July 9, 2025 • 35 mins
The Roaring Twenties was a period of tremendous financial growth in America — punctuated by a stock market crash and the highest poverty and unemployment the nation has ever seen. The question is, can this happen again?
Looking back, we explore what was happening in the country during the boom years that led to the bust years.
GUEST: Gabriel Mathy, associate professor of economics at American University. His area of expertise is macroeconomics of the Great Depression.
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Speaker 1 (00:03):
You've reached American History Hotline. You asked the question what
is political technology?
Speaker 2 (00:08):
George Washington really cut down at churchree.
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JFK, Marilyn Monroe having an affair. We get the answers.
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Speaker 2 (00:16):
This is such a ridiculous story that we tell ourselves
because we don't want to know the real story.
Speaker 1 (00:21):
Leave a message. Hey, there are American History Hotliners. Your
host Bob Crawford here, happy to be joining you again
for another episode of American History Hotline. You're the ones
with the questions. I'm a guy trying to get you
some answers and keep those questions coming. Please. The best
way to get us a question is to record a
(00:42):
video or a voice memo on your phone and email
it to Americanhistory Hotline at gmail dot com. That's Americanhistory
Hotline at gmail dot com. And remember we are American
History Hotline. I love talking about the Spanish Inquisition as
much as the next guy or gal, but hey, let's
(01:03):
talk about this continent. Okay. Today's question is about the
Great Depression. Here to help me answer this question is
Gabriel Matthey. He is an economic historian at American University
with a special focus on studying the Great Depression. I
think we found the right guest for today, Gabe. Thanks
(01:25):
for joining me.
Speaker 2 (01:26):
Thanks so much for the invitation, looking forward to it.
Speaker 1 (01:28):
Okay, Gabe, here's the question we're hoping you could help
us answer.
Speaker 2 (01:33):
Hi, this is Mackenzie from Santa Barbara. Why did the
stock market crash in nineteen twenty nine and is that
what led to the Great Depression? Could that happen again?
Speaker 1 (01:42):
Now, Gabe, let's start by defining some terms. How is
a depression different from a recession? We hear a lot
about a recession these days. What's the difference between depression
and recession?
Speaker 2 (01:55):
So that's a great question. I was just teaching that
a few weeks ago in my macroeconomics class. So the
Great Depression was named that because they had a long
history of thinking about economic down terms and calling them depressions.
But they used to call any economic downturn a depression.
The terminology of recession comes a bit later, so that's
(02:18):
really going to date to the twentieth century. So in
the nineteen twenties, by the end, the Great Depression is
starting and people are comparing it to the other depression
that they had in the eighteen seventies after the Civil War,
there's a whole decade where the economy is depressed. So
in general today we call a depression as a kind
(02:38):
of big recession. And so we talk about the Great
Recession starting around two thousand and seven two thousand and
eight as great because it's a bad recession, but it's
not on the order of a depression. So the terminology
has changed a little bit. But in nineteen twenty nine
you would have used depression just like you used recession.
Speaker 1 (02:58):
So when I study eighteenth century American history, I read
about panics, right, the panic of eighteen thirty six, eighteen
thirty seven, thirty eight, and there's another one in thirty nine,
And so our panics essentially depressions. How do we compare
those for you know, those of us who love history
(03:18):
and go back.
Speaker 2 (03:20):
So that's a great question too. So the nineteenth century
through the Great Depression, is really going to see a
lot of financial panics and other financial crises that are
usually the trigger for economic downturns, what we might call
recessions today. So in general, those are almost going to
be the same thing, because almost every recession in the
(03:40):
nineteenth century is going to correspond to a financial panic
of some kind where you see bank runs, people taking
their money out of the bank, some banks failing, and
so on and so forth. So in general, those are
really closely linked. After the Great Depression, then we're gonna
have a period where there's almost no financial panics that
(04:02):
are corresponding to big recessions until we get to two
thousand and seven. So that's why people really started looking
at the Great Depression around two thousand and seven two
thousand and eight, because we had a kind of old
fashioned recession that really corresponded to these financial crises, whereas
after World War Two recessions really had other causes.
Speaker 1 (04:22):
Let's talk about the causes of the Great Depression, and
I want to start in the nineteen twenties. This is
the period after World War One. What was happening in
terms of global cooperation at this time.
Speaker 2 (04:35):
So that's also a really great question. The roots of
the Great Depression, of course, lie in the nineteen twenties
and the post World War One period, and so we
really want to look internationally. So after World War One,
the big financial hedgemon or economic hegemon in the United
Kingdom has really been worn out by World War One,
(04:57):
and so now the US is really the leading place
the world. But the thing is, after World War One,
Americans thought that entering in the war was largely a mistake,
that it had been costly. The view on World War
One is very different than World War II, and so
Americans really thought that was a mistake and that the
US should look more domestically rather than abroad. So the
(05:18):
US is kind of the leading nation in the world,
but it's not willing to really engage with the world
to the same degree. The US wants to make sure
that the war doesn't come back, but they're not really
interested in making sure that the global system functions in
the same way that the UK did, where they were
really economically integrated globally. They had a global global empire,
(05:38):
and they're a small island that needs to trade, so
they really need to be engaged internationally, whereas the US
has two oceans that separate it from most of the
major countries, and so then the US wanted to retreat
more domestically, and so it wasn't willing to cooperate to
the same degree to make the international system worsen. And
(05:59):
so one aspect to the Great Depression is really the
international aspect that you're seeing the end of the gold standard.
So the gold standard really worked well before World War One.
It really created a lot of globalization and integration. After
World War One, then countries try to go back on
the gold standard, but it doesn't work. And so while
the US has economic boom in the nineteen twenties, the
United Kingdom actually sees economic weakness throughout the nineteen twenties,
(06:23):
even before the Great Depression. And so the problems with
the global economic system after the nineteen twenties really lay
the foundation for the Great Depression that starts in nineteen
twenty nine.
Speaker 1 (06:35):
Yeah, for a minute, when you were talking about America
not wanting to cooperate with the rest of the world
and separated by two oceans, and I had a moment
where I thought we were talking about like twenty twenty five.
Speaker 2 (06:50):
Yes, I mean, there are definitely similarities in terms of
the US wanting to sort of retreat inward. Though you know,
the World War One really is very costly for the US, right,
there's very little upside to entering the war directly, whereas
you know, we didn't really have the same kind of
trigger for why the US was retreating inward in the
last few years. The kind of US hegemony over the
(07:13):
globe in terms of kind of global leadership of the
economic system was working well in a lot of ways.
You know, there obviously were some cost to that, but
there was no clear crisis that needed a big change
in my opinion, whereas after World War One, the world
system really is broken.
