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A person who was a child during the Great Depression of the 1930s would be in his or her nineties
today. There is no shared national experience of the depths and devastating human impact of the
Great Depression. We feel the recession of today as being extraordinary, but how does it compare
to the singular economic event of the last century?

There are many relevant parallels between and lessons to be learned from the Great Depression
and Great Recession that can provide a historical perspective and policy insight. The stock market
crash of 1929 marked the beginning of the Great Depression, whereas the collapse of Lehman
Brothers in September 2008 was the beginning of the Great Recession we are currently
experiencing.

Both periods were marked by increased unemployment, frugality, and popular unrest. The scope
of the economic crisis, however, is radically different. During the Great Depression the global
market did not have the institutionalized structures necessary to undermine the extent of the
bust. Furthermore, the Great Depression was characterized by a severe double dip, whereas the
current economic crisis has maintained a steady growth rate; growth has slowed, but it has not
stopped. There are also significant differences in the levels of deficit spending, manufacturing
capacity, and bank foreclosures.

Perhaps of greatest importance were the public policy actions of President George
Bush, President Barack Obama, and Ben Bernanke, today’s Chairman of the Federal Reserve. The
quick and significant actions taken by a Republican President, a Democratic President, and a
Republican-nominated Chairman of the Federal Reserve Board have been the difference between
the extent of the severity of these two economic downturns—both of them were the result of
historically unsustainable levels of debt prior to the economic collapse.
 Comparing the Great Depression vs. the Great Recession

1. Deficit Spending and Monetary Policy

Prior to the Great Depression, the United States was under the very frugal leadership of the
Warren G. Harding and Calvin Coolidge administrations. Both men took strong steps toward
austerity and maintaining fiscal responsibility. The understanding of fiscal policy was simple: the
federal government should be run on a balanced budget. The great role the federal government
now plays, especially in regard to Medicare, Social Security, Medicaid, and military spending
relative to the insufficient tax rates we desire, is unsustainable. However, during an economic
crisis, private spending evaporates. This is problematic because consumer spending represents
70% of the United State’s economy.

Bruce Bartlett of Forbes states further:

In the 1930s, there were a number of economists who argued strenuously for a do-nothing policy.
But as the Great Depression dragged on and collapsed in 1937—when conservatives were
successful in having the federal government slash the budget deficit (it fell from 5.5% of GDP in
1936 to 0% in 1938) they lost credibility. Economists today generally believe that it was the
unprecedented deficits resulting from World War II that actually ended the Great Depression.

Total US Debt

As America spends to get out of recession the deficit increases exponentially

Government spending must compensate for the private sector in order to compensate for private
spenders’ newfound frugality. If nothing fills the consumer gap, deflation is inevitable, and once a
country enters a deflationary period, recovery becomes all the more difficult. Unlike many of the
European economies who were suffering from hyperinflation during the Great Depression, the
United States was experiencing substantial deflation. Prices had to be cut and subsequently so did
wages and labor.

The United States is flirting with deflation today, and it experienced mild deflation in 2009, but
many believe that governmental deficit spending can counter-balance these deflationary forces.
The great unknown is the continued downward spiral of housing resale values. This is the catalyst
for much of our current deflationary pressure as home prices continue to decline.
The first overarching similarity of today’s recession to the Great Depression is the amount of
deficit spending as part of federal monetary policy.

2. Neo-functionalism

The first significant difference between the Great Depression and our Great Recession is that
there is a significantly larger amount of neo-functionalism today than there was during the Great
Depression. Simply put, there has been a growth of technical economic institutions that have
required the growth of political institutions as a result. This need to compensate economic
markets with governance is known as the “spill-over” effect.

Brue Bartlett of Forbes elaborated on October 2009,

Policymakers were united in their desire to make sure this didn't happen if humanly possible.
Many postwar institutions such as the World Bank, General Agreement on Tariffs and
Trade and International Monetary Fund were created to fix various problems thought to be
responsible for the Great Depression. Congress even passed a law, the Employment Act of 1946,
which requires the president to do everything in his power to prevent another depression.

These institutions have played a vital role in alleviating the severity of bust cycles. The dollar has
always been one of the more stable currencies in modern times, but the European Union and the
creation of a common, standard currency for the EU has positively increased the stability of the
major currencies. This has prevented the massive hyperinflation experienced in the German and
Hungarian currencies that occurred during the global Great Depression. Increased political
coordination through international institutions has also increased response time and readiness to
handle international economic crises.

