Brief Summary
This video addresses common questions about the Great Depression, covering its severity, causes, and impact. It examines the role of the stock market crash, bank failures, and policy decisions like the Smoot-Hawley Act. The video also discusses the Dust Bowl, the military's involvement, and the effects of Hoover's and Roosevelt's policies, including the New Deal and the gold standard. It concludes by comparing the Great Depression to more recent economic crises and highlighting the importance of macroeconomic policy in preventing future catastrophes.
- The Great Depression was exceptionally severe, with a 25% unemployment rate and a collapse in industrial production.
- The stock market crash of 1929, combined with bank failures and protectionist trade policies, worsened the economic downturn.
- The New Deal implemented various programs, such as the WPA and FDIC, to provide relief and stabilise the economy, though criticisms existed regarding their effectiveness and inclusivity.
Great Depression Support
Chris Clark, an economics professor at Washington State University, introduces the segment dedicated to answering questions about the Great Depression.
How bad was The Great Depression?
The Great Depression was extremely severe, with a 25% unemployment rate, dwarfing the 10% peak during the 2009 Great Recession. Industrial production halved, leading to widespread hunger and prompting the creation of federal welfare systems like social security, unemployment insurance, federal minimum wage, and housing subsidies throughout the 1930s to alleviate suffering.
What caused The Great Depression?
The Great Depression was caused by a speculative boom in the US financial markets during the late 1920s, where heavy investments were made on margins, creating inflated stock values. When the economy entered a recession in the summer of 1929, the stock market peaked in September and subsequently crashed in October due to the prevalence of loans used to hold stocks, triggering a cascade of loan recalls. This crash reduced wealth, leading to decreased consumption and business failures, which cascaded into the real world with massive bank failures. The fractured banking system in the US, with numerous small banks, exacerbated the crisis as 10,000 banks collapsed due to their inability to absorb shocks or draw on resources from other regions.
Who decides it’s a Great Depression?
A great depression involves significant economic collapse, high unemployment, and a general slowdown in economic activity. The National Bureau of Economic Research (NBER), a non-profit research group, determines the start and end dates of economic contractions, including declaring when a great depression begins and ends, based on extensive research.
Failing to see what’s so “great” about it honestly
The term "depression" has been used to describe economic downturns since the time of James Monroe. The episode in the early 1920s was also referred to as a great depression. The term "Great Depression" with capital letters gained prominence by the mid-1930s, popularised by economist Lionel Robbins' book, The Great Depression.
Smoot-Hawley Act
The Smoot-Hawley Act, which significantly increased tariffs, was enacted under the belief that it would protect domestic businesses by reducing reliance on foreign trade. Economists warned that trade is crucial for long-term economic growth, enabling specialisation, economic activity, diversity, and global options. While the act had a modest effect on the US economy due to its size, it triggered retaliatory tariffs from other countries, leading to a decline in global trade throughout 1932 and 1933.
Great Dust Bowl
The Great Dust Bowl of the 1930s was triggered by a severe drought combined with the effects of mechanised agriculture. Increased migration to regions like the Oklahoma panhandle led to the ploughing of millions of acres of prairie grass. The drought, starting in 1931 and lasting for years, left fields bare, resulting in massive dust storms. The government implemented measures such as promoting erosion-reducing ploughing methods, planting trees as windbreakers, and converting land back to prairie. While the Dust Bowl primarily affected around 100 million acres and caused significant migration, it wasn't a primary cause of the Great Depression nationally, as only 20% of workers were in agriculture.
How was the military affected during the Great Depression?
World War I veterans, promised bonuses to be paid in the 1940s, sought early payment due to the severe unemployment during the Great Depression. They organised a march on Washington DC, setting up camps to demand their promised support. President Hoover directed General Douglas MacArthur to forcibly remove the veterans, resulting in the camps being set on fire and the veterans being forced out.
Getting a lot of “Great Depression” vibes from this
Despite concerns and parallels, current economic conditions are not comparable to the magnitude of the Great Depression. Home ownership and car ownership rates are much higher today, and assistance programs like food stamps exist. While the 2008 financial crisis was significant, the Federal Reserve intervened to preserve the financial system. Although tariffs are increasing to levels seen in the 1930s, their potential harm is limited compared to the broader impact of the tariffs during the Great Depression.
Who made it through the Great Depression easiest?
The wealthy generally did not fare well during the Great Depression, as much of their wealth was tied to the collapsing stock market, leading to a decrease in inequality. Unlike the responses to the 2008 and COVID crises, where the wealthy were largely protected, the rich experienced economic pain alongside everyone else during the Great Depression.
