Introduction

Great depression occurred between 1929 and 1933 and is considered a critical financial and stock market crash in the history of the financial crisis. From 1933, the world tried to recover from the depression, and no depression have been reported lately. In 2007, the world almost experienced another depression, but various measures were placed to counter the crisis. Since the 2007-2008 had light effects on the global financial market compared to the 1929-1933, it was therefore termed as ‘great recession’. Han and Goetz (2015) define an economic recession as an extended period of slow economic growth and reduced economic activities.

The great depression is defined by Cole and Ohanian (1999) as the period by which stock market values, businesses and employment fall too low levels for a longer period, probably more than two years. The essay will, therefore, compare and contrast the great depression (1929-1933) and the great recession (2007-2008) and how the monetary policies implemented by the banks during these crises. The essay will final explore the current crisis (Covid-19 pandemic) and various ways monetary policies have been used to stabilize the economy.

Comparison of the great depression and the great economic recessions

After the First World War, 1920 to 1925, the US and other international economies began to experience an economic boom. During this period (1920-1925), global manufacturing and mining companies experience a 20% economic growth rate (McNally 2010). The working class and middle-class individuals in the US began to improve their living standards. Since Americans were experiencing an improved economy, about four-fifth did not save their funds, and the rich only had a third of their entire savings. About 90% of the American began experiencing income falls. This income fall was followed by anti-labour law and union- busting, which further increased inequality in income. McGovern (2000) claimed that textile, agriculture and mining industries were experiencing post-war hangover, which accelerated their decline. American government was also responsible for about 60% of international lending, which also created instability in international trade. Individuals, including investors, began to borrow funds to support their businesses and purchases their stocks. At this stage, the United States economy began to show signs of an economic slowdown before the crash of the stock market. On October 23, 1929, the US stock market drop and investors began panic selling. On October 29, ‘Black Tuesday’, the great depression was experienced when the stock market value declined and gave up entire gains of the previous year (McNally 2010).

This great depression contributed to the decline of the financial institutions and the introduction of trade war.

Unlike the great depression, the great recession started in December 2007, and the great recession occurred very fast compared to the great depression of the 1930s. In the great depression, the GDP declined by 4.3%, and the unemployment rate rose by 10% and fall back to 8.5% compared to the great depression, which hit 25% of its level. The great recession was linked to the subprime mortgage crisis (Fligstein and Goldstein 2011). The US financial institutions granted home loans to most of its citizens, including those with poor credit histories. Since the demand for houses rose, the price of the houses also rose, including Western Europe and North America. In April 2007, the subprime mortgage lender was declared bankruptcy. Most of the lenders were unable to return the funds in time, and most of the financial institutions failed to support their financial needs and services. In the great recession, the US Federal Reserve tried to reduce the national target rate of interest, which guided lenders in setting loan rates. This action was mend to make a financial change that could enable the US and other European countries to recover from the global financial crisis. The great depression was too severe because the Federal Reserve was mandated to increase the credit base and did not protect the matter since not monetary supply was done (Bemanke and James 1991).

According to Crafts and Fearon (2010), the great depression contributed to over 9,000 bank failures, which represents 50% of all banks across the globe. This impact is different in a great recession, where 57 banks representing 0.6% of the banks nationwide failed.

Unemployment was a common problem in all the two crises. The stock market was also affected where Dow lost 50% of its market value in great recession but recovered as first as possible, and an average loss of 90% of Dow Jones Industrial value was recorded in the great depression. The government was also affected in the two crises during their attempt to stabilize the global economy. In the great recession, the federal government used about 2.5% GDP for two years, while only 1.5% was used for one year during the great depression. These financial crises also affected European countries, especially the countries that were linked to the American financial trade. In the great depression, the global economy was linked to the gold standards, which was on suspension during the First World War. In the return of the gold trade, the global prosperity depended on the US economy to absorb import and manage an increased level of international lending, which they also failed. The great recession affected countries like Portugal, Cyprus, Ireland and Greece. These European countries defaulted their debts making the EU give them “bailout” loans and cash investments.

