A comparison of the 1929 Recessions to 2008

To understand the ongoing recession of 2008-09 it is important to compare and contrast it with the Great Depression of 1929. The 2008-09 recession is the worst recession since 1929 which has not turned into a depression as of now.

There is no single cause for The Great Depression, while there were number of causes.

1. Stock Market Crash

Stock Market is always acting as a barometer of any Economy. The Great Depression started with the stock market crash on October 29, 1929. Within two months of the crash in October, the stockholders have lost $40 billion. Even though the stock market started regaining some of its losses by 1930, but this was not enough and America entered into what is called The Great Depression.

Similarly, it took 28 years for Sensex to reach at the level of 12000 in year 2007 and Sensex took only one year to reach at the level of 21000 from 12000. The crash occurred in 2008, though it was not the reason for the recession to begin. But it was the effect of causes of recession. The housing bubble in the US has busted which forced the foreign investors to pull out their money from the stock market which was the cause of the Sensex jump from 12000 to 21000.

2. Bank Failures
Many people think that stock market crash was the reason of Great Depression, but the crash only set the stage for the Great Depression. It was after the crash that people became insecure about there money in the banks, and started withdrawing money from the banks resulting in bank failures. In all 9000 banks failed in the 1930s, and in the first 10 months of the recession as many as 744 banks failed. Those people who left money in the failed banks lost it. The surviving banks stopped lending money, in fear that if they lend they would also fail.
In 2008, there have been only 19 bank failures. Also the 1930’sfailure of banks led to the creation of Federal Deposit Insurance Corporation (FDIC). When the banks had a run in deposits in the early 1930’s, there was no deposit insurance and there was no requirement that a bank keep a percentage of reserves for just such a run. Now, a bank that offers FDIC insurance must keep a percentage of assets available, with the FDIC kicking in the rest required to return the insured limit (usually $250,000) should a run occur.

3. Reduction in Purchasing Across the Board
In 1929, the stock market crash has already set a fear in the hearts of the investor as well as the non investors, and the fear of further economic difficulties, ceased them from purchasing new items. This resulted in reduction in the number of items produced and thus a reduction in workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation.
These days a similar position is prevailing, people have stopped spending because of which the jobs are getting reduced and the unemployment is increasing. The unemployment rate hit 6.1% in September 2008 a 5 year high & the prevailing unemployment rate in the US is 8.5%.

4. Trade and industrial production
Most historians and economists partly blame the American Smoot-Hawley Tariff Act (enacted June 17, 1930) for worsening the depression by seriously reducing international trade and causing retaliatory tariffs in other countries. Foreign trade was a small part of overall economic activity in the United States and was concentrated in a few businesses like farming; it was a much larger factor in many other countries.
In middle-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.
In February 2009, The Economist claimed that the financial crisis had produced a "manufacturing crisis", with the strongest declines in industrial production occurring in export-based economies.
In March 2009, Britain's Daily Telegraph reported the following declines in industrial output, from January 2008 to January 2009: Japan -31%, Korea -26%, Russia -16%, Brazil -15%, Italy -14%, Germany -12%.