June 6, 2019 • 8 mins
There were many factors that led to the depth and length of the Great Depression, but some of these mistakes are being repeated today. Learn what historians and economists are saying we should watch out for in this episode of BrainStuff.
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Speaker 1 (00:01):
Welcome to brain Stuff production of iHeart Radio. Hey brain Stuff,
Lauren vogelbam here. If you didn't live through the Great
Depression that started in the late nineteen twenties and lasted
until the beginning of World War Two, it's hard to
imagine just how rough many ordinary Americans had it. At
the depressions peak in nineteen thirty three, the nation's gross
domestic product had been cut roughly in half, and nearly
(00:23):
one in four American workers was unemployed since they didn't
have money to pay their mortgages. The foreclosure rate more
than doubled, and people who lost their homes found themselves
erecting cardboard and scrap wood checks and living in camps
known as Hooverville's on the edge of towns and cities,
named after President Herbert Hoover, who many blamed for the depression.
In an interview published by the Federal Reserve Bank of St.
(00:44):
Louis in two thousand seven, two men who survived the
depression describe how people around them often were so desperate
for food that they eagerly rooted through garbage bins at
markets for discarded vegetables and spoiled chicken. Carcasses. Even after
Franklin Roosevelt's New Deal program eased some of the depper nation,
the nation's battered economy continued to struggle right up until
the war brought a massive surge in government spending and
(01:06):
created jobs at defense plans for those who didn't go
off to fight overseas. But why did the Great Depression happen?
And could it ever happen again? The depressions causes have
been a long time subject of debate by historians and economists,
though there seems to be a consensus that the economic
disaster was the result of multiple factors, some of which
led to the event, while others worsened or prolonged it.
(01:27):
And while the nation's economy, the financial system, and government
regulation have changed considerably since the nineteen twenties and thirties,
experts warned that we're still not immune to some of
the same risks that contributed to the catastrophe. Worse yet,
some mistakes of that era are now being repeated. At
the top of the list is income inequality. We spoke
with Robert S. McElvaine, a history professor at Millsap's College
(01:48):
in Mississippi and author of The Great Depression America nine
ninety one. He says that the US shifted during the
nineteen twenties to an economy heavily dependent upon consumption of
mass produced goods ranging from automobiles to radios. While sales
of those products drove up profits for factory owners and retailers,
most American workers wages grew much more slowly. Eventually, he notes,
(02:11):
people didn't have enough money to buy more things and
keep the economy going. Businesses tried to cope by extending
consumer credit and allowing people to gradually pay off their purchases,
but they didn't have enough income to keep buying new
stuff as well. In the summer of nineteen twenty nine,
to avoid having inventory pile up, factories started cutting back
on production and laying off workers. Those workers then couldn't
(02:33):
buy things, which meant even more products piled up. That
started the economy on a downward spiral that contributed to
a four day stock market crash in late October of
ninety nine, which erased a quarter of the value of
the Dow Jones industrial average, wiping out investors and severely
damaging public confidence. Circle nineteen twenties, income inequality was exacerbated
(02:53):
by a series of tax cuts pushed through Congress by
Secretary of the Treasury Andrew W. Mellon, ostensibly to stimulate
the economy. As one of the world's richest men, Melon
personally benefited from the cuts more than practically all the
taxpayers in the state of Nebraska. As one political opponent
of the bill pointed out ninety years later, income inequality
is growing and it's a threat to an economy which
(03:14):
depends upon personal consumption of two thirds of its economic output.
And Congress in seventeen passed a massive tax cut package
which most Americans see themselves as not benefiting from. In
addition to income inequality, there was a lot of investment
speculation going on. There's a difference between investing and speculating,
which Investipedia defines as putting your money into high risk
(03:37):
investments in hopes of making a killing. But in the
nineteen twenties, when everything seemed to be booming, investors often
were a bit too trusting. We also spoke with Todd Noope,
a professor of economics and business at Cornell College in
Mount Vernon, Iowa. He said, many people think of the
dust bowl or the stock market crash as the proximate
cause of the Great Depression, but in reality it was
(03:58):
caused by the same factors the have caused financial crises
throughout history in the U S and elsewhere. Debt financed speculation.
