Comparing the Great Depression to the Great Recession
President Obama has often remarked that the Great Recession (2008–10) is the greatest economic crisis since the Great Depression. It’s interesting to study the many parallels between the Great Recession and the Great Depression.
Causation. The main causes of both crises lie in actions of the federal government. In the case of the Great Depression, the Federal Reserve, after keeping interest rates artificially low in the 1920s, raised interest rates in 1929 to halt the resulting boom. That helped choke off investment. Also, President Hoover signed into law the sky-high Smoot-Hawley Tariff, which stifled trade and damaged American exports throughout the 1930s. Finally, the President signed a large tax increase into law in 1932, which halted entrepreneurship.
The seeds of the Great Recession were planted when the government in the 1990s began pushing homeownership, even for uncreditworthy people, with a vengeance. Mortgage-backed securities built on dubious mortgage loans became “toxic” when the housing market took a downturn, and many American banks verged on collapse. The government’s urgent desire to bail out various banks and corporations created uncertainty and instability, and this may have widened the recession.
Massive federal spending. Presidents Roosevelt and Obama responded similarly to the crises. They talked about balancing the federal budget, but instead resorted to massive spending. Earlier presidents, like Cleveland and Harding, cut spending when the nation was threatened with economic hardship. Hoover was the transition president, running deficits with record spending on public works, the first federal welfare program, and the first large-scale federal farm program. The results were budget deficits and 25 percent unemployment.
President Roosevelt became Hoover on steroids. FDR and his advisers, despite some early moves to cut spending and control the deficit that Hoover left behind, decided that ever-larger federal spending would trigger economic expansion and pull the country out of its economic slump. Thus Roosevelt began the Agricultural Adjustment Act (AAA), which paid farmers not to produce, and then expanded Hoover’s Reconstruction Finance Corporation, which provided bailout money to large banks and corporations. He also expanded spending on public works and targeted large subsidies to various special interests.
President Obama, who often cites FDR, followed his example of targeting spending to interest groups. He signed into law a $787 billion stimulus package that sent tax dollars to various cities and voting groups across the nation. He later supported an expensive “jobs bill” that would send money into key congressional districts. The President also campaigned for a cap-and-trade bill and universal health coverage, both of which promised to increase the federal debt substantially. In fact, the increase in federal debt under Obama and Roosevelt is similar. The national debt more than doubled in Roosevelt’s first two terms, and it is projected to double again in eight to ten years.
Spending fails. After the large increases in federal spending under Roosevelt and Obama, unemployment remained high. In the 1930s unemployment fluctuated, but recovery never occurred. In April 1939, toward the end of Roosevelt’s second term, unemployment was almost 21 percent. Treasury Secretary Henry Morgenthau complained, “We are spending more than we have ever spent before and it does not work.” Nonetheless, almost all of FDR’s programs continued—usually with annual budget increases.
When Obama took office unemployment was at 8 percent, and in the next year it steadily increased to over 10 percent before falling back just under that mark. He and his advisers were puzzled that large spending increases did not slash unemployment, and he argued that his spending was saving jobs that would otherwise have been lost.
Critics of Roosevelt and Obama insisted that it was impossible to spend our way out of a recession. During the New Deal, economics writer Henry Hazlitt observed that public-works spending destroyed as many jobs as it created. “Every dollar of government spending must be raised through a dollar of taxation,” Hazlitt emphasized. If the Works Progress Administration builds a $10 million bridge, for example, “the bridge has to be paid for out of taxes. . . . Therefore for every public job created by the bridge project a private job has been destroyed somewhere else.”
Tax rates raised. During the Great Depression Roosevelt raised both income and excise taxes. In 1935, with FDR’s push, the top marginal tax rate hit 79 percent. Few paid that rate, but thousands of Americans were in the 50-percent bracket. Entrepreneurs had to hand over more than half of any income above a certain level. Facing disincentives to make capital investments, many entrepreneurs used their wealth cautiously—investing in tax-exempt bonds, art collections, and foreign banks. Little wealth went into creating jobs, so high unemployment persisted. During World War II FDR raised taxes further, to 94 percent on all income over $200,000.