Speaker 1 (07:30):
So let me snap people's heads back to the Roaring twenties,
the nineteen twenties, which we call the Roaring twenties. Were
there factors that caused the boom, like what caused the
Roaring twenties that ultimately caused the bust.
Speaker 2 (07:44):
So the US has a Roaring twenties, but many countries
in Europe are not doing so well. So the US
is going to be a major export. During the First
World War, all the major European economies are going to
be focused on the war, and so a lot of
their agricultural product falls In France, there's just a lot
of land that's behind the trenches. And even in the UK,
(08:07):
you know, they're devoting all their manpower to the war,
so they're not able to produce as much agricultural production.
So the US is exporting lots of agricultural products to Europe,
and of course US manufacturing is really the world leader
at that point. So the US is exporting lots and
lots of products to Europe, and so the US is booming.
(08:30):
The European countries though after World War One they see
a lot of inflation. So given that they're on the
gold standard, countries like the UK are going to go
back to the old exchange rate before World War One,
and so there's a big discussion between Caines, the famous economist,
and Churchill, who at that point is the Treasury Secretary
of the UK, the Chancellor of the Exchequer. He is
not Prime Minister yet, so Kaine says going back to
(08:52):
the old exchange rate is a mistake. Churchill wants to
go back to the old exchange rate, but given that
the UK has had so much inflation, then all their
a uncompetitive. It's much more expensive to buy British products
because you're essentially having the same exchange rate with a dollar,
but British prices are much higher. So that really causes
the British to be incompetitive. And so the US can
(09:14):
export lots of goods to Western Europe because given that
they went back on the gold standard, then their products
are going to be uncompetitive. So it's going to be
very good for the US. But then the major economies
in Europe are going to be suffering because they've got
this deluge of American products. So it's again, you know,
with analogy to today. The US is running big trade
surpluses back then, whereas now it's running big trade deficits.
Speaker 1 (09:38):
This is American History Hotline. I'm your host, Bob Crawford.
Today my guest is Gabriel Matthey. He's a professor of
economics at American University with a specialty in the Great Depression.
We're talking about the nineteen twenty nine stock market crash
and the depression that followed. So October twenty eighth, nineteen
(10:00):
twenty nine, it's come to be known as Black Monday.
The Dow Jones average decline nearly thirteen percent in one day.
Within three years, at the peak of the financial crisis,
the nation's public companies had lost nearly ninety percent of
their value. So let's take each of those. Okay, what
(10:20):
would it be like if tomorrow the Dow Jones declined
thirteen percent in one day, what would that trigger?
Speaker 2 (10:30):
Yes, So, I mean, this is one of the biggest
crashes of US history. But you know, we've had other
economic crashes. There was one big one in nineteen eighty
seven that doesn't correspond to a recession, and we have
them in two thousand and eight, which obviously were part
of that financial crisis. But what makes the one nineteen
twenty nine different is that it's sort of the start
(10:53):
of the stock market falling a lot, so there's kind
of a recovery. It looks like maybe things will turn
around in nineteen thirty. So people, you know, with the
benefit of hindsight, we think it's obvious in twenty nine
that it's going to keep going. The economy will keep
shrinking till thirty three. At the time, they thought it
would be like those panics you talked about in the
late nineteenth century. You have a financial crisis, the economy
(11:15):
goes down, banks fail. But then what usually happened back
then is remember the British were really the leading economic player,
and there's this global gold standard. So if you've got
a financial panic, your interest rates skyrocket, everybody wants cash,
but then money comes in from abroad because you've got
this global gold standard, and so what's different in twenty
(11:37):
nine is that nobody has any gold because of all
the disruptions of World War One, and the US is
the leading player. So there's no big UK market to
bring in gold to reset things. And so people think
it's going to be like a nineteenth century crisis, that
things will get better by nineteen thirty, and they keep
getting worse and worse and worse. So you talked about
the ninety percent decline. If you bought at the peak
(11:59):
in twenty nine, and it takes you until nineteen fifty
four to get your money back, oh my gosh. And
if you bought Manhattan real estate at the peak, some
estimates one paper I read said it takes till the
seventies to make your money back.
Speaker 1 (12:13):
Oh so, anybody who has a financial advisor, who's spoken
with a financial advisory, they if times get rough, they
send you this historical data. You know, that's say they
hang in there, just stay in the market. Stay in
the market. For the people who stayed in the market
on October twenty eighth, nineteen twenty nine, you're telling me
(12:34):
that they weren't made whole until nineteen fifty four if
they stayed in the market.
Speaker 2 (12:39):
So you know, you would get dividends, but in terms
of the price recovering to that level, it took you
a quarter of a century. So all those kind of
historical data. You know, our data is not as good
in the Great Depression. So a lot of times our
data series will only go back to the seventies or
the fifties. So we had that. You know, with the
(12:59):
housing bubble and bust in the mid two thousands, people
said housing prices never go down, Well, they only had
data back to the fifties, which is, you know, relatively
stable period if you look historically. Of course, if you
look to the Great Depression, housing prices get clobbered. And
so it really depends how long back you're looking, whether
you think, like the questioner asked, can the Great Depression
(13:20):
happen again or not? And so I think the financial
advisors are kind of assuming that we're in a world
where the Great Depression can happen. If it can, then
you do face these tail risks. There's a small probability
that you just get wiped out.
Speaker 1 (13:33):
Okay, so let's get back to October twenty eighth, nineteen
twenty nine In the years that followed. How did those
massive losses on Wall Street impact Main Street in America?
Speaker 2 (13:46):
Yeah, so one feature of the nineteen twenties that you
started to get more broad based stock ownership. So stock
market is really cooking throughout the nineteen twenties. And you
have one feature that's different than today because remember you
have countries going back on the gold Standard and you
don't have the same kind of regulatory system where you know,
(14:06):
you try to buy stocks abroad, you have to comply
with local regulations. Some countries have capital controls where it's
hard to move money in and out, like China and India.
So at the time, we have the gold Standard and
it's a fairly less a fair system. So if you're
in Belgium or the Netherlands, or Switzerland or the UK,
or you know other countries like that, even the Philippines
or South Africa, if you buy stocks in the US, well,
(14:29):
everybody's got fixed exchange rates on the gold Standard, so
you don't face any exchange rate risks. So buying a
stock in New York is the same as buying a
stock in Brussels or London in terms of your exchange
rate risk. So that means you're getting lots of inflows
from other countries. Remember, the European economies are not doing well,
so everybody's buying US stocks across the globe. So, you know,
(14:49):
given the regulatory barriers that kind of developed over time,
not saying they're bad, but that's going to really slow
down the amount of international investment. So the US economy
is really benefiting from both Americans but also foreign nurs
buying stocks because the US economy is doing so well
in the twenties.