In other words, when people find it too easy to
borrow other people's money to speculate on risky ventures, stock spawn,
subprime housing, etcetera. Than people risk too much and prices boom,
only to eventually bust decades later. Unfortunately, we're still vulnerable
(04:21):
to that psychological flaw, Noop said. Markets are prone to
thinking that this time it's different, only to find out
again and again that it is usually not. In the
nineteen twenties, the United States was also dealing with some
bad Federal Reserve policy. Today, we're accustomed to thinking of
the Federal Reserve the nation central bank as the guardian
of the economy. That's because it's board could use monetary
(04:43):
policy control of the supply of money and credit to
stimulate the economy when it needs a boost, or to
put on the brakes when inflation is starting to creep upward.
But in a two thousand four lecture, former FED Chairman
Ben Bernanke detailed his theory that ninety years ago, the
FED dropped the ball with policy blunders that helped cause
and prolong the Great Depression. Starting in the FED, hoping
(05:05):
to put the brakes on Wall Street, speculators who were
investing borrowed money, started raising interest rates. That policy succeeded
a little too well, as evidenced by the stock markets
catastrophic drop in October of nine. But then, even after
the stock market collapsed, the FED kept increasing interest rates.
The reason was that the US, like many other countries,
(05:25):
was on the gold standard, meaning that the dollar was
redeemable in gold and pegged to its value. When panicked
investors started trading their dollars for gold, the FED moved
to thwart them, Bernankey explained in his speech. To stabilize
the dollar, the Fed once again raised interest rates sharply,
on the view that currency speculators would be less willing
to liquidate dollar assets if they could earn a higher
(05:47):
rate of return on them. But the high interest rates
made it tough for businesses to borrow to weather the
hard times, and many went bankrupt as a result. At
the same time, according to Bernanke, the FED also didn't
do enough to protect the nation's banks, leading depositors to
out their savings and hoard the cash, further worsening the
economic crisis. The US wasn't the only country with such problems.
(06:08):
We also spoke with Nathaniel Klein, an assistant professor of
economics at the University of Redlands an expert on economic history.
He said the gold standard helped things along by limiting
the policy responsive nations around the world. Things like lower
interest rates and government deficit spending were made much more difficult.
In addition, while Great Britain provided global economic leadership before
World War One, after the war, the US essentially refused
(06:31):
to lead despite being the new center of the world economy. Fortunately,
this is one area where policymakers learned their lesson, Klein said.
In the end, countries dropped the gold standard and many
engaged in deficit spending and monetary policy, and the US
established its leadership under the Breton Woods Agreement. That pact
(06:52):
created the World Bank and the International Monetary Fund, as
well as eliminating the gold standard internationally. On the other hand,
and as a candidate, Donald Trump said that bringing back
the gold standard quote would be very hard to do,
but boy would it be wonderful. As president, he considered
nominating to the FED Board. Herman Kaine, who wrote in
twelve in The Wall Street Journal that the dollars should
(07:14):
be redefined as quote a fixed quantity of gold, though
in a recent interview came backed away from that position,
and Stephen Moore, another past gold standard advocate, told CNN
that he now favored pegging the currency to a quote
whole basket of commodities. Both later withdrew from consideration in
the face of political opposition. One of the other big
factors that led to the depression was trade wars. The
(07:36):
Smoot Holly Act, which was written in early nine when
the economy was still going strong, but became law after
the Wall Street Crash, raised US tariffs by an average
of sixteen The idea was to keep other countries from
hurting US manufacturers by flooding the market with lower priced products,
but when those countries responded by imposing their own tariffs,
the result was a ruinous global decline in trade. The
(07:57):
deepened and lengthened the Great Depression. That bit of history
worries many people today due to President Trump's fondness for
imposing tariffs in an effort to protect US industries. So
many of the factors that contributed to the Great Depression
are still risks. Whether they will ever combine in an
economic perfect storm is a harder question to answer. Today's
(08:22):
episode was written by Patrick J. Tiger and produced by
Tyler clayg. Brain Stuff is a production of I Heart
Radio's How Stuff Works. From more on this and lots
of other economical topics, visit our home planet, howstuff Works
dot com, and for more podcasts from my heart Radio,
visit i Heart Radio app, Apple Podcasts, or wherever you
listen to your favorite shows.