From an American perspective, the Employment Act of 1946 has radically increased our ability to
deal with crisis. The impetus for creating such an act was to create mechanisms that could be used
to immediately begin to combat an economic downfall. The purpose of the Employment Act of
1946 has been outlined by [SOURCE?] as follows: “Because of the planlessness of the twenties—
because of the lack of courageous action immediately following the collapse—the nation lost
105,000,000 man-years of production in the thirties.”

Public policy conventions recognize that the critical difference between deflation and its
accompanying large unemployment rates and inflation is that a nation, and in fact individual
workers, can never recover the lost days, weeks, months, and years of idle factories and idle
workers that are the result of deflation. The economic drag on a nation and the individual
devastation is defining for an age and for the individual lives of the unemployed. What the 1946
Employment Act ultimately accomplished was a philosophical justification for putting new
economic systems in place before times of economic crisis.

Even before this bill was passed there was a significant growth of circuit breakers. The Social
Security Act of 1935 established the retirement vehicle that we know today, but the Social Security
Act was also responsible for creating an unemployment insurance program. The law is
administered and enforced by The Employment and Training Administration in the U.S.
Department of Labor. The program has grown substantially; by 1994 more than 96% of
workerswere covered by unemployment insurance. Unemployment insurance has been a vital
asset during times of economic woe as it allows the unemployed to remain part of the consumer
economy.

This fact remains true to this day. Just like during the Great Depression, the Great Recession has
also seen the growth of unemployment insurance. In 2008, a special extended benefits program
known as the EUC program was created. In mid-November the program was up for an extension,
but it failed to pass in the House. The President and Republican leaders of Congress have now
reached a compromise extending the Bush-era tax cuts and creating a further extension of
unemployment benefits.

David Greenlaw of Morgan Stanley elaborates on the potential impacts of the failure to extend the
EUC program:

As seen in the accompanying figure, the unemployment benefits share of personal income is
historically high at present but is about on par with that seen in the deepest recessions of the
post-war period (namely, the 1973-75 and 1981-82 recessions). So, how much of an economic
impact would be associated with the loss of extended unemployment benefit payments?
According to the BEA's monthly personal income report, total unemployment benefit payments in
October amounted to $128 billion (SAAR). Based on the breakdown of recipients, we estimate
that EUC payments accounted for $55 billion (SAAR) of the total. The loss of these payments
would be worth about -0.4% of personal income—or roughly -0.1pp of income growth spread out
over the next several months. Assuming that about two-thirds of the effect would be concentrated
in 1Q, and that the propensity to spend of benefit recipients is relatively high, the direct negative
impact on 1Q GDP could be as much as one full percentage point.

Greenlaw’s estimates, if accurate, are indeed troubling. However, the creation of the EUC and its
functions are very much on a par with what happened during the creation of the Social Security
Act of 1935. Some programs, like the EUC or National Recovery Administration during the
depression, do fail, but the overarching principle is that during an economic crisis there is a
spillover between government institutions and economic growth. That was true then, and it is
even truer in today’s global economic climate.

3. GDP Growth

Gross domestic product (GDP) growth is probably the greatest factor in determining what
constitutes a depression versus a recession. The most simplistic definition of a recession is when
economic growth contracts for two quarters straight; however, the severity is measured in actual
decline, not merely by the distinction between positive and negative growth. The economy was
slowing in 2007, and fell by -0.7 and +0.6 in the 1st and 2nd quarters of 2008, respectively, but
then fell off a cliff. The 3rd and 4th quarters of 2008 were -4.0% and -6.8%, respectively, followed
by -6.40% and 0.70% in the 1st and 2nd quarters of 2009. The 4th quarter of 2008 and the
1st quarter of 2009 were the first successive quarters since the Great Depression that sustained
growth below -5.0%.

Change in real GDP

The National Bureau of Economic Research (NBER), which is the main watchdog institution for
determining when recessions decline or end, defines recession as follows:

Significant decline in economic activity is spread across the economy, lasting more than a few
months, normally visible in real GDP, real income, employment, industrial production, and
wholesale-retail sales. The beginning of a recession is commonly referred to as a business cycle
“peak,” and the end of it is called a business cycle “trough.”

This is a much better definition because it is all encompassing. A recession does not necessarily
have to be a broad general decline; it can be that only certain segments of the economy are
causing the economic woes.

The unofficial definition of a depression is much more clear. A depression is broadly defined as a
drop in 10% of the GDP. Between 1929 and 1933, the United States’ GDP dropped more than
30%.