Speaker 1 (15:07):
Help me understand the Federal Reserve. What was it doing
at this time and why was it unable to stop
the depression.
Speaker 2 (15:15):
Yes, so the Federal Reserve has been is a central actor,
of course, but I think perhaps we've focused a bit
too much on it, given those international aspects I like
to focus on. But you know, the FED is set
up very differently back then. So it's set up in
the wake of the nineteen oh seven panic, which is
one of these. It's in the twentieth century, but it
(15:37):
follows that kind of nineteenth century pattern of a very
of a financial panic in New York that then causes
a brief recession, but a sharp one. So then the
US had seen all these late nineteenth century crises, and
the US says, we need to change things. We've got
to do something different. You know, lots of countries are
getting central banks. Even Canada doesn't have a central bank,
(15:59):
but they're system has almost no panics, so they just
have a very different banking system. So we've got to
do something different. So eventually that leads to the creation
of the FED, and the FED is meant to alleviate
those kind of panics like you talked about, where everybody's
scrambling for cash and so people are withdrawing money from
banks and so on. So the FED will essentially do
(16:23):
something called rediscounting. So if a bank made alone, then
the FED will lend money to the bank, so now
the bank is liquid again. So that is going to
help provide for when you have these liquidity squeezes during
the panics. The issue with the depression is that, well,
the economy starts doing really badly, so nobody's borrowing, so
interest rates are low. So the FED says, look, our
(16:44):
mandate is to deal with these late nineteenth century crises
when interest rates spike. In the panic, we're seeing low
interest rates, so everybody can access money. If you want
to borrow, you can borrow at low interest rates, So
that was one reason why they didn't really intervene to
try to stop the panic. They also don't have the
same mandate like they do today to really deal with
financial crises. They were just meant to deal with these
(17:06):
liquidity squeezes that would arise in the late nineteenth century.
So in the wake of the depression, then the Federal
Reserve is given a much bigger mandate to try to
deal with economic crises. That's one reason why we haven't
seen a great depression since then, because the Fed now
has a lot more tools and a lot more authority
to try to intervene in the economy to try to
deal with these kind of crises. So if you look
(17:27):
at the two thousand and eight crisis, arguably the initial
shock is bigger than in twenty nine, but because the
FED responds much more aggressively, you don't see as deep
of a downturn.
Speaker 1 (17:39):
I'm curious, do we know what interest rates were before
the crash and after?
Speaker 2 (17:47):
Yeah, so you can look at the Federal Reserve discount rate,
which is the interest rate that banks can borrow from.
The FED had been tightening monetary policy. It was raising
interest rates because of the stock market boom. So, like
we say, there's a already the economy is seeing a
downturn by the summer, even before October nineteen twenty nine,
and so that's because the stock market is really booming.
(18:10):
After twenty seven to twenty eight, arguably it's in a
bubble where the stock prices are just shooting to the moon,
and so the Fed is worried about this, and so
they start to try to raise interest rates to try
to cool down the bubble. Because back then there's no
regulation on margin lending, so you can borrow from the
bank overnight to try to buy stocks. So then if
you have one hundred dollars, rather than buying one hundred
(18:31):
dollars in stock, you can use your hundred dollars as
collateral and borrow nine hundred dollars. Now you've got one
thousand dollars to invest in the stock market. And so
because of that, that's going to drive the stock market
up because you're able to borrow very easily to invest
in stock. So after the Great Depression, then there's very
tight regulations on margin lending, so that way you can't
(18:53):
borrow as much money because the margin lending is going
to feed the bubble on the way up. But then
what happens once stock price is going down in October
twenty nine, Well, then the bank says, okay, you're underwater.
You need to sell your stocks because we don't want
to take bigger losses. So you concentrate the buying on
the way up, and then you concentrate the selling, So
then everybody's selling at the same time the prices go down.
(19:13):
Further More, people are underwater on their loans, there's more
selling and so on, and so that really drives the
bubble up and drives the bubble down. The FED is
trying to raise interest rates to try to deal with
the bubble. But the thing is, if you're expecting ten
or twenty percent gains on the stock market, if the
cost of you you're borrowing goes up one or two percent,
it's not really going to deter you. Whereas if a
(19:36):
solid business that's not speculative sees one or two percent
or three percent higher borrowing costs, that might make the
difference between investing or not. So that interest rate policy
is going to start to slow down investment and harm
the economy. While not really deterring the speculators on Wall Street.
Speaker 1 (19:52):
People stay on the sidelines. Yeah, this is American History Hotline.
I'm your host, Bob Crawford. Today, my guest is Gabriel Matthew.
He's an economic historian at American University. We're talking about
the perfect storm that created the Great Depression nearly one
(20:14):
hundred years ago. And remember, send us your burning questions
about American history. You can record yourself using the voice
Memo app on your phone, or take a video and
email it to Americanhistory Hotline at gmail dot com. That's
Americanhistory Hotline at gmail dot com. Now back to the show.
(20:37):
Smoot hawllye. This is a phrase coming up in a
lot of conversations these past few weeks and months. Let's
talk about smoot Holly. What is it?
Speaker 2 (20:49):
Oh, it's a smooth Holly refers to big Tariff bill
passed by Congress in nineteen thirty. So, if I could,
I'd like to back up a little bit about the
kind of political economy of tariff's. The nineteenth century when
the US, or maybe even the eighteenth when the US
is set up, the federal government has given very little
power under the Constitution to impose taxes. So one tax
(21:11):
authority it has is tariffs, and so that's going to
fund most of the federal government.
Speaker 1 (21:16):
Wait, I'm sorry, did you say that Congress has the power.
Speaker 2 (21:20):
Yes, you might not know it recently, but back then
it's supposed to be Congress having power. So after actually
the back jumping back after nineteen thirty the Republicans are
in control, as they had been basically unbroken since the
Civil War. More or less, they were the dominant party.
(21:41):
Then in nineteen thirty two, the Democrats come in in
a wave election because of the Great Depression. People are dissatisfied.
But the Democrats their economic basis farmers. They export agricultural products,
so they don't like tariffs because they need to pay
the import tariffs and then they're going to face retaliation
in foreign markets. So the Democratic then under FDR, starts
(22:02):
lowering tariffs after Smooth Holly, and so then Congress tries
to give the president more leeway to try to pass
these tariffs. Since Congress, you know, there's always some districts
that are going to be hurt by tariff reductions, so
they tried to give the president more power to negotiate
tariff reductions in the wake of Smooth Holly, and so
(22:22):
that power continues to be concentrated in the president, even
though that's not how the Constitution set things up. The
Congress was supposed to pass tariffs, and so then it's
reached its kind of apex today where essentially the president
has unchecked power effectively to set tariffs despite the law.