Most of the tax hikes under Obama are planned for the future. Thus far we have seen proposed tax hikes on products such as cigarettes, liquor, plane tickets, and soft drinks. He wants the tax cuts enacted under President Bush to expire. That will mean a spike in the capital gains tax, the income tax, and the estate tax. As FDR showed, tax hikes eventually follow large spending increases.
Scapegoats. The sequence of massive federal spending followed by a lack of recovery plus tax hikes is poison for a politician. Therefore Roosevelt sought scapegoats to explain his failure. Wall Street bankers were his favorites. He called them “economic royalists” and blamed them for causing the Great Depression. He also blamed America’s top businessmen for instigating a “capital strike”—they were refusing to invest in order to make him look bad. FDR then launched IRS investigations of key Republicans and used the newspapers to encourage hostility toward these targets.
Obama has followed FDR’s playbook of attacking Wall Street bankers and various corporate leaders. He condemns the raises these bankers sometimes receive and the profits earned by some large oil companies and health insurance companies.
Such emphasis on “class warfare” may be an inevitable part of redistributing wealth from one group to another. Perhaps Roosevelt and Obama believed that by increasing envy and resentment toward some Americans, they could capture the votes of larger groups of Americans and thereby win reelection (in FDR’s case there is evidence of this). True, this strategy guarantees that many wealthy Americans will attack any president who uses class warfare, but the campaign for redistribution will always supply large amounts of money to subsidize favored groups.
When Roosevelt was reelected in 1936 Senator Carter Glass, Virginia Democrat, admitted, “The 1936 elections would have been much closer had my party not had a 4 billion 800 million dollar relief bill as campaign fodder.”
Obama may be hoping his “stimulus” package and his health insurance bill will generate similarly large support among Americans receiving federal benefits and that these voters will go to the polls to overwhelm those who are paying the bills.
Comment by jason on 7 June 2010:
What a brillant letter. Should be required reading for all Americans. History lives on.
Comment by A William Jasper on 7 June 2010:
I was born in 1925, but many memories of the so-called Great Depression remain fresh in my 85-year-old mind. My father, who was a “job loss victim”, seemed to always be in the minority when he complained that FDR’s policies were lengthening the Depression. He was a professional mechanical engineer who walked the streets for a few years trying to make a few bucks. Fortunately his mortgage was not foreclosed.
Recently published research makes it clear that FDR’s policies did indeed extend the Depression by at least seven yeras (when World War II finally bailed us out). Meantime, my maternal grandfather lost his total life savings of over $17,000, when his bank in West Philadelphia failed.
Comment by Penny Jacobson on 7 June 2010:
William Jasper, your father wasn’t the only one complaining about FDR. Both my grandfathers did not like what he was doing to the country. My mother was lucky in that her family lived on a farm and they were able to grow much of what they needed.
Comment by Todd on 8 June 2010:
Please inform me of the existence of a Stimulus Package–anywhere, in world history.
Comment by James Madison Fan on 8 June 2010:
I think Mr. Folsom is correct but goes too far when he starts discussing scapegoats. Yes the Feds did push homeownership but no one told the bankers to go anywhere near as far as they did. Everyone kept saying the housing bubble was going to burst and no one listened.
You had corruption from the ground up and everyone turned a blind eye to it. In one case I read about an agent sold a $750,000 house to a couple with a combined income of less than $40,000. He didn’t care as long as he got his 6%. In my case I was trying to buy a half-million dollar condo using Country Wide and I had to send the contract back 3 times because they kept upping the agreed upon interest rate, made it adjustable instead of fixed, added points and closing costs I didn’t agree to, and failed to inform me of a non-competition clause in the contract so I finally backed out. If I were the typical homeowner that signs what he’s told is in the contract rather than actually reading the microscopic script they use I’d have been fantastically screwed to the tune of $250,000 and that’s not including watching a supposedly fixed rate balloon on me as well as paying a full point more than I originally agreed to.
So while I do not think the government is the answer to a depression / recession pretending that Corporations and Banks are blameless scapegoats is every bit as naïve. There is enough blame to go around. We can be just as secure handing out portions to Wall Street as the White House including Baby Bush as well as Barry.
