The one that started around 1929? I’ve done a search and can find little relevant threads in the last 12 months.
This is probably a simplistic question from a non economist, but why did everything go tits up world wide?
A stock market bubble, followed by a run on the banks, while the federal government did little to stimulate the economy.
Thanks Dolphin Boy, but hasn’t that happened after (and probably before) while the result wasn’t the same?
It had happened before – they were just called a “panic,” not a depression. Also, the extent was greater. In the 1920s, everyone owned stocks. Banks were taking their deposits and investing them in the market; some even had stock tickers in the lobby.
So the crash was far more extensive than in the past. In addition to the general investor’s losses, banks lost their deposits. Since people were buying on margin, they often lost more than they had invested. With the banks losing deposits, people started going to them to get their money out, making things worse.
Banks started calling in loans (i.e., requiring people to pay them in full) to cover their losses. People had no money, so they lost their houses and farms (mortgages were different – they were relatively short term, so you’d refinance the balance after five years). Banks started failing because they couldn’t sell the foreclosed properties.
No one was sure what to do. Hoover thought the government should stay out of it, and that cutting spending to balance the budget was the best solution. This decreased the money being pumped into the economy, exacerbating the situation.
The economy kept in its death spiral until Roosevelt came to power. He stopped and and slowly began to improve things, but things were so far in the hole that it took a decade to return things to where they were.
The drought in the Great Plains was another contributing factor.
Grapes of Wrath might make for a nice read if you’re interested.
If you’re looking for a good book on the financial side of things, I’d recommend Lords of Finance
Thanks Reality and Darth. I have seen the movie Grapes of Wrath. Could the whole situation happen again today?
And Darth, I am in no way trying to be insular but the drought affected the States. Did it really have that much impact
globally?
Anything is possible, but there are a lot of things in place that reduce the likelihood. Some of the key instigators - like the UK’s switch back to the gold standard and the protectionist legislation like the Smoot-Hawley Tariff - are unlikely to be something people try again. At the same time, stock ownership is much more legislated with various state Blue Sky laws as well as SEC oversight.
It certainly affected the US a lot more than it did the rest of the world. But indirectly, the inability of the US to recover as quickly as it might had it not been for the drought would be a factor for the global economy.
This chart:
Change in economic indicators 1929–32[14]
United States Great Britain France Germany
Industrial production –46% –23% –24% –41%
Wholesale prices –32% –33% –34% –29%
Foreign trade –70% –60% –54% –61%
Unemployment +607% +129% +214% +232%
from Great Depression - Wikipedia
shows just how hard the US was hit - a lot of that unemployment was driven by the huge mass migration in the Midwest, adn I think we all know how hard it is for a country to recover when unemployment remains high.
Thanks. I guess after the Great War all the European Countries were more or less skint, Russia was in turmoil so the USA was the only effective economy around (I can’t imagine another).
And the old saying that if the US economy sneezes ours has a coronary…it is true.
It almost did. Why do you think the government spent trillions on “stimulus” and bailing out banks? and, … we’re still not out of the woods. Even though some people are making ahy criticising he current administration, it could be a lot worse.
Just substitute “real estate” for “stocks” and it’s the same scenario.
Take the case of the auto industry as a key example of the downward spiral. Cars are almost all bought on credit, loaned by banks. Suddenly, the banks discover huge amounts of their holdings are worthless - people can’t pay mortgages, the bonds they hold based on these mortgages are worthless and not paying, the foreclosed properties are almost impossible to sell. If the bank cashes a cheque drawn on another bank, they are worried the other bank has the same problem, may go belly up and may stiff them.
So the banks stop issuing loans until they are sure they have the assets to cover outstanding loans. Businesses that rely on lines of credit to provide operating cash suddenly can’t cover their bills, close and lay people off. These laid-off people stop paying their mortgages, making things worse.
Nobody can get a loan to buy cars. Suddenly, sales go from “almost normal” to “almost zero” a whole section of a major industry is about to close. What does this do to steel, to parts makers, to dealers?
This is just the most glaring example. Noody wants to buy fridges and stoves, new furniture, or any other big cost items unless they really really have to and are sure they have the money and don’t have to worry about their jobs.
So this was the Great Depression. Instead of a stimulus like the last 4 years, the government let things “work out”, which things did. Badly. Everybody went broke, and even people who had money lost it in bank failures.
Also keep in mind the number of government employees and othes with “safe jobs” was a much smaller number in 1929.
In the 1920s all of the major industrial nations were on the gold standard. The government of France had the bright idea to start hoarding gold. This lead to deflation around the world. Deflation lead to businesses failing. In the US branch banking laws caused this to lead to bank failures. Bank failures and deflation lead to a credit crunch and massive unemployment.