Hoovervilles
The Great Depression led to a drastic increase in homelessness, with makeshift homes known as "Hoovervilles" appearing in major cities. These homes were constructed from materials like corrugated tin, cardboard, and loose construction materials. By 1933, an estimated 1.5 million people were homeless, representing about 1.2% of the population, a significantly higher proportion than the approximately 700,000 homeless people today.
Hoover’s Policies
President Herbert Hoover's policies during the Great Depression were largely characterised by inaction, influenced by his advisor Andrew Melon, who believed recessions were necessary for economic health. Hoover later regretted this lack of action, criticising Melon's desire to liquidate labour, investment, and Wall Street. Despite his initial reluctance, Hoover did urge industries to maintain high wages, a move some economists believe hindered the economy's self-correction by encouraging monopoly practices and distorting the market.
FDR’s Fireside Chats
Franklin Roosevelt's fireside chats were notable because they were a novel use of radio technology, which was widely accessible by the end of the 1930s. This allowed the president to directly communicate with the public, providing leadership and encouragement during a critical time.
The Gold Standard
The gold standard significantly constrained monetary policy during the Great Depression. Both Hoover and initially FDR adhered to it, fixing the price of gold at $20 per ounce, which limited the central bank's ability to respond to the economic crisis. Economists like Milton Friedman argued that the central bank's adherence to the gold standard exacerbated the depression by restricting the money supply. Countries that abandoned the gold standard earlier, such as Scandinavia and Great Britain, experienced earlier economic recovery, while the United States and Germany followed in 1933, and France waited until 1937.
Hands off our gold, Uncle Sam
In 1933, the US government seized gold owned by private citizens due to the dire economic situation and the need for drastic political change. FDR, despite initially supporting the gold standard, recognised the necessity of changing the currency system. He issued an executive order in April 1933, raising the value of gold from $20 to $35 per ounce and requiring citizens to sell back any gold holdings exceeding $100 (equivalent to about $10,000 today), with exceptions for jewellery and coin collections. The Supreme Court upheld the law in multiple rulings between 1934 and 1936.
FDIC
The Federal Deposit Insurance Corporation (FDIC) was established as part of FDR's New Deal to prevent bank runs. Banks pay a premium into the system, which guarantees deposits up to a certain amount. This assurance prevents depositors from rushing to withdraw their money during times of financial instability, thus stabilising the banking system.
What would happen if there were another run on banks?
Due to federal deposit insurance, bank runs similar to those in 1929 are unlikely today. However, runs can still occur in the shadow banking sector, involving investment banks not covered by deposit insurance. The 2008 crisis saw runs between investment banks, leading to the collapse of firms like Bear Stearns and Lehman Brothers, and the bailout of AIG.
The New Deal
The New Deal was a multifaceted approach to addressing the Great Depression, with varying degrees of success. Programs like the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA) hired the unemployed for public works projects, providing employment, dignity, and purpose. These projects included constructing buildings like the Griffith Observatory, schools, libraries, and improving parks. However, some criticised these programs as "make work" initiatives. Economist Sadi Alexander Moser criticised the New Deal for implicitly excluding African-Americans through policies that did not cover domestic workers and tenant farmers.
Great Depression cuisine
Economic productivity increased during the 1930s, with more households owning refrigerators by the end of the decade. Studies indicate that diets improved, with increased consumption of fruits and meat in 1940 compared to 1930.
Where was the fed during The Great Depression?
The Federal Reserve's actions during the Great Depression are a critical point of discussion. Some argue that the Fed's inaction or missteps exacerbated the crisis. Economists like Milton Friedman and Ben Bernanke have highlighted the decline in the money supply and the loss of information due to bank collapses as key factors. Bernanke, as Fed chair during the 2008 Great Recession, focused on preventing further bank failures, drawing on the principle of the central bank as a lender of last resort. The Fed's limited influence over smaller rural banks and concerns about maintaining the gold standard contributed to its initial inaction.
Fabled market crash reactions
Stories of wealthy individuals jumping out of windows after the 1929 market crash are largely unsubstantiated. Despite international reports, historical evidence does not support widespread occurrences of such events.
Works Progress Administration
Massive job creation projects like the WPA declined in the late 20th century as the economy recovered. With unemployment decreasing from 25% in 1932 to 2% by the end of World War II, the need for public programs diminished. Debates persist about whether the government should maintain a public jobs option to reduce unemployment to zero, balancing efficiency and market allocation of resources.
WW2 and The Great Depression
World War II ended the Great Depression by prompting a significant increase in government spending through deficit spending, influenced by the economic theories of John Maynard Keynes. Keynes advocated for government intervention as the spender of last resort during recessions. This approach has become dominant, with governments increasing deficit spending during economic downturns, such as the $5 trillion spent during the COVID-19 pandemic.