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Comment by Tom McNIchol on 29 July 2010:
I find it striking that FDR during WWII raised taxes on those making more than $200,000. Seems I have heard that amount before. Didn’t Obama say that he would not raise taxes “one dime” on those making LESS than $200,000? What is it with democrats and that number?. The parallels between FDR and BHO are amazing to say the least.
Comment by James Madison Fan on 29 July 2010:
Unfortunately Barry isn’t half the leader FDR was. He’s got a rep for being a great orator that is exceedingly over rated. He’s Churchill compared to Baby Bush but then again so is a mime. Obamacare is about as well thought out as a train reck, his polciy on NASA and other technology is abysmal, and the recovery plan increase taxes rather than cutting them. There isn’t any money for science but when there’s plenty of cash for Acorn.
He seems to think that European Socialism works when the ECU is taking a hard look at their overly confiscator tax system as well as their overly generous entitlement programs, including the health care system Barry wants to clone. When Europe tells you that you are spending too much then you have left the reservation well behind in the rear view.
“Better to remain silent and be thought a fool than to speak out and remove all doubt.” – A. Lincoln
Comment by James Madison Fan on 29 July 2010:
I find it comically ironic that a libertarian magazine censors the word F00L? First Amendment? What’s that?
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Comment by Jennifer on 6 August 2010:
Hillsdale College is a 1300 student overtly right wing institution in rural Michigan. You really should inform your readership of your credentials so they can better evaluate your opinions. There is, of course, a significant difference between Roosevelt and Obama: there weren’t any not jobs clamboring for FDR’s birth certificate in the thirties. And FDR was elitist and white, so he didn’t scare racists and old boys as much as Obama does.
Comment by James Madison Fan on 6 August 2010:
And thus Jennifer prooves why the far Left is to be given the same level of contempt as the far Right. Well done.
Comment by Joe Schmoe on 26 August 2010:
I prefer to think of “Left and Right” as euphemisms for anything below “Up”.
http://www.theadvocates.org/quiz_result?e=100&i=100_100.gif&p=100
Comment by kayla on 15 September 2010:
this document shows alot of information… However, im not sure of the information that is being provided because i’ve heard alot of things in my AP world history class about the great depression, herbert hoover, and the way the recession started… but in my opinion i feel that FDR did what he could to reverse the way of the Great Depression and this document used too many downfaults of President Obama and President Roosevelt
Comment by David Orel on 22 September 2010:
Hey Madison fan, take it easy, Jennifer is just being silly.
—-
The last 100 years proved that lowering taxes is the one measure that can be relied on to stimulate economy. Nothing else comes even close. And, it’s bipartisan thing it has been applied by administrations of both parties.
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WalterLippman on the warfare between the Roosevelt administration and the business community, and why attempts at peace always broke down, in the New York Herald Tribune, May – 16,1939:
The reason is that there are in fact two main tendencies inside the New Deal, and the President is never able finally to make his choice for the one or the other. Between the conciliatory and irreconcilable New Dealers the crucial difference is that the one group is interested primarily in social reform and the other is interested primarily in the control of the economic system. Thus the reformers wish to provide relief, to practice conservation, to establish social security, and by law to impose social standards upon business and finance. But in order to do these things, they know that there must be money available, and so they would like to promote recovery, not only for its own sake, but in order to finance the reforms. When they are convinced that a certain tax is “deterrent” to enterprise and investment, they would like to modify it.
The radicals, on the other hand, are primarily interested in reducing the power of corporate business men, and the heart of their program is precisely those deterrent taxes and those restrictive regulations which limit private initiative – they would rather not have recovery if the revival of private initiative means a resumption of private control in the management of corporate business.
Among the radical New Dealers the essence of the New Deal is the reduction of private corporate control by collective bargaining and labor legislation, on the one side, and by restrictive, competitive and deterrent government action on the other side. Thus they cling to taxes which do not come anywhere near to yielding enough revenue to balance the budget because those particular taxes paralyze the financial power of the rich and well-to-do.
This is the issue between the reformers and the radicals. Both believe in spending [But] [t]he reformers regard the spending as an instrument of recovery and a means for improving the condition of the people. The radicals regard the spending as a substitute for recovery and as a means of altering the balance of social policy.
Comment by James Madison Fan on 22 September 2010:
David,
If you say so but it appears to me Jennifer is another one of these Lefties that is as nutters ala Streisand and Moore on her side of the socialist coin as the Far Right “Wing Nuts.”