Stock market bubbles are not a good explanation because it was a worldwide depression in a much less globalized economy. The collaps of Wall Street would not have caused the depression in Germany and it is unlikely that all of the industrialized countries had stock market bubble that popped simultaneously.
Lack of government stimulus is also a poor explanation since the size of the federal budget went up 50% in the years following the stock market collapse with no apparent effect on the economy.
One of the strongest evidences for the gold standard theory is that the sooner the countries went off the gold standard the sooner they recovered from the Great Depression.
The government budget was not that big to begin with. (Massive government departments are a more recent thing). Adding 50% to spending probably just helped keep the soup kitchens running. Note in the recent stimulus, the government has repeatedly spent or promised backing well above 100% of the current high federal budget.
One of the most productive aspects was to prop up banks, much as it pains us to give money to stupid bankers. Before FDIC, even a solvent business or person could be wiped out if their banker went under. For some businesses like the auto industry, even the basic coverage obviously is nowhere near enough - the bailouts prevented gridlock in the financial system.
Cite for this?
From what I can find (link), the large increase in governmental spending didn’t kick in until 1935, which was well after the Depression started.
Government spending was flat for the first few years of the Depression. Certainly this would have been the thinking of Herbert Hoover, who wouldn’t jump at government spending as a solution to the problem.
It also shows a correlation (though causation isn’t proved just with these data points) with rising US GDP with a lag of a year or two.
Actually, as odd as this sounds, there are some scientists who actually think the depression caused the drought (or at least made it much much worse) as opposed to the other way around. After World War I and lingering into the 1920’s, agricultural prices were extremely high and so there was a land rush into the marginal lands in the southern Great Plains. With farm machinery and irrigation from wells, it was possible to get pretty good crop yields, but they plowed up the native grasses that were the only thing keeping the dirt from blowing away. Things were fine so long as the farm land stayed in use, but when prices tanked at the end of the 20’s, people started abandoning the land en masse and with nothing to hold the soil in place, you started getting the huge dust storms that killed crops, livestock and people and actually removed moisture from the atmosphere. So the “Dust Bowl drought” might have only been a minor one that was exacerbated and extended by human activity.
(While we’re recommending books, Timothy Egan’s The Worst Hard Time is an excellent non-fiction account of the Dust Bowl years)
There were many causes, but one that economic historians neglect is the issues resulting from the Peace of Versailles.
Under the treaty, Germany was bound to pay enormous reparations for the damage caused by WWI. This immediately caused a depression in Germany, and German trade dropped significantly. This hurt the UK (the UK had a large trade with Germany), and also France (French bauxite, iron ore, and luxury goods lost their German market.
At the same time, the USA was flush with cash-this money went looking for investment in Europe (a lot of it was loaned to Germany)-where it caused deflation. The German Banks took the borrowed money, and much of it went back as reparations payments. None of this money went for German wages, so Germany bought less and less.
Also, the normal recovery actions to an economic downturn (like dropping prices, cutting costs) did not have their restorative effect, because the US enacted tariffs that cut imports (Smoot-Hawley), and the UK did likewise (Imperial Preference).
So worldwide demand dropped drastically, and unemployment soared.
The second question: why did the “Great Depression” last so long? That was because most governments were afraid of inflation-so the money supply shrank. With bad memories of WWI, most countries cut military spending-so demand shrank further.
In effect, demand had shrunk to the point that about 70% of the normal labor force was needed-so the other 30% lost their jobs and stayed unemployed for 10 years.
Not so. Federal outlays nearly doubled under Hoover. Because revenue had cratered at the same time, this caused a spike in the deficit, to such a degree that FDR hammered Hoover in the 1932 campaign for his free-spending ways, calling for “immediate and drastic reductions of all public expenditures.” (In looking at the chart, remember that budgets are forward-looking, and so the first year of a president’s administration will generally be under his predecessor’s budget).
Your link is total government spending. If you change the scenario to federal government spending it goes from about 3.8 billion in 1928 to almost 6 billion in 1936, this is just in nominal terms, the actual increase was bigger due to the aforemention deflation.
In a way some already has. Hoover started the Reconstruction Finance Corporation which gave money to the banks so that they could lend it out to average Americans. Thing was, there were no requirements for the banks to actually lend out the money so the banks kept the money and said thanks to the government. Obama’s bailout of the banks was eerily similar.
Sure, but the standard arguments for stimulus involve spending at all levels of government, which didn’t increase until the latter part of the 30s. The idea is that federal spending should do more than simply replace state and local spending. The Keynesians harp on it all the time, even now.
Money supply also decreased. The Money Supply and the Banking System Before and During the Great Depression Money got a lot harder to come by, as did jobs. A quarter of the workforce was unemployed. All of the factors listed in this thread contributed and made it worse.
I was getting ready to recommend that book as well. But be warned that it is not an uplifting read. Things went all to shit, then got worse, then got even worse, and then the really bad things started happening.