How the COVID-19 economic crisis compares to the Great Depression
Updated: May 28, 2020
What is the Great Depression?
Great Depression, a worldwide economic downturn that began in 1929 and lasted until about 1939. Although it originated in the United States, the Great Depression caused drastic declines in output, severe unemployment, and acute deflation in almost every country in the world. During this time, many people were out of work, hungry, and homeless. In the cities, people would stand in long lines at soup kitchens to get a bite to eat.
How did it start?
After World War I, the economy was doing great. More women were working outside of the home. Banks began to give loans to everyone as things looked pretty good. Soon people were able to buy the latest gadgets, to be exact, most people had a T-Model, Henry Ford 's car. All this made very wealthy businesses and the average American is making good money themselves. People started looking for things to do with their new-found wealth, most people were investing, after all, why be rich when you can be richer. So, the stock market became quite a popular practice and with so many buying stocks, investors finding it very easy to make money on stocks.
People were pouring their money into whatever security is hot that day. In fact, there was so much money to made people took out loans to invest even more, and by 1929 America's stole wealth doubled, and, since 1922, investments had risen by 218 percent. In fact, the stocks were rising so fast businesses had difficulty keeping up and justifying their stock price, and production slowed down. It seemed businesses had overestimated their growth and the wages are now falling. Interest rates started to rise sharply.
Uncertainty increased among investors. Which brings us to the start of the Great Depression on Thursday, 24 October 1929, Black Thursday. when frightened investors sent the Dow Jones Industrial Average plunging.
Also, another reason why the Great Depression got so bad, was because banks wouldn't do anything to stop the giant cycle of deflation that was happening. Because people were losing their jobs, they weren't able to spend as much. So, companies lowered the prices of their products in order to lure more people into buying their goods.
But, then they would make less money from selling the goods, forcing them to lower wages or lay people off. With even MORE people unemployed, they were not able to buy as many goods causing prices to drop lower and lower, while the unemployment rate shot higher and higher. Leading us into this giant downward cycle of deflation and unemployment.
Leadership was also a key factor in causing the crisis.
Herbert Hoover was President of the United States when the Great Depression began. Many people blamed Hoover’s policies and inaction for the Great Depression. They even named the shantytowns where homeless people lived "Hoovervilles" in disgust with the president’s inaction in the face of crisis. In the country-sides, farmers struggled in the Midwest where a great drought turned the soil into dust causing huge dust storms, deepening the crisis further.
Finally, in 1933, Franklin D. Roosevelt was elected president. He promised the people of America a "New Deal” to overcome the Great Depression.
The New Deal
The New Deal was a series of laws enacted and agencies established to help the country deal with the Great Depression. These laws placed regulations on the stock market, banks, and businesses. They helped put people to work and tried to help house and feed the poor. Many of these laws are still in place today like the Social Security Act, child labor laws, and federal minimum wage laws.
How Did It End?
The New Deal changed the face of the economy. The Great Depression ended in 1939 because of the regulations put in place via the New Deal. But with the start of World War II, the American economy boomed like never before. The wartime economy put many people back to work and filled factories to capacity.
Why was the Great Depression important?
The Great Depression shows the important roles that money, banks, and the stock market play in our economy. The Great Depression also brought us the Federal Deposit Insurance Corp (FDIC), regulation of securities markets, the birth of the Social Security System, and the first national minimum wage. Such regulations and oversight helped keep the economy balanced over the next numerous decades.
Comparison with COVID-19 crisis
With the U.S. economy in free-fall, a lot of forecasters have been digging deep into the history books, looking for guideposts of what to expect. Often, they've turned to the chapter on the 1930s, The Great Depression. As we just discussed, that crisis was triggered by a financial meltdown and made worse by bad policy choices, including the decision by the Feds to raise interest rates. Most important to note is that the Great Depression dragged on for a dozen years.
In contrast, most economists expect to rebound from the current crisis in the next six months or so and don’t see it stretching out indefinitely. That optimistic view is supported by a different historical example from more than a decade before the Great Depression: the 1918 Spanish Flu pandemic, after which the U.S. economy bounced back relatively quickly. They used the same social distancing measures and it was proven that, in the long run, fewer people died and the economy got better.
There are differences, though. The Great Depression started off with the giant stock market crash. This was so bad because almost everybody had their money crammed into whatever stock they could. Today, although stacks are big, we don’t have the insane margins put in place like what they had during the Great Depression. Also, there was quite a long stretch before the recession started to show itself, and when the virus actually hit. This provided a nice buffer for people to start to see it coming. And for the government to start to put things in place. Plus, massive unemployment is happening because it has to. People have to stay at home because of the virus, and they can’t go to work. Whereas during the Great Depression it was a deflation cycle. Although we may be heading into one somewhat similar because the delivery restaurants may have to lower prices due to the unemployment. Therefore lowering wages, and possibly laying off workers.
All in all, the coronavirus crisis is not as bad as the Great Depression. There are signs of faster recovery and growth, even without a world war!