Welcome to brain Stuff production of iHeart Radio. Hey brain Stuff,
Lauren vogelbam here. If you didn't live through the Great
Depression that started in the late nineteen twenties and lasted
until the beginning of World War Two, it's hard to
imagine just how rough many ordinary Americans had it. At
the depressions peak in nineteen thirty three, the nation's gross
domestic product had been cut roughly in half, and nearly
(00:23):
one in four American workers was unemployed since they didn't
have money to pay their mortgages. The foreclosure rate more
than doubled, and people who lost their homes found themselves
erecting cardboard and scrap wood checks and living in camps
known as Hooverville's on the edge of towns and cities,
named after President Herbert Hoover, who many blamed for the depression.
In an interview published by the Federal Reserve Bank of St.
(00:44):
Louis in two thousand seven, two men who survived the
depression describe how people around them often were so desperate
for food that they eagerly rooted through garbage bins at
markets for discarded vegetables and spoiled chicken. Carcasses. Even after
Franklin Roosevelt's New Deal program eased some of the depper nation,
the nation's battered economy continued to struggle right up until
the war brought a massive surge in government spending and
(01:06):
created jobs at defense plans for those who didn't go
off to fight overseas. But why did the Great Depression happen?
And could it ever happen again? The depressions causes have
been a long time subject of debate by historians and economists,
though there seems to be a consensus that the economic
disaster was the result of multiple factors, some of which
led to the event, while others worsened or prolonged it.
(01:27):
And while the nation's economy, the financial system, and government
regulation have changed considerably since the nineteen twenties and thirties,
experts warned that we're still not immune to some of
the same risks that contributed to the catastrophe. Worse yet,
some mistakes of that era are now being repeated. At
the top of the list is income inequality. We spoke
with Robert S. McElvaine, a history professor at Millsap's College
(01:48):
in Mississippi and author of The Great Depression America nine
ninety one. He says that the US shifted during the
nineteen twenties to an economy heavily dependent upon consumption of
mass produced goods ranging from automobiles to radios. While sales
of those products drove up profits for factory owners and retailers,
most American workers wages grew much more slowly. Eventually, he notes,
(02:11):
people didn't have enough money to buy more things and
keep the economy going. Businesses tried to cope by extending
consumer credit and allowing people to gradually pay off their purchases,
but they didn't have enough income to keep buying new
stuff as well. In the summer of nineteen twenty nine,
to avoid having inventory pile up, factories started cutting back
on production and laying off workers. Those workers then couldn't
(02:33):
buy things, which meant even more products piled up. That
started the economy on a downward spiral that contributed to
a four day stock market crash in late October of
ninety nine, which erased a quarter of the value of
the Dow Jones industrial average, wiping out investors and severely
damaging public confidence. Circle nineteen twenties, income inequality was exacerbated
(02:53):
by a series of tax cuts pushed through Congress by
Secretary of the Treasury Andrew W. Mellon, ostensibly to stimulate
the economy. As one of the world's richest men, Melon
personally benefited from the cuts more than practically all the
taxpayers in the state of Nebraska. As one political opponent
of the bill pointed out ninety years later, income inequality
is growing and it's a threat to an economy which
(03:14):
depends upon personal consumption of two thirds of its economic output.
And Congress in seventeen passed a massive tax cut package
which most Americans see themselves as not benefiting from. In
addition to income inequality, there was a lot of investment
speculation going on. There's a difference between investing and speculating,
which Investipedia defines as putting your money into high risk
(03:37):
investments in hopes of making a killing. But in the
nineteen twenties, when everything seemed to be booming, investors often
were a bit too trusting. We also spoke with Todd Noope,
a professor of economics and business at Cornell College in
Mount Vernon, Iowa. He said, many people think of the
dust bowl or the stock market crash as the proximate
cause of the Great Depression, but in reality it was
(03:58):
caused by the same factors the have caused financial crises
throughout history in the U S and elsewhere. Debt financed speculation.