You don’t need to be a racist, elitist, good old boy, fascist, whatever name comes next to find Barry’s policies alarming any more than you need to be a far left wack’a'mole to have found many of Baby Bush’s policies alarming. I don’t mind painting with a broad brush but when the brush covers the majority instead of a particular minority it is overly broad even by the most generous definition of broad.
Comment by James Madison Fan on 22 September 2010:
Could someone explain why the post is awaiting moderation? Does anyone note the irony of an overly broad language filter on a Libertarian web site? I think Swift would be amused.
Comment by George Orwell on 22 September 2010:
How exciting that an AP student would read & post on such a site. Keep up the good work Kayla. As for FDR’s intentions I agree. I don’t belive he was malevolent, just ignorant. And some might argue insaine.
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[...] The Freeman: Comparing the Great Depression vs. the Great Depression [...]
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Comment by Russ on 15 January 2011:
Why does the paragraph about scapegoats mention Theodore Roosevelt? I thought the comparison in the article was about Franklin Roosevelt. Is there a reason for this, because I would hope an educator being the author would take time to proof read.
Comment by KKK4EVER on 1 February 2011:
OBAMA IS A PORCH MONKEY!!!!!!!!!!!!!!
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Comment by James on 12 April 2011:
Interesting that you would say anything in an internet “article” to sell your book.
Comment by jack on 1 May 2011:
But, this article doesn’t say that the very low tax rates of the late 1920s 24-25% led to the Depression
Comment by jack on 1 May 2011:
This article doesn’t say that it was Republican Presidents that were in office that led to the Depression and the Recessions.
Comment by jack on 1 May 2011:
Why was the last time the Republicans had a balance budget was in 1956. And, with top tax rates of 91%?
Comment by Dan on 6 June 2011:
Re:Russ,
Where does the author use the name Theodore? I saw Therefore but could not find Theodore. FDR id more to socialize America that any previous president and his programs still haunt us to this day.
Comment by Gary Anderson on 5 July 2011:
This author misses the point of both the Great Recession and the Great Depression. Both were caused by excessive speculation. That speculation takes various forms. It is accompanied by easy money, which churns the values of stocks, and everything else, to higher than sustainable prices. Then the powers that be take it down from the top.
And the speculation starts again because we don’t put enough banksters in jail. Pretty simple, really.
Comment by Wiley on 9 September 2011:
Moral of the story: debt is bad.
Comment by Bill Ryder on 10 September 2011:
Third party control without a vested interest–is the beginning of the end!
Comment by David H on 7 October 2011:
Your history is a bit off. The Great Depression caused the deficits, not the other way around. The first deficit year was 1931, after the depression had been going for over a year. When FDR brought in the New Deal, the deficit spending was actually a shot in the arm for the economy. We got double-digit growth the first year and continued strong growth every year FDR continued his New Deal policies. The only down year he had was in 1938, the second straight year of fiscal restraint. Similarly, stimulus spending stopped the latest recession, turning an economy that was in freefall to one that is growing (albeit slowly). Predominant thinking amongst economists is that FDR’s and Obama’s responses were both too timid, and that greater spending would have helped in both situations.
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[...] Comparing the Great Depression to the Great Recession [...]
Comment by alexus on 18 October 2011:
scruw obama this is his fallt and if he stays in offes it WILL git waers
Comment by Jacob on 20 October 2011:
It is very strange and somewhat true how history repeats itself.
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Comment by Thomas Martin on 7 November 2011:
i hate u dumb people who think i’m smart
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Pingback by The Great Depression vs. The Great Recession « The Third I on 19 November 2011:
[...] since consolidation in the banking industry hadn’t happened during those times. Click here for a very lucid article of the comparision between the RD and the [...]
Comment by William House on 5 January 2012:
Mr. President Obama – Lessons from FDR & How He Handled The Housing Crisis
Nov 19, 2011
…Home purchases were financed by mortgages issued with five- or ten-year maturities, at 8% interest or higher, depending upon the assessment of risk and asset
strength, and requiring down payments of 35% of the purchase price, and a balloon payment at maturity. Then, as now with short-term mortgages or riskier
adjustable rate mortgages (ARMs), the homeowner depended on ever-increasing valuations of his property and a stable income stream to secure refinancing.