The difference between the Great Depression and the Great Recession is very clear. In the current
economic crisis there has been a period of GDP loss, followed by a period of slow growth as
opposed to the massive decline in economic output that occurred during the Great Depression.
At the end of the day, the GDP definitional debate does not matter to the American public. One of
the most interesting examples of this occurred during the 1980 election cycle. President Jimmy
Carter attacked Ronald Reagan for misusing the term depression to describe the economic
situation of the country. Reagan’s response to President Carter’s claim would become one of the
most notable responses in American political history. Reagan stated:

Let it show on the record that when the American people cried out for economic help, Jimmy
Carter took refuge behind a dictionary. Well, if it's a definition he wants, I'll give him one. A
recession is when your neighbor loses his job. A depression is when you lose yours. And recovery
is when Jimmy Carter loses his.

Seven Biggest Downturn Since 1929

This chart is a good comparison of the economic crises of the 20th century

 GDP Decline 2008

This graph shows the GDP in its monetary value.

4. United States Manufacturing Decline

Both the Great Depression and the Great Recession were characterized by an immense decline in
manufacturing production. However, there was a radical difference between the two in the scale
of the decline. Karl Aiginger, of the Austrian Institute of Economic Research and the Vienna
University of Economics and Business, writes this:

The speed of the breakdown of activity at the start of the recent crisis is highlighted if we analyze
quarterly or monthly data on manufacturing and exports. Industrial production declined by 19%
between 3Q2008 and 1Q2009, and then leveled off. During the Great Depression it declined by
12% in the first three quarters and did not recover before 1932. Only one half of the total decline
therefore happened in the first three quarters in the Great Depression. This time manufacturing
output resumed growth after three quarters. The standard deviation of the decline in the first
three quarters (across countries) is again much smaller in the recent crisis.

World Great depression Table

(This chart shows the change in manufacturing production, on a country-by-country basis)

*) 01 - 05/2009 compared to 01 - 05/2008. - **) 1929/1923. - 1) Peak/2008. - 2) Peak/2007. - 3)

1Q2009/peak. -4) Weighted by GDP. --"World": Countries in table weighted by GDP.

Source: WIFO calculations using Mitchell, IFS, ST.AT.

5. Global Industrial Production

During the Great Depression industrial production had a massive three-year decline. Today’s
global markets experienced an initial shock, but since then global trade and global production
have continued more slow than previously but nonetheless remains unabated. Barry Eichengreen
and Kevin H. O’Rourke elaborate on this in the think tank VOX in March 2010:

Global stock markets have mounted a sharp recovery since the beginning of the year.
Nonetheless, the proportionate decline in stock market wealth remains even greater than at the
comparable stage of the Great Depression. The downward spiral in global trade volumes has
abated, and the most recent month for which we have data (June) shows a modest uptick.
Nonetheless, the collapse of global trade, even now, remains dramatic by the standards of the
Great Depression.
World industrial production is much more vibrant in today’s Great Recession than it was during
the Great Depression.

6. Bank Foreclosures

Another interesting point of study is how many banks foreclosed during the Great Depression as
compared to the Great Recession. Between the months of January 30, 1933 to March 1933, there
were 9,096 bank failures, which represented 50% of the banks. Between the months of December
2007 to May 2009, the U.S. lost 57 banks, which equates to 0.6 % of our total banks. As you can
see, the difference is staggering. While banks are still not in a great position to lend, which has
caused a stagnation of business, we are not in nearly as dire a position as during the Great
Depression.

Lehman Brothers: Was it Merely a Fake StoreFront?

This cartoon depicts the Lehman Brothers Bank. Lehman Brothers would file for bankruptcy on
September 15, 2008. This bankruptcy filing was the largest in United States history; it also
represented the beginning of the current recession. Picture provided
by http://www.toonpool.com/cartoons/Lehman%20Brothers%20Bank%20bankrupt_22808

7. Unemployment

The unemployment rate at the height of the Great Depression was at a staggering 25%. Today
unemployment is around 9.80%. Having a quarter of the working population hungry and
unemployed during the Great Depression was a massive impetus for strikes and civil unrest;
today we are not nearly at the same levels. However, there are common trends in demographical
and regional unemployment.
 Great Depresssion vs. Great Depression Unemployment Experience

For instance, African-American male unemployment was higher than white unemployment
during the recession and this continues to be the case. Global Research elaborates on this:

No wonder Chris Tilly— director of the Institute for Research on Labor and Employment at UCLA
—says that African-Americans and high school dropouts are experiencing depression-level
unemployment. And as I have previously noted, unemployment for those who earn $150,000 or
more is only 3%, while unemployment for the poor is 31%. The bottom line is that it is difficult to
compare current unemployment with what occurred during the Great Depression. In some ways
things seem better now. In other ways, they don't. Factors like where you live, race, income and
age greatly affect one’s experience of the severity of unemployment in America.
This shows that while unemployment levels are far less severe than they were during the Great
Depression, race and region play a huge role in determining who is unemployed.
 Rescue Society Great Depression Photo

