I think this was a good idea because they will be prepared if banks failed again. Government had a little more power over the economy, and I think that it important. After looking further into these two economic events, I learned how banks got to the point where they had to close or sell to other banks, the impact it causes to everyone and the struggles it took to recover from these collapses. I’m not sure if something like this would happen in the future but I know we will be more prepared to deal with it. We will be able tell whether we are heading towards a recession or not. We can now identity the causes and effects and act right away. High interest rates are a first sign, because they limit the amount of money to invest. Another big sign would be the stock market crashing again and this reduces investment causing many damages to the environment.

Although, I did further research and came across an article that talked about financial crisis happening in the future. It was mentioned that the current global will continue to grow and by 2020 we can face a financial crisis followed by a global recession. The United States is increasing government consumption, and it has been unsustainable. Inflation will also continue to rise above target. I also read that the US Federal Reserve will continue to raise the federal funds rate from its current 2% to about 3.5% by 2020. As a result of this, short-term and long-term interest rates and the US dollar will rise. Oil prices will continue to increase. It was also mentioned that unemployment will start to rise. I wasn’t aware of this information, and it terrifies me. I just hope we act right away when we start seeing the major signs that could lead the economy to a recession. Overall, technology has increased tremendously and that will help us see upcoming changes in the economy and be able to act before it leads to a crisis.

References

  1. A&E Television Networks. 'Great Recession Timeline.' Google Search. Google, 2017. Web. 5 Feb. 2019.
  2. Amadeo, Kimberly. 'The Worst Day in Wall Street's History.' The Balance Small Business. The Balance, 2018. Web. 04 Feb. 2019.
  3. Amadeo, Kimberly. 'Did Obama's Stimulus Plan Work?' The Balance Small Business. The Balance, 2018. Web. 04 Feb. 2019.
  4. Amadeo, Kimberly. 'Why Another Dust Bowl Is Likely.' The Balance Small Business. The Balance, 2017. Web. 10 Feb. 2019.
  5. Beck, Richard E., and Kathlyn L. Farrell. Consumer Lending. Washington, DC: American Bankers Association, 2013. Print.
  6. Coghlan, Erin. 'What Really Caused the Great Recession?' Institute for Research on Labor and Employment. N.p., 19 Sept. 2018. Web. 07 Feb. 2019.
  7. Editors, History.com. 'Glass-Steagall Act.' History.com. A&E Television Networks, 15 Mar. 2018. Web. 07 Feb. 2019.
  8. Fiorillo, Steve. 'Great Depression: Causes, Effects and Timeline.' Google Search. Google, 2018. Web. 10 Feb. 2019
  9. Marx, Jerry D. 'Great Depression: American Social Policy.' Social Welfare History Project. N.p., 26 Feb. 2018. Web. 10 Feb. 2019.
  10. Rich, Robert. 'The Great Recession.' Federal Reserve History. N.p., n.d. Web. 07 Feb. 2019.
  11. Roubini, Nouriel, and Rosa Brunello. 'We Are Due a Recession in 2020 – and We Will Lack the Tools to Fight It | Nouriel Roubini.' 2018. Web. 06 Feb. 2019.
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Causes for the Great Depression Compared to Causes for the Great Recession: Analytical Essay on Dust Bowl. (2022, August 12). Edubirdie. Retrieved June 16, 2024, from https://edubirdie.com/examples/causes-for-the-great-depression-compared-to-causes-for-the-great-recession-analytical-essay-on-dust-bowl/
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