But in the nineteen thirty the president didn't have that power,
but it was passed by Congress, though Hoover at the
(22:44):
time supported it. The Republicans were the party of kind
of the North and manufacturing, and so they were facing
competition from foreign producers of manufactured goods, especially the UK,
which was the leading manufacturing country from the start of
the Industrial Revolution till about the late nineteenth century. So
the Republicans, with their base in the North and manufacturing,
(23:06):
wanted to have a high tariff wall to try to
develop our own manufacturing. So that continues through nineteen thirty.
And so the US is going to set up very
high tariff barriers in nineteen thirty, though they had been
higher in the eighteen nineties.
Speaker 1 (23:19):
And correct me if I'm wrong, that was sixteen percent.
Speaker 2 (23:23):
That's kind of average. The thing with calculating tariffs is
the easy way is to kind of look at the
taxes paid at the port and then divided by the
value of the goods, and so you can get an
average that way. The thing is, if you've got a
really high tariff like was proposed for China recently forty
five exactly right through triple digits, I mean, nobody's really
(23:46):
going to trade except if it's something essential. So then
you're not going to measure that because there won't be
any imports, so you won't measure that very high level.
You'll measure the very low level of things which are traded.
But sixteen seventeen percent is probably about right.
Speaker 1 (24:02):
And so what was the impact of Smooth Holly of
those terrafs?
Speaker 2 (24:06):
Right, So it's gonna set off kind of global retaliation.
It's really harmful for Canada, like the tariffs are today.
You know, Canada very economically integrated with the US. Not
only is it neighboring the US, but almost all the
economic activity in the population is really close to the
US border, and so you get a massive retaliation. It's
part of what I talked about earlier in terms of
(24:29):
American hegemony that the US rather than trying to have
a global trading system that works now is active in
breaking down the trading system. So there we could see
an analogy to today. And the key difference there is
that the world is on a gold standard. So if
(24:49):
you're on a gold standard, you need to have enough gold,
but you pay for imports with gold. If you're running
low on your gold reserves, is if gold is leaving
your country, then tariffs can help because you're going to
disc courage imports and so then you're not going to
lose as much gold. So what the US should have done.
The US had a lot of gold. The countries in
Western Europe, as we said, they're uncompetitive. They can't export
(25:11):
and get more gold because their prices are elevated after
the inflation in World War One. So the US really
should have let gold flow abroad. Instead it puts on
these boot Holly tariffs, which worsens the economic crisis internationally.
So then nineteen thirty one you see a wave of
panics across the major economies of Europe, countries like Austria
and Germany, and nineteen thirty one, then the year after
(25:33):
Smooth Holly really sees perhaps the worst year macroeconomically of
the twentieth century.
Speaker 1 (25:38):
So explain it to me, like I just don't know anything.
A plus B plus C plus D equal the Great Depression.
Speaker 2 (25:46):
Well, I would love to give you that, But the
Great Depression really, like I said, you want to think
about it in terms of multiple punches. Also really have
different macroeconomic schools of thought. You've got Kaynzi and you've
got Milton Friedman style monitorists. You've got Austrian economists like
Friedrich Hayek. Marxists have their own view on the depression
(26:09):
that it's kind of the last crisis of capitalism at
the time, that's what it was looking like because the
USSR is seeing its economy really boom. It's not economically connected.
So each different school of thought has got its own views.
There's also kind of under consumptionists, the view that inequality
had gotten too high. You actually have American economists Foster
and Catchings talking about that economic inequality in the twenties
(26:32):
got too high, so then middle class people couldn't buy
enough products, which led to the Great Depression. And actually
Herbert Hoover really liked this theory a lot, though he
didn't really do much to deal with the kind of
root causes in that theory of inequality. But it's really
hard to give a pat answer. But if I had to,
I would say the flaws in the gold standard are
(26:53):
really at the cause. If you look at the recovery
the faster countries leave the gold standard, that really corresponds
to their because the gold standard is really golden handcuffs.
It really constrains your policies. You can't really cut interest
rates because then people are going to bring gold out
of your country to go to high interest rate countries.
So in terms of dealing with the crisis, then you
(27:13):
have to keep really high high interest rates to try
to attract gold, which kills your economy. You also want
to be able to depreciate your exchange rate to try
to export more. So that's what the US does in
nineteen thirty three when it leaves the gold standard under
the FDR administration and the Democratic Congress. And so it's
really the flaws in the gold standard that caused the depression.
(27:33):
And so as countries leave the gold standard, you can
see that their recoveries start. And so it's unfortunate that
at the time, you know we're getting closer to World
War two, and so unfortunately, the fascist powers like Japan
and Germany are going to leave the gold standard early.
They're going to see really rapid growth because they've got
big fiscal stimulus from all their spending on weapons which
(27:54):
they're going to use to invade the world. And then
a lot of the liberal democracies likes are going to
stay on the gold standard, their economies stay weak. And
then of course France is defeated in nineteen forty. So unfortunately,
because a lot of the liberal democracies stayed with the
gold standard, they had weaker economies. Luckily, the US leaves
the gold standard in thirty three, the UK leaves in
(28:14):
thirty one, and so they're able to recover a bit
before World War two. But really the gold standard is
the culprit there.
Speaker 1 (28:21):
What has the government done in the intervening years to
make sure this does not happen again?
Speaker 2 (28:27):
Well, there's been a lot of things done, of course,
you know, there's lots of discussion about that. There's a
famous book by the economist Hymen Minsky. Can it happen again?
Where it is the Great Depression? You know, for one thing,
we don't have the gold standard, And I would advise
not to bring it back. Those kind of arrangements are really.
Speaker 1 (28:44):
Do people talk about that? Is that on the table?
Speaker 2 (28:47):
You know, the we could talk about the modern time too,
but you know, I think some of the crypto enthusiastic
cryptocurrencies as the new gold and there's always been a
strain of thought in Austrian economics that the gold standard
has been official. There was a commission during the Reagan
administration to talk about going back to the gold standard.
But the issues with the gold standard are that they
(29:09):
really constrain policy makers in dealing with these crises in
many ways. The Euro, the European currency arrangement, the handcuffs
are even tighter in some ways because if you're the
US dollar on the gold standard, you can just say, well,
now it's more dollars per gold and that's going to
help our exports. So you don't need to reintroduce a
(29:30):
new currency. If you're on the Euro. If you're Greece
and you want to try to depreciate your currency to
try to export more and stimulate the economy, well now
you need to reintroduce the drakma, the Greek money, and
that's a lot harder. So and we saw that Greece
did see essentially a Great Depression level event, and actually
their unemployment took longer to fall than the US did
(29:52):
during the Great Depression. So in some ways, the Eurozone
was even worse than the gold Standard. Not to say
that there's not benefits, but in terms of dealing with crisis,
the Eurozone provides governments with fewer options than the Gold
Standard did in the nineteen twenties and thirties.
