The current financial crisis compared with the 1929 crisis

Abstract

The growing number of newspapers and magazines citing similarities between the 1929 crisis and the current crisis raises questions about the relevance of these comparisons. Since the 1930s, the world has experienced other crises, but the magnitude that one is now experiencing, explains the key reconciliations. Strictly speaking, a crisis is a process of turning over the business cycle at its highest point, which interrupts the expansion phase and precipitates the economy into depression. Cycle theorists do not isolate the crisis from global movement, of which it forms only a small part. Thus, the 1929 crisis was a result of the stock market crash (from "Black Thursday, October 24, 1929), and the failure of a U.S. bank triggered the global recession of the 1930s, leading to the collapse of production, deflation, rising unemployment and significant contraction in international trade. Economists like Schumpeter spoke of a mere "bottomed out" at the time, against which they did not recommend state intervention, as they believed in letting the market regulate itself. Jean-Paul Fitoussi opined that "the lessons from the crisis of 1929 have been drawn." Indeed, as one will see, the current policy responses are very different, and laissez-faire has been replaced by a strong state interventionism.

In addition, the nature of the real economy has driven growth during the phase preceding the crash that is not the same, the boom in the auto industry had driven growth in the 1920s, while the real Estate is the leading sector for the growth period 2002-2007. The disconnect between changes in productivity gains and wage growth is, however, a striking phenomenon in the real economy common to both crises. The stagnation of wage income in 1929 leads to an overproduction crisis preceding the outbreak of the financial bubble. In 2006, given the stagnation of median income, the development of private debt fueled by mortgage credit was the main driver of U.S. growth after the Internet bubble burst in 2000.

After the First World War, the international financial system is fragile: the "gold exchange standard" was relevant, national currencies were connected to the dollar and the pound sterling, only for gold-linked currencies. In addition, financial pressures related to the settlement of the war debt and reparations by Germany was accompanied by tensions in the market for commodities and agricultural products. Indeed, Western countries encountered difficulties to recycle their industry and thus had to reduce their purchase of raw materials. The United States decided to reduce loans to Europe. Agricultural production in turn is seen to increase sharply due to the discovery of new techniques (extensionism). Demand does not increase and all were facing a real over supply of agricultural products as prices declined. In 20 years, an open economy takes place vis-à-vis the countries of Europe: a wave of protectionism emerges to limit the impact of new competition.Against this background of over production that will break the 1929 crisis that can be termed a crisis of production.

At present, the economic and financial system is different, it is rather the result of a strong liberalization. Excess liquidity in the financial world realizes large trade surpluses and high rates of savings and exports of raw materials in emerging countries.

Tags: 1929 crisis; present financial crisis; comparison study;