Monetary policies

In the great depression, the monetary value was quite a disaster. The supply of money and the monetary values fell by a third. The real interest rate also doubled, making the banks to fail extremely. The Federal Reserve could not manage to save this situation during the great depression because of its diverse role. The Federal Reserve's monetary policy was considered disastrous under the two explanations. 1) The failure was considered to be an innocent neglect, and 2) the Federal Reserve willingly caused a contractionary monetary policy with the aim of fostering bureaucratic objective. Most of the economist blames the federal reserves on their misguiding policies that limit their decisions, thus making them fail in offering a rapid change to save the decline of the global economy. Cargill (1992) claimed that the shift in policy occurred immediately after the death of Benjamin Strong in 1928, the Federal Bank of New York’s governor. Before, Strong had ideas on how to implement monetary policy tools in minimizing cyclical fluctuations in prices and outputs. This Strong’s capability could have been effective in limiting the financial panics and controlling the factors that could accelerate financial decline. During the crisis, the Federal Reserve seemed to be too reluctant compared to when the crisis was taking place. For example, the Federal Reserve open new markets and reduced discount rates in 1924 and 1927 as their attempt to boost economic growth and ensuring Britain attract more gold reserves. When the discount rate and open market sales hikes in 1928 and 1929, the Federal Reserve became more reluctant and discouraged speculation of the stock market. Different states and financial institutions responded differently to the two crises to ensure that such crises are limited in future businesses. In the US, US President Roosevelt implemented New Dealmaking numerous countries to leave the gold standards and focus on the macroeconomic regimes. Monetary policy regimes were also applied in Great Britain after the great depression. The European Central Bank has responded to the great recession using a “full allotment at policy rate”(Micossi 2015). This strategy involves providing banks with more liquidity than any European bank may require. This was also suggested to be provided in the form of overnight loans at usual policy loans.

Impacts of covid-19

The greatest lesson that nations and Federal Reserve learnt from the great depression is that the financial sectors should not be left as a stand-alone sector. Since poorly regulated financial institutions accelerated the stock market crash in 1929, various there is a need for institutions that regulate loans and mortgages. This can be applied in the great recession to ensure proper regulations of lending intensity despite the appreciation value of certain products like houses. These two crises have enabled the government to take control of bank monitoring and increased the roles of the Federal Reserve towards ‘national interest’. In the current pandemic, Covid-19, the world has experienced financial threat in its global market. For instance, due to strict quarantine and lock-down measures, export and import have been heavily affected. Most of the global investors have also reduced their global trade, thus reducing product surplus. Although the demand for the products is high, investors have fear losing their funds since they are not aware of the next Covid-19 measures the government may impose. The keenness in investment during the pandemics is greatly considered by most of the investors following the aftermaths of the great depression and great recession that were previously encountered. For instance, due to sellers fear and uncertainty, the global stock market has struck out about six trillion US Dollars from 24^th to 28^th February 2020 (Ozili and Arun 2020).

In conclusion, a financial crisis is a common occurrence that may be caused by any financial activity. But with proper regulations, its impact may not be too intense for a country's economy. Therefore, various policies, governments and institutions are required to control the financial activities of national banks.

References

Bemanke, B. and James, H., 1991. The gold standard, deflation, and financial crisis in the Great Depression: An international comparison. In Financial markets and financial crises (pp. 33-68). University of Chicago Press.

Cargill, T.F., 1992. Irving Fisher comments on Benjamin Strong and the Federal Reserve in the 1930s. Journal of Political Economy, 100(6), pp.1273-1277.

Cole, H.L. and Ohanian, L.E., 1999. The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review, 23, pp.2-24

Crafts, N. and Fearon, P., 2010. Lessons from the 1930s great depression. Oxford Review of Economic Policy, 26(3), pp.285-317.

Fligstein, N. and Goldstein, A., 2011. Catalyst of disaster: Subprime mortgage securitization and the roots of the great recession.

Han, Y. and Goetz, S.J., 2015. The economic resilience of US counties during the Great Recession. Review of Regional Studies, 45(2), pp.131-149.

McGovern, J.R., 2000. and a Time for Hope: Americans in the Great Depression (p. 1).

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McNally, D. 2010. Global slump: The economics and politics of crisis and resistance. PM Press.