Speaker 1 (30:07):
When did I mean? I was born in nineteen seventy one.
I've always known the term great Depression. When did great
Depression come into our parlance?
Speaker 2 (30:16):
That's a good question, you know, you can start to
see it soon after. I mean, there are people talking
about the eighteen seventies, so in the nineteen thirties they
just called it the seventies because there were no nineteen
seventies yet. But I think it's roughly contemporaneous. I didn't
quite note exactly if I saw. I didn't kind of
newspaper articles. But I think it's really thinking about this
(30:39):
crisis is worse than the eighteen seventies, which is sort
of our benchmark for really bad depression, And so this
one is actually greater because it's unambiguous that the nineteen
thirties is a worse crisis than the eighteen seventies, which
is actually also a global economic crisis that you see
crises in Western Europe too.
Speaker 1 (30:56):
Sitting here listening to all this, I can't help but
that our listeners, you know, are drawing the same parallel
as I am to today. Are economists concern a depression
could happen again.
Speaker 2 (31:10):
In general, there was a lot of talk in two
thousand and eight. I mean, that was genuinely a huge
economic crisis. People thought a lot about nineteen oh seven
in terms of having another crisis with a financial panic
and a recession in the wake of the Great Depression.
You asked earlier about you know, what was done by policymakers.
There's basically a kind of less a fair system, very
(31:31):
loose regulation in the depression, things like margin borrowing, so
that's really tightly regulated by the New Deal. So they
put in place a lot of regulations to lock down
the system. You could think about the pros and cons
of that, but it definitely is going to avoid any
kind of financial crisis because there's just not much you
can do. Think about a mad men world of the
nineteen fifties. You can't buy options on robin Hood, can't
(31:53):
buy cryptocurrency. Your options are basically a checking account which
doesn't give you interest, and a savings account. There's not
even much market funds, so there's just really not very
many shenanigans you can get into. The Wall Street is
very inaccessible. You need a broker who's part of some
New England wasp family that's inherited the seat on the
board and so on. So it's a lot harder to
(32:15):
get access to things like even stock ownership. And so
because you have this really tightly regulated financial system, then
you don't get financial crises. So the recessions after World
War Two are really not going to have the same
kind of financial panic aspect. But then by the eighties
and nineties we're starting to deregulate. American policymakers say, we
regulated too much. It created inefficiencies in our economy. We
(32:39):
need to let the financial sector have more rain to
provide funds to businesses to invest and so on. We
want to let people buy stocks, have more access to
different assets. And so then the possibility of some kind
of big financial panic really reasserted itself, especially in two
thousand and eight. But I think given that we have
the Federal Reserve and other central banks, we don't have
the gold standard. So I think the prospects for another
(33:02):
Great Depression are pretty remote. Even the prospects of a
global economic shock like the kind of high tide of
Trump's reciprocal tariffs, well, that's really self inflicted. So then
you know, as the Trump administration sees the cost starting
to develop that people are forecasting recessions and so on,
the administration can reverse itself. The financial panics are not
(33:23):
self inflicted, so the politicians can't just reverse themselves. So
I think that for that reason, you know, it would
never get as bad because eventually there'll be an election
if it's a self inflicted crisis like from the tariffs,
and so I don't see it being as bad as
as it was, but you know, you never say never.
There's always that possibility lurking out there, the kind of
(33:45):
comment hitting the dinosaurs.
Speaker 1 (33:47):
I've been talking with Gabriel Matthey. He is an economic
historian at American University. He specializes in studying the Great Depression.
Thank you Gabriel for joining us today on American history.
We hope we can call on you again.
Speaker 2 (34:02):
Thanks. I would love to I've got an interest in
Huey Long, so if you ever get any questions on
Huey Long, I've got my own theory on his assassination.
Oh my gosh, be to riff with you for another hour.
Speaker 1 (34:11):
I would love to talk about you Long.
Speaker 2 (34:13):
All right, thanks so much, Thank you.
Speaker 1 (34:17):
You've been listening to American History Hotline, a production of
iHeart Podcasts and Scratch Track Productions. The show's executive producer
is James Morrison. Our executive producers from iHeart are Jordan
run Tall and Jason English. Original music composed by me,
Bob Crawford. Please keep in touch. Our email is Americanistory
(34:40):
Hotline at gmail dot com. If you like the show,
please tell your friends and leave us a review in
Apple Podcasts. I'm your host, Bob Crawford. Feel free to
hit me up on social media to ask a history
question or to let me know what you think of
the show. You can find me at Bob Crawford Bass.
(35:01):
Thanks so much for listening. See you next week.
You've reached American History Hotline. You asked the question what
is political technology?
Speaker 2 (00:08):
George Washington really cut down at churchree.
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JFK, Marilyn Monroe having an affair. We get the answers.
I'm so glad you asked me this question.
Speaker 2 (00:16):
This is such a ridiculous story that we tell ourselves
because we don't want to know the real story.
Speaker 1 (00:21):
Leave a message. Hey, there are American History Hotliners. Your
host Bob Crawford here, happy to be joining you again
for another episode of American History Hotline. You're the ones
with the questions. I'm a guy trying to get you
some answers and keep those questions coming. Please. The best
way to get us a question is to record a
(00:42):
video or a voice memo on your phone and email
it to Americanhistory Hotline at gmail dot com. That's Americanhistory
Hotline at gmail dot com. And remember we are American
History Hotline. I love talking about the Spanish Inquisition as
much as the next guy or gal, but hey, let's
(01:03):
talk about this continent. Okay. Today's question is about the
Great Depression. Here to help me answer this question is
Gabriel Matthey. He is an economic historian at American University
with a special focus on studying the Great Depression. I
think we found the right guest for today, Gabe. Thanks
(01:25):
for joining me.
Speaker 2 (01:26):
Thanks so much for the invitation, looking forward to it.
Speaker 1 (01:28):
Okay, Gabe, here's the question we're hoping you could help
us answer.
Speaker 2 (01:33):
Hi, this is Mackenzie from Santa Barbara. Why did the
stock market crash in nineteen twenty nine and is that
what led to the Great Depression? Could that happen again?
Speaker 1 (01:42):
Now, Gabe, let's start by defining some terms. How is
a depression different from a recession? We hear a lot
about a recession these days. What's the difference between depression
and recession?
