Welcome to an economics history course. Weakon 247 is a class that talks about the Great Depression. Most notably we’ll talk about what created it, and how we got out of it. The Great Depression is considered the standard by which we compare “how bad things get.”
To know the Great Depression is to know the 1920s. Times were good, America had just won WWI, industrial production was booming, and woman were showing their ankles in public. Money was easy to come by thanks to low interest rates. The Federal Reserve, which essentially operates the on and off valve of the economy set the interest rates that banks were allowed to borrow on. With low rates, banks borrowed lots of money.
The problem was that no matter how good or bad your bank was, you could basically borrow from the Fed at the same interest rate. This meant that less reputable banks had access to easy money. The response was a credit driven economic expansion like none had ever seen in the past. Business was booming, wealth was being created, and America was showing its economic dominance on the world stage. With so many people borrowing money to invest (including in real estate), we generated a leveraged bubble in the economy. Amid speculation of this problem in the late 1920s, the Fed started to raise interest rates and slowly deflate a bubble. It was too late though.
On Tuesday, October 29th, 1929 the Dow dropped 12% following a previous day’s drop of 13%. In essence, anyone invested in the stock market pulled their money out. This day is now known as Black Tuesday. Black Tuesday is often thought of as the day stock brokers jumped out of windows of Wall Street’s building because of the awful circumstances. But in actuality, suicide rates were down in NY during the days leading up to and following Black Tuesday.
Black Tuesday is largely considered the start of the Great Depression, but it wasn’t. It was merely a well publicized crack in a fragile foundation (one of many). In the months and years following the crash, the economy itself simply froze. The FDIC did not exist at this time, and so bank runs not only wiped out the bank, but also the savings of the people. Think about that scene from “It’s a Wonderful Life.” With banks closed and consumers wiped out, spending in the country dropped by 10%. Companies were forced to layoff millions and general pessimism about the future stifled any potential investment in growth. Further damage to the economy was caused by severe drought, known as the Dust Bowl which reduced the food supply and displaced many farmers from their rural roots into crowded cities. Unemployment peaked around 25% during the Great Depression, which fueled a downward spiral of the economy.
In 1932, the United States elected Franklin D Roosevelt as their president. Roosevelt hit the ground running with his “New Deal” in 1933. It was a combination of economic policies and stimulus programs designed to get America back on her feet. The economic policies placed a large favor on establishing government agencies. Some are there for regulation while others provided direct welfare to the people. Just some of the program that were born from the New Deal are: Social Security, the Tennessee Valley Authority, the SEC, the FDIC, Fannie Mae, and the Federal Housing Administration.
Many question the effects the New Deal actually had on improving the economy, with some saying it made it worse. Some say it was gold that saved us. The cascading effects of the Great Depression stretched into other countries around the globe. Many sought refuge for their wealth in the United States. The only stable source of wealth was gold, and this brought in a huge money supply back to the US. With more money supply at work, companies were able to get back on their feet. Still others will say neither gold nor the New Deal was the trigger. In 1939 Europe plunged into war (partially because of the political strains of the depression). Though the US didn’t enter the war until 1941, they were able to get production going on equipment and supplies for the French and English forces. With a patriotic attitude in 1941, America went back to work to support the war effort. In all actuality, it is likely a combination of all three and other factors that brought us out of the Great Depression.
Today we have learned many lessons from this time. Unfortunately we didn’t learn enough of them and in 2007 we went downhill into the worst recession since the Great Depression. The parallels between 2007 and 1929 are uncanny. Both economic periods were defined by a growth of credit spending and living beyond our means. Both suffered from unregulated financial industries, where trust in capitalism was the ultimate demise. Though things look bleak here in 2009, the policies and government agencies that do exist have played a role in controlling the downward spiral of this economy. History will repeat itself again some day, perhaps next time things will be even less worse. One thing is for sure, the Great Depression was much worse than anything we have experienced since.