…At the insistence of Wall Street in 1927, the commercial banks, both Federally chartered and state-chartered, were allowed to jump into the lucrative housing
market. With greater access to lending capital, such banks made loans at a feverish pace, pushing up the price of housing, especially in the suburban Northeast. In
addition, the commercial banks, without roots in the communities, could afford to “cherry pick” mortgages, taking the best prospects away from the S&Ls, which
were left with the riskier loans.
When the Coolidge-Hoover financial bubble burst in the 1929 Crash, the housing sector imploded, mostly on the S&Ls. Widespread unemployment left many
homeowners unable to roll over their short-term mortgages when the balloons came due. Meanwhile, the deflation drove down property values to a fraction of the
value of mortgages.
…
http://seekingalpha.com/instablog/988132-the_american/237970-mr-president-obama-lessons-from-fdr-how-he-handled-the-housing-crisis
Comment by Cari Beth on 25 January 2012:
David H’s response is spoken as a true Keynsian.
Comment by New England Patriots on 4 February 2012:
Many thanks for that high quality writeup. Furthermore, exactly how could all of us talk?
Comment by Lucian on 6 February 2012:
I like to work on PHP rather than .NET, even though .NET presents the facility of drag and drop elements, except I like Personal home pages much.
Comment by Tony Christoffel on 25 February 2012:
Boy your revisionst history is a lot of bunk!i’ve added up all the recessions from 1923-present.When a Republican was in the White House there were 175 months of recesssion and I’m including the last mess we inherited and only 38 months when a Democrat was in office.In those 90 years we have inherited the G.O.P. recessions or Depressions in 1933,1961 and 2009.We’ve also balanced the budget 10 times since 1945,while the G.O.P. has balanced it three times,the last one being in 1960 by Eisenhower.So why businessmen vote Republican escapes me.The G.N.P. exploded when F.D.R. was in office and the economy started growing the minute Hoover left office,with the exception of the 1937-1938 recession and that was because we put our foot on the brake and STOPPED the spending and tried to balance the budget.So I’ll talk FACTS and you can talk FICTION.Those recession figures are from the non-partisan N.B.E.R. who have been calling it as they see it since 1920.
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Comment by Kilijan on 1 April 2012:
First, your reasons for the occurrence of both the depression and the recession are almost completely false. The main cause of the depression was found on wall street, with the use of customers money for stock market speculation by banks. FDR saved the total and complete collapse of the American economy from occurring by passing reform bills– a major one of these made the use of customer’s money for speculation illegal. He also understood, as it is evident that many of you don’t, that for an economy to function there actually has to be money involved. He created a number of organizations, including the WPA, the PWA, and the CWA, in order to create jobs to put money in people’s pockets and increase purchasing power, which, as it turns out, is essential to an economy. Obama was stuck with a different problem. While with FDR, people were unsure of what the new industrial economy could do, bankers today were completely aware, and the problem was again found at Wall Street, in the form of corruption. Bad loans were wrapped up in investments, which were given AAA certifications, and banks bet on the failure of these bad investments. All along the way, bonuses were rampant. The main reason Obama has not had as much success? The cost of bribing government employees is far outweighed by the bonuses one receives.
Comment by Dale on 6 April 2012:
this article is garbage. Warren G Harding, Calvin Coolidge and Hoover were THREE (3) Republican presidents who came before the Great Depression who caused it by tax cuts and tax cuts and tax cuts!!!! and deregulation of stock market as the stock market bubble kept rising throughout the 1920s. Tax cuts and deregulation of financial institution! Sound familiar in 2008? Yup. You bet. GW BUSH pushes through a massive tax cut that is for everyone, on paper, but really it primarily benefits the wealthy. Then there’s Wall St. deregulation and ultimately the final humiliation, the bailout for Wall St. at $700 BILLION.
Comment by Tony Christoffel on 8 April 2012:
Also the Gross National Product grew 56% under Roosevelt from 1933-1940.even BEFORE WW2.Were there some mistakes made?Sure but he was doing everything he could to get us out of a still standing record of 25%unemployment rate.The public would not forget soon either and that’s why the G.O.P was clobbered 5 elections in a row and 7 out of the next 9,only winning twice with Ike in the 50′s.