Speaker 2 (01:55):
So that's a great question. I was just teaching that
a few weeks ago in my macroeconomics class. So the
Great Depression was named that because they had a long
history of thinking about economic down terms and calling them depressions.
But they used to call any economic downturn a depression.
The terminology of recession comes a bit later, so that's
(02:18):
really going to date to the twentieth century. So in
the nineteen twenties, by the end, the Great Depression is
starting and people are comparing it to the other depression
that they had in the eighteen seventies after the Civil War,
there's a whole decade where the economy is depressed. So
in general today we call a depression as a kind
(02:38):
of big recession. And so we talk about the Great
Recession starting around two thousand and seven two thousand and
eight as great because it's a bad recession, but it's
not on the order of a depression. So the terminology
has changed a little bit. But in nineteen twenty nine
you would have used depression just like you used recession.
Speaker 1 (02:58):
So when I study eighteenth century American history, I read
about panics, right, the panic of eighteen thirty six, eighteen
thirty seven, thirty eight, and there's another one in thirty nine,
And so our panics essentially depressions. How do we compare
those for you know, those of us who love history
(03:18):
and go back.
Speaker 2 (03:20):
So that's a great question too. So the nineteenth century
through the Great Depression, is really going to see a
lot of financial panics and other financial crises that are
usually the trigger for economic downturns, what we might call
recessions today. So in general, those are almost going to
be the same thing, because almost every recession in the
(03:40):
nineteenth century is going to correspond to a financial panic
of some kind where you see bank runs, people taking
their money out of the bank, some banks failing, and
so on and so forth. So in general, those are
really closely linked. After the Great Depression, then we're gonna
have a period where there's almost no financial panics that
(04:02):
are corresponding to big recessions until we get to two
thousand and seven. So that's why people really started looking
at the Great Depression around two thousand and seven two
thousand and eight, because we had a kind of old
fashioned recession that really corresponded to these financial crises, whereas
after World War Two recessions really had other causes.
Speaker 1 (04:22):
Let's talk about the causes of the Great Depression, and
I want to start in the nineteen twenties. This is
the period after World War One. What was happening in
terms of global cooperation at this time.
Speaker 2 (04:35):
So that's also a really great question. The roots of
the Great Depression, of course, lie in the nineteen twenties
and the post World War One period, and so we
really want to look internationally. So after World War One,
the big financial hedgemon or economic hegemon in the United
Kingdom has really been worn out by World War One,
(04:57):
and so now the US is really the leading place
the world. But the thing is, after World War One,
Americans thought that entering in the war was largely a mistake,
that it had been costly. The view on World War
One is very different than World War II, and so
Americans really thought that was a mistake and that the
US should look more domestically rather than abroad. So the
(05:18):
US is kind of the leading nation in the world,
but it's not willing to really engage with the world
to the same degree. The US wants to make sure
that the war doesn't come back, but they're not really
interested in making sure that the global system functions in
the same way that the UK did, where they were
really economically integrated globally. They had a global global empire,
(05:38):
and they're a small island that needs to trade, so
they really need to be engaged internationally, whereas the US
has two oceans that separate it from most of the
major countries, and so then the US wanted to retreat
more domestically, and so it wasn't willing to cooperate to
the same degree to make the international system worsen. And
(05:59):
so one aspect to the Great Depression is really the
international aspect that you're seeing the end of the gold standard.
So the gold standard really worked well before World War One.
It really created a lot of globalization and integration. After
World War One, then countries try to go back on
the gold standard, but it doesn't work. And so while
the US has economic boom in the nineteen twenties, the
United Kingdom actually sees economic weakness throughout the nineteen twenties,
(06:23):
even before the Great Depression. And so the problems with
the global economic system after the nineteen twenties really lay
the foundation for the Great Depression that starts in nineteen
twenty nine.
Speaker 1 (06:35):
Yeah, for a minute, when you were talking about America
not wanting to cooperate with the rest of the world
and separated by two oceans, and I had a moment
where I thought we were talking about like twenty twenty five.
Speaker 2 (06:50):
Yes, I mean, there are definitely similarities in terms of
the US wanting to sort of retreat inward. Though you know,
the World War One really is very costly for the US, right,
there's very little upside to entering the war directly, whereas
you know, we didn't really have the same kind of
trigger for why the US was retreating inward in the
last few years. The kind of US hegemony over the
(07:13):
globe in terms of kind of global leadership of the
economic system was working well in a lot of ways.
You know, there obviously were some cost to that, but
there was no clear crisis that needed a big change
in my opinion, whereas after World War One, the world
system really is broken.
Speaker 1 (07:30):
So let me snap people's heads back to the Roaring twenties,
the nineteen twenties, which we call the Roaring twenties. Were
there factors that caused the boom, like what caused the
Roaring twenties that ultimately caused the bust.
Speaker 2 (07:44):
So the US has a Roaring twenties, but many countries
in Europe are not doing so well. So the US
is going to be a major export. During the First
World War, all the major European economies are going to
be focused on the war, and so a lot of
their agricultural product falls In France, there's just a lot
of land that's behind the trenches. And even in the UK,
(08:07):
you know, they're devoting all their manpower to the war,
so they're not able to produce as much agricultural production.
So the US is exporting lots of agricultural products to Europe,
and of course US manufacturing is really the world leader
at that point. So the US is exporting lots and
lots of products to Europe, and so the US is booming.
(08:30):
The European countries though after World War One they see
a lot of inflation. So given that they're on the
gold standard, countries like the UK are going to go
back to the old exchange rate before World War One,
and so there's a big discussion between Caines, the famous economist,
and Churchill, who at that point is the Treasury Secretary
of the UK, the Chancellor of the Exchequer. He is
not Prime Minister yet, so Kaine says going back to
(08:52):
the old exchange rate is a mistake. Churchill wants to
go back to the old exchange rate, but given that
the UK has had so much inflation, then all their
a uncompetitive. It's much more expensive to buy British products
because you're essentially having the same exchange rate with a dollar,
but British prices are much higher. So that really causes
the British to be incompetitive. And so the US can
(09:14):
export lots of goods to Western Europe because given that
they went back on the gold standard, then their products
are going to be uncompetitive. So it's going to be
very good for the US. But then the major economies
in Europe are going to be suffering because they've got
this deluge of American products. So it's again, you know,
with analogy to today. The US is running big trade
surpluses back then, whereas now it's running big trade deficits.
Speaker 1 (09:38):
This is American History Hotline. I'm your host, Bob Crawford.
Today my guest is Gabriel Matthey. He's a professor of
economics at American University with a specialty in the Great Depression.
