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Ten Key Differences between the Current Recession and the Great Depression

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

There are many ways in which the current recession differs from the Great Depression of the 1930s. Ten key points of variation can be separated into four socio-economic categories.

There are many ways in which the current recession differs from the Great Depression of the 1930s. Ten key points of variation can be separated into four socio-economic categories. Let/'s begin with three main differences relating to financial markets.

(1) In the 1930s, the Federal Reserve in the Unites States reduced the credit available to the banking system, exactly the opposite of the tack that is being taken at this time.

(2) Washington, when first faced with a recessionary fall in revenue, tried to balance its budget by an overall tax increase. Again, this is a move that would be deplored today. Increasing monetary and fiscal stimulus is now seen as the only way to go.

(3) The banking sector may be having problems now, but in the 30s there were many more small banks with little asset diversification. The risk of bank failure was much greater. Furthermore, there was no deposit insurance to reduce surges in bank runs.

There were also major world trade differences.

(4) In the 1930s, world trade ground to a halt as individual nations tried to save themselves through erecting barriers. The net effect was to hold back everybody. The failure of this flight into protectionism was epitomized by the Smoot-Hawley tariff-raising act in the U.S. It continues to be sited as one of the biggest mistakes of the period.

Today, trade barriers are a lot lower simply as a result of negotiated agreements that have lowered tariffs between almost all nations. There are still problems in services and agriculture, but the freer flow of goods has raised living standards everywhere. Whenever G7 or G20 nations gather, they descry any evidence of overt or subtle protectionism. It is taking place, nonetheless, with “Buy America” in the forefront of misguided policy.

(5) In the earlier period, currencies were fixed and based on the gold standard. This tied governments/' hands in some key policy areas. Today/'s variable exchange rates allow nations to adjust their trade imbalances with a minimum of fuss and disruption.

(6) There were no global agencies such as the International Monetary Fund (IMF), the World Trade Organization (WTO) and the World Bank, which are now available to lend a helping hand to countries in distress. The same goes for international aid agencies.

There are also societal differences. Some of these relate to the “safety net” and are appreciated by almost everyone. But there are two other factors that are often overlooked.

(7) In the United States and Canada in 1930s, there was no unemployment insurance, nor universal health care, Medicare or Medicaid and no social security or Canada Pension Plan. These are the financial backstops that now allow most of us to sleep better at night.

(8) Most families now have two wage earners. If one spouse loses his or her job, the other can support the household for a while. This has been particularly important in North America in this latest downturn, where many adult males in the manufacturing sector have been “downsized” or let go. In the 1930s, there was usually only one wage earner.

(9) Government was not nearly as large a factor in the economy in the 1930s. In the present, the sheer size of government provides some economic security. Workers in the public sector have been much safer in their employment prospects. In fact, it has been somewhat shocking to see some public sector employees seeking wage increases at a time when workers in the private sector are clinging to their jobs by their fingernails.

Finally, there was one other factor that hopefully made the Great Depression unique.

(10) As exemplified by the term “dust bowl”, the 1930s included an agricultural crisis, brought on by drought, which added to and magnified the problems in all other areas.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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