Comment by john q on 9 April 2012:
Where is the carts and graphs? Math does not lie. Where are your facts?
Comment by James Madison Fan II on 25 April 2012:
Jennifer? Stop judging people and deciding who is right or wrong based on race religion or where they live. Learn to judge their statements by the facts presented and their sources. THAT is what educated people do! Judging Obama by his performance, a rehash of FDRs Socialist/Marxist policies does NOT make someone racist. Did you not learn ANYTHING from MLK? That content of their character thing? If a certain politician has to lie and misrepresent everything they believe and do to get elected and cover up the intent and actions of their policies… well we just have to judge them by their lack of character.
Comment by James Madison Fan II on 25 April 2012:
James Madison Fan?
They are still paying those bankers off with near zero interest loans from the Fed that they use to buy govt treasury bonds and make a FREE profit. How else can the banks show record profits the last couple of years even though the economy is struggling and the banks are making very few loans?
Yes, many corrupt people and corporations colluded with the govt to run the housing mortgage scam. But your conclusion is incorrect.
1) The collusion was made possible when the govt used unconstitutional power over the mortgage industry.
2) In a free market system without the government invervention, this NEVER would have happened no matter how corrupt they wanted to be.
3) Why? Before the govt intervention, if the bank made a bad loan, they were stuck with it. It was their loss. No one would buy it from them.
4) Then what happened? The government created a system of ‘conforming loans’ meaning that if it meets the government’s standards, the government PROMISED to buy those loans from anyone who wrote them. They gave FANNIE MAE and FREDDIE MAC the money to buy the loans and the regulatory structure that allowed them to package a large numbers of mortgages into a financial product that managed the loans and paid the interest.
5) NO ONE would have bought or sold most of these loans except for the Govt’s PROMISE to back them!
6) When the loans started failing, the govt reneged on that promise and started letting the banks fail. Those sleazy politicians couldn’t face explaining why they had to pay a few trillion dollars they didn’t have to cover the bad loans.
7) Then the whole banking system began to collapse and those sleazy politicians couldnt hide anymore so they colluded with the bankers for a couple $trillion on “stimulus” spending to save the bankers and buy their silence on the whole govt failure to keep their promise thing.
This is a small quibble with JMF since he/she has been spot on with everything else. But I say this because too few people understand economics and just want to blame those ‘evil corporations’ and American FREE Market Capitalism which does not exist in America today. Bubbles and corruption can occur in a free market but are small and recover quickly without the govt intervention magnifying its rise and attempt to prop it up during the fall. The ONE AND ONLY REASON the housing bubble and collapse occurred was the use of UN-constitutional power to manipulate the markets!
Comment by Uc8tcme on 28 April 2012:
Not one mention of Bush Iraq war.
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Comment by john wrider on 18 May 2012:
During the Bush Administration 12 times the Republicans wanted to address the problems with Freddie Mae and Fanny Mac, but were stopped by two Dems.: Chris Dodd and Barney (I am on my knees for you) Frank.
Claude Raines at the head of Freddie Mae also jumped in and accused the Republicans along with Dodd and Frank as raicists..Sub Prime mortgages were back by the Government and not by the Banks, thus the banks said OK, if the government is going to take care of this, and we are forced to make these mortgages, because the government says we must then we will.
We should all thank the Dems and the wonderful way they screwed you out of your money!!
Comment by Tony Christoffel on 22 May 2012:
@John W. As far back as 2003 the Democrats tried to reform the housing industry but Bush’s Treasury department blocked it.To get anybody to believe that the GOP had control of the White House for 8 years and Congress for 6 out of 8 years and yet try to blame the Democrats are dreaming.That is why the Republicans got clobbered in 2008.The Democrats are better at running the country and have been for a long time.They beat the GOP in every category,job growth,less time in recession,which I covered in an earlier post along with budgets,lower unemployment and finally and most surprisingly the GOP Holy Grail of the stock market,which is currently up 4,000 points since Obama took office.Just recently a study of the records going back to 1898 for the market showed the Dems blew away the GOP by a margin so wide that you could eliminate the Clinton boom and still beat them handily.Google in which party is better for the stock market if you think you can handle it.