We're talking about the nineteen twenty nine stock market crash
and the depression that followed. So October twenty eighth, nineteen
(10:00):
twenty nine, it's come to be known as Black Monday.
The Dow Jones average decline nearly thirteen percent in one day.
Within three years, at the peak of the financial crisis,
the nation's public companies had lost nearly ninety percent of
their value. So let's take each of those. Okay, what
(10:20):
would it be like if tomorrow the Dow Jones declined
thirteen percent in one day, what would that trigger?
Speaker 2 (10:30):
Yes, So, I mean, this is one of the biggest
crashes of US history. But you know, we've had other
economic crashes. There was one big one in nineteen eighty
seven that doesn't correspond to a recession, and we have
them in two thousand and eight, which obviously were part
of that financial crisis. But what makes the one nineteen
twenty nine different is that it's sort of the start
(10:53):
of the stock market falling a lot, so there's kind
of a recovery. It looks like maybe things will turn
around in nineteen thirty. So people, you know, with the
benefit of hindsight, we think it's obvious in twenty nine
that it's going to keep going. The economy will keep
shrinking till thirty three. At the time, they thought it
would be like those panics you talked about in the
late nineteenth century. You have a financial crisis, the economy
(11:15):
goes down, banks fail. But then what usually happened back
then is remember the British were really the leading economic player,
and there's this global gold standard. So if you've got
a financial panic, your interest rates skyrocket, everybody wants cash,
but then money comes in from abroad because you've got
this global gold standard, and so what's different in twenty
(11:37):
nine is that nobody has any gold because of all
the disruptions of World War One, and the US is
the leading player. So there's no big UK market to
bring in gold to reset things. And so people think
it's going to be like a nineteenth century crisis, that
things will get better by nineteen thirty, and they keep
getting worse and worse and worse. So you talked about
the ninety percent decline. If you bought at the peak
(11:59):
in twenty nine, and it takes you until nineteen fifty
four to get your money back, oh my gosh. And
if you bought Manhattan real estate at the peak, some
estimates one paper I read said it takes till the
seventies to make your money back.
Speaker 1 (12:13):
Oh so, anybody who has a financial advisor, who's spoken
with a financial advisory, they if times get rough, they
send you this historical data. You know, that's say they
hang in there, just stay in the market. Stay in
the market. For the people who stayed in the market
on October twenty eighth, nineteen twenty nine, you're telling me
(12:34):
that they weren't made whole until nineteen fifty four if
they stayed in the market.
Speaker 2 (12:39):
So you know, you would get dividends, but in terms
of the price recovering to that level, it took you
a quarter of a century. So all those kind of
historical data. You know, our data is not as good
in the Great Depression. So a lot of times our
data series will only go back to the seventies or
the fifties. So we had that. You know, with the
(12:59):
housing bubble and bust in the mid two thousands, people
said housing prices never go down, Well, they only had
data back to the fifties, which is, you know, relatively
stable period if you look historically. Of course, if you
look to the Great Depression, housing prices get clobbered. And
so it really depends how long back you're looking, whether
you think, like the questioner asked, can the Great Depression
(13:20):
happen again or not? And so I think the financial
advisors are kind of assuming that we're in a world
where the Great Depression can happen. If it can, then
you do face these tail risks. There's a small probability
that you just get wiped out.
Speaker 1 (13:33):
Okay, so let's get back to October twenty eighth, nineteen
twenty nine In the years that followed. How did those
massive losses on Wall Street impact Main Street in America?
Speaker 2 (13:46):
Yeah, so one feature of the nineteen twenties that you
started to get more broad based stock ownership. So stock
market is really cooking throughout the nineteen twenties. And you
have one feature that's different than today because remember you
have countries going back on the gold Standard and you
don't have the same kind of regulatory system where you know,
(14:06):
you try to buy stocks abroad, you have to comply
with local regulations. Some countries have capital controls where it's
hard to move money in and out, like China and India.
So at the time, we have the gold Standard and
it's a fairly less a fair system. So if you're
in Belgium or the Netherlands, or Switzerland or the UK,
or you know other countries like that, even the Philippines
or South Africa, if you buy stocks in the US, well,
(14:29):
everybody's got fixed exchange rates on the gold Standard, so
you don't face any exchange rate risks. So buying a
stock in New York is the same as buying a
stock in Brussels or London in terms of your exchange
rate risk. So that means you're getting lots of inflows
from other countries. Remember, the European economies are not doing well,
so everybody's buying US stocks across the globe. So, you know,
(14:49):
given the regulatory barriers that kind of developed over time,
not saying they're bad, but that's going to really slow
down the amount of international investment. So the US economy
is really benefiting from both Americans but also foreign nurs
buying stocks because the US economy is doing so well
in the twenties.
Speaker 1 (15:07):
Help me understand the Federal Reserve. What was it doing
at this time and why was it unable to stop
the depression.
Speaker 2 (15:15):
Yes, so the Federal Reserve has been is a central actor,
of course, but I think perhaps we've focused a bit
too much on it, given those international aspects I like
to focus on. But you know, the FED is set
up very differently back then. So it's set up in
the wake of the nineteen oh seven panic, which is
one of these. It's in the twentieth century, but it
(15:37):
follows that kind of nineteenth century pattern of a very
of a financial panic in New York that then causes
a brief recession, but a sharp one. So then the
US had seen all these late nineteenth century crises, and
the US says, we need to change things. We've got
to do something different. You know, lots of countries are
getting central banks. Even Canada doesn't have a central bank,
(15:59):
but they're system has almost no panics, so they just
have a very different banking system. So we've got to
do something different. So eventually that leads to the creation
of the FED, and the FED is meant to alleviate
those kind of panics like you talked about, where everybody's
scrambling for cash and so people are withdrawing money from
banks and so on. So the FED will essentially do
(16:23):
something called rediscounting. So if a bank made alone, then
the FED will lend money to the bank, so now
the bank is liquid again. So that is going to
help provide for when you have these liquidity squeezes during
the panics. The issue with the depression is that, well,
the economy starts doing really badly, so nobody's borrowing, so
interest rates are low. So the FED says, look, our
(16:44):
mandate is to deal with these late nineteenth century crises
when interest rates spike. In the panic, we're seeing low
interest rates, so everybody can access money. If you want
to borrow, you can borrow at low interest rates, So
that was one reason why they didn't really intervene to
try to stop the panic. They also don't have the
same mandate like they do today to really deal with
financial crises. They were just meant to deal with these
(17:06):
liquidity squeezes that would arise in the late nineteenth century.
