Crash and Burn?

The Great Depression was the most pronounced recession of the 20^th century and followed the Wall Street Crash of 1929.  Former US President Calvin Coolidge described the onset of the depression in 1932, “In other periods of depression, it has always been possible to see some things which were solid and upon which you could base hope, but as I look about, I now see nothing to give ground to hope – nothing of man.”  The following video gives a short insight into the Great Depression and highlights its global reach. 

This Great Depression has a strong resonance with the current economic depression.  For example, Eichengreen and Mitchener (2003) identify the following features of the Wall Street Crash and subsequent Great Depression which seem broadly similar with the 2008 crisis: “cheap credit, a property boom, increasing consumer debt, and rising equity prices.”  Furthermore, David Murphy (2009) in his book, “Unravelling the Credit Crunch” highlights 3 areas of improper behavior identified by the Senate Banking and Currency Committee in 1934 which could readily apply today; crony capitalism (e.g. insider trading), fraud and antisocial behavior (e.g. tax avoidance). 

The Wall Street Crash and Great Depression also led to the infamous Glass-Steagall Act which attempted to curb such behaviors.  Interestingly, this legislation seemed to keep capitalism on the ‘straight and narrow’ until is repulsion in the 1990’s (more information here) ushered in a new age of financial innovation, and paved the way for the emergence of a housing bubble and subsequent financial crisis.  It should also be noted that the banking system became more deregulated through the 1920’s e.g. McFadden Act (1927), similar to the greater deregulation which occurred before the current crisis. 

There are two distinct views about how the why the Great Depression became so ‘great’.  The first is the monetarist view of Friedman and Schwartz (1963).  They suggest the Fed exacerbated the crisis through its unwillingness to act as a lender of last resort which spread panic, and further, by failing to increase money supply (perhaps due to fear of a new bubble).  In contrast, Bernanke (1983) argues that although money supply fell, it cannot entirely account for the output erosion.  Instead, Bernanke advocates that the banking crisis led to a break-down of credit provision to the economy.