In other words, when people find it too easy to
borrow other people's money to speculate on risky ventures, stock spawn,
subprime housing, etcetera. Than people risk too much and prices boom,
only to eventually bust decades later. Unfortunately, we're still vulnerable
(04:21):
to that psychological flaw, Noop said. Markets are prone to
thinking that this time it's different, only to find out
again and again that it is usually not. In the
nineteen twenties, the United States was also dealing with some
bad Federal Reserve policy. Today, we're accustomed to thinking of
the Federal Reserve the nation central bank as the guardian
of the economy. That's because it's board could use monetary
(04:43):
policy control of the supply of money and credit to
stimulate the economy when it needs a boost, or to
put on the brakes when inflation is starting to creep upward.
But in a two thousand four lecture, former FED Chairman
Ben Bernanke detailed his theory that ninety years ago, the
FED dropped the ball with policy blunders that helped cause
and prolong the Great Depression. Starting in the FED, hoping
(05:05):
to put the brakes on Wall Street, speculators who were
investing borrowed money, started raising interest rates. That policy succeeded
a little too well, as evidenced by the stock markets
catastrophic drop in October of nine. But then, even after
the stock market collapsed, the FED kept increasing interest rates.
The reason was that the US, like many other countries,
(05:25):
was on the gold standard, meaning that the dollar was
redeemable in gold and pegged to its value. When panicked
investors started trading their dollars for gold, the FED moved
to thwart them, Bernankey explained in his speech. To stabilize
the dollar, the Fed once again raised interest rates sharply,
on the view that currency speculators would be less willing
to liquidate dollar assets if they could earn a higher
(05:47):
rate of return on them. But the high interest rates
made it tough for businesses to borrow to weather the
hard times, and many went bankrupt as a result. At
the same time, according to Bernanke, the FED also didn't
do enough to protect the nation's banks, leading depositors to
out their savings and hoard the cash, further worsening the
economic crisis. The US wasn't the only country with such problems.
(06:08):
We also spoke with Nathaniel Klein, an assistant professor of
economics at the University of Redlands an expert on economic history.
He said the gold standard helped things along by limiting
the policy responsive nations around the world. Things like lower
interest rates and government deficit spending were made much more difficult.
In addition, while Great Britain provided global economic leadership before
World War One, after the war, the US essentially refused
(06:31):
to lead despite being the new center of the world economy. Fortunately,
this is one area where policymakers learned their lesson, Klein said.
In the end, countries dropped the gold standard and many
engaged in deficit spending and monetary policy, and the US
established its leadership under the Breton Woods Agreement. That pact
(06:52):
created the World Bank and the International Monetary Fund, as
well as eliminating the gold standard internationally. On the other hand,
and as a candidate, Donald Trump said that bringing back
the gold standard quote would be very hard to do,
but boy would it be wonderful. As president, he considered
nominating to the FED Board. Herman Kaine, who wrote in
twelve in The Wall Street Journal that the dollars should
(07:14):
be redefined as quote a fixed quantity of gold, though
in a recent interview came backed away from that position,
and Stephen Moore, another past gold standard advocate, told CNN
that he now favored pegging the currency to a quote
whole basket of commodities. Both later withdrew from consideration in
the face of political opposition. One of the other big
factors that led to the depression was trade wars. The
(07:36):
Smoot Holly Act, which was written in early nine when
the economy was still going strong, but became law after
the Wall Street Crash, raised US tariffs by an average
of sixteen The idea was to keep other countries from
hurting US manufacturers by flooding the market with lower priced products,
but when those countries responded by imposing their own tariffs,
the result was a ruinous global decline in trade. The
(07:57):
deepened and lengthened the Great Depression. That bit of history
worries many people today due to President Trump's fondness for
imposing tariffs in an effort to protect US industries. So
many of the factors that contributed to the Great Depression
are still risks. Whether they will ever combine in an
economic perfect storm is a harder question to answer. Today's
(08:22):
episode was written by Patrick J. Tiger and produced by
Tyler clayg. Brain Stuff is a production of I Heart
Radio's How Stuff Works. From more on this and lots
of other economical topics, visit our home planet, howstuff Works
dot com, and for more podcasts from my heart Radio,
visit i Heart Radio app, Apple Podcasts, or wherever you
listen to your favorite shows.
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