This picture depicts a typical unemployment line during the Great Depression. Picture provided
by http://www.adannews.com/16333/video-foreclosure-fraud-investigation-and-unemployment-
extension-99ers-could-be-affected/
 Cumulative GDP Loss vs Peak Unemployment Rate During Recessions

8. Length of Average Unemployment

Very much as in the Great Depression, people are currently experiencing a long duration of
unemployment. By January of 2010, Americans were waiting an average of 35.2 weeks to find
employment.
 Average Length of Unemployment

That number has since declined. During the Great Depression the duration of unemployment was
no doubt longer, but interestingly enough, the United States federal government has been
tracking the duration of unemployment only since 1948. So in terms of records, this current
recession represents the longest duration of unemployment.

9. Protectionism

Both the Great Depression and the Great Recession are showing very long periods of
unemployment. There was more protectionism in Europe than in the United States, but both
societies became considerably less open. From 1929 to 1935, customs inflow in the United
Kingdom went from 0.8 % of their GDP to 4.7 % of their GDP. In France the rate went from 1.4 %
to 3.0%.

These measures were responsible for deepening the European depression. The

United States was not a beacon of free trade during the depression either. In 1930, the Smoot-
Hawley Tariff Act was passed, which raised tariffs on over 2,000 goods to record levels. This
move is widely considered by economists today to be a significant factor in prolonging the Great
Depression.

World-Crisis.net, an online site dedicated to providing news and analysis of economic

crisis, states this:
The initial government response to the crisis exacerbated the situation; protectionist policies like
the 1930 Smoot-Hawley Tariff Act, rather than helping the economy, merely strangled global
trade. Industries that suffered the most included agriculture, mining, and logging as well as
durable goods such as cows and automobiles.

Like the Great Depression, this current recession is incredibly global. However, new structures
have been put in place, like the G20, the E.U. Commission, and the IMF, which help to curb
protectionist policies.

These organizations are by no means a foolproof way of completely eradicating mercantilist

policies. In order to protect the American auto industry, President Barack Obama levied a 35% tax
on all tires made in China in September 2009.

The scale of the recession and inequalities in economic recovery could no doubt exacerbate
protectionist policies. At this point in time, however, it is unlikely that protectionism will reach
Great Depression levels, but it is still too early to rule out that possibility.

"World": Weighted by GDP.

1) 1Q2009/2Q2008. - 2) 1Q2009/3Q2008. - 3) 2Q2009/1Q2008. - 4) 2Q2009/3q2007. - 5) -

1Q2009/1Q2008. - 6)

2Q2009/4Q2006. - 7) 2Q2009/1Q2008.

Source: WIFO calculations using Mitchell, IFS, WTO.

10. Double Dip During Depression and Possibility for It Now

A major characteristic of the Great Depression that people worry about a recurrence of in the
present recession is a “double dip.” The Great Depression consisted of two major economic dips.
The first occurred from August 1929 through March 1933. The second economic decline, also
known as “ Roosevelt’s Recession,” occurred from May 1937 through June 1938.

This graph was found at http://www.marketoracle.co.uk/Article8778.html

Whether or not the American economy will experience a “double dip” during this current crisis is
yet to be determined. During the summer of 2010, many economists certainly thought so.
However, these concerns were contingent on the possibility of coming deflation, which have not
materialized.

Jamie Dimon, CEO of J.P. Morgan Chase, stated the following in an interview with Fortune
Magazine in its November 2010 edition:

I don’t think we’ll have one but no one knows. The American economy may be stronger than
people think. At the root of my optimism is the sense that the embedded strengths of this country
—a lot of which reside in its businesses—are still here. We work hard, we are innovative, we adapt
quickly. It will surprise people when America gets its mojo back.

Internet Resources on the Great Depression vs Great Recession

 Pew Study on Great Depression

 CNN Comparison: Great Depression vs. Great Recession
 Bruce Bartlett, Forbes: Great Depression vs. Great Recession
 The Atlantic Magazine: The Great Depression vs. the Great Recession
 Paul Krugman, New York Times: The Great Depression vs. the Great Recession
 The Freeman: Comparing the Great Depression vs. the Great Depression
 VOX: A Tale of Two Depressions
 Congressional Budget Office Compares Two Dep
 National Bureau of Economic Research
 The Tattler: The Great Depression vs the Great Recession
 Economics Journal Comparing the Great Depression vs. the Great Recession
 Atlantic Journal
 New York Times: Unemployment Today vs. the Great Depression
 Bloomberg: US Data Shows Recession Worst Since Great Depression