So in the wake of the depression, then the Federal
Reserve is given a much bigger mandate to try to
deal with economic crises. That's one reason why we haven't
seen a great depression since then, because the Fed now
has a lot more tools and a lot more authority
to try to intervene in the economy to try to
deal with these kind of crises. So if you look
(17:27):
at the two thousand and eight crisis, arguably the initial
shock is bigger than in twenty nine, but because the
FED responds much more aggressively, you don't see as deep
of a downturn.
Speaker 1 (17:39):
I'm curious, do we know what interest rates were before
the crash and after?
Speaker 2 (17:47):
Yeah, so you can look at the Federal Reserve discount rate,
which is the interest rate that banks can borrow from.
The FED had been tightening monetary policy. It was raising
interest rates because of the stock market boom. So, like
we say, there's a already the economy is seeing a
downturn by the summer, even before October nineteen twenty nine,
and so that's because the stock market is really booming.
(18:10):
After twenty seven to twenty eight, arguably it's in a
bubble where the stock prices are just shooting to the moon,
and so the Fed is worried about this, and so
they start to try to raise interest rates to try
to cool down the bubble. Because back then there's no
regulation on margin lending, so you can borrow from the
bank overnight to try to buy stocks. So then if
you have one hundred dollars, rather than buying one hundred
(18:31):
dollars in stock, you can use your hundred dollars as
collateral and borrow nine hundred dollars. Now you've got one
thousand dollars to invest in the stock market. And so
because of that, that's going to drive the stock market
up because you're able to borrow very easily to invest
in stock. So after the Great Depression, then there's very
tight regulations on margin lending, so that way you can't
(18:53):
borrow as much money because the margin lending is going
to feed the bubble on the way up. But then
what happens once stock price is going down in October
twenty nine, Well, then the bank says, okay, you're underwater.
You need to sell your stocks because we don't want
to take bigger losses. So you concentrate the buying on
the way up, and then you concentrate the selling, So
then everybody's selling at the same time the prices go down.
(19:13):
Further More, people are underwater on their loans, there's more
selling and so on, and so that really drives the
bubble up and drives the bubble down. The FED is
trying to raise interest rates to try to deal with
the bubble. But the thing is, if you're expecting ten
or twenty percent gains on the stock market, if the
cost of you you're borrowing goes up one or two percent,
it's not really going to deter you. Whereas if a
(19:36):
solid business that's not speculative sees one or two percent
or three percent higher borrowing costs, that might make the
difference between investing or not. So that interest rate policy
is going to start to slow down investment and harm
the economy. While not really deterring the speculators on Wall Street.
Speaker 1 (19:52):
People stay on the sidelines. Yeah, this is American History Hotline.
I'm your host, Bob Crawford. Today, my guest is Gabriel Matthew.
He's an economic historian at American University. We're talking about
the perfect storm that created the Great Depression nearly one
(20:14):
hundred years ago. And remember, send us your burning questions
about American history. You can record yourself using the voice
Memo app on your phone, or take a video and
email it to Americanhistory Hotline at gmail dot com. That's
Americanhistory Hotline at gmail dot com. Now back to the show.
(20:37):
Smoot hawllye. This is a phrase coming up in a
lot of conversations these past few weeks and months. Let's
talk about smoot Holly. What is it?
Speaker 2 (20:49):
Oh, it's a smooth Holly refers to big Tariff bill
passed by Congress in nineteen thirty. So, if I could,
I'd like to back up a little bit about the
kind of political economy of tariff's. The nineteenth century when
the US, or maybe even the eighteenth when the US
is set up, the federal government has given very little
power under the Constitution to impose taxes. So one tax
(21:11):
authority it has is tariffs, and so that's going to
fund most of the federal government.
Speaker 1 (21:16):
Wait, I'm sorry, did you say that Congress has the power.
Speaker 2 (21:20):
Yes, you might not know it recently, but back then
it's supposed to be Congress having power. So after actually
the back jumping back after nineteen thirty the Republicans are
in control, as they had been basically unbroken since the
Civil War. More or less, they were the dominant party.
(21:41):
Then in nineteen thirty two, the Democrats come in in
a wave election because of the Great Depression. People are dissatisfied.
But the Democrats their economic basis farmers. They export agricultural products,
so they don't like tariffs because they need to pay
the import tariffs and then they're going to face retaliation
in foreign markets. So the Democratic then under FDR, starts
(22:02):
lowering tariffs after Smooth Holly, and so then Congress tries
to give the president more leeway to try to pass
these tariffs. Since Congress, you know, there's always some districts
that are going to be hurt by tariff reductions, so
they tried to give the president more power to negotiate
tariff reductions in the wake of Smooth Holly, and so
(22:22):
that power continues to be concentrated in the president, even
though that's not how the Constitution set things up. The
Congress was supposed to pass tariffs, and so then it's
reached its kind of apex today where essentially the president
has unchecked power effectively to set tariffs despite the law.
But in the nineteen thirty the president didn't have that power,
but it was passed by Congress, though Hoover at the
(22:44):
time supported it. The Republicans were the party of kind
of the North and manufacturing, and so they were facing
competition from foreign producers of manufactured goods, especially the UK,
which was the leading manufacturing country from the start of
the Industrial Revolution till about the late nineteenth century. So
the Republicans, with their base in the North and manufacturing,
(23:06):
wanted to have a high tariff wall to try to
develop our own manufacturing. So that continues through nineteen thirty.
And so the US is going to set up very
high tariff barriers in nineteen thirty, though they had been
higher in the eighteen nineties.
Speaker 1 (23:19):
And correct me if I'm wrong, that was sixteen percent.
Speaker 2 (23:23):
That's kind of average. The thing with calculating tariffs is
the easy way is to kind of look at the
taxes paid at the port and then divided by the
value of the goods, and so you can get an
average that way. The thing is, if you've got a
really high tariff like was proposed for China recently forty
five exactly right through triple digits, I mean, nobody's really
(23:46):
going to trade except if it's something essential. So then
you're not going to measure that because there won't be
any imports, so you won't measure that very high level.
You'll measure the very low level of things which are traded.
But sixteen seventeen percent is probably about right.
Speaker 1 (24:02):
And so what was the impact of Smooth Holly of
those terrafs?
Speaker 2 (24:06):
Right, So it's gonna set off kind of global retaliation.
It's really harmful for Canada, like the tariffs are today.
You know, Canada very economically integrated with the US. Not
only is it neighboring the US, but almost all the
economic activity in the population is really close to the
US border, and so you get a massive retaliation. It's
part of what I talked about earlier in terms of
(24:29):
American hegemony that the US rather than trying to have
a global trading system that works now is active in
breaking down the trading system. So there we could see
an analogy to today. And the key difference there is
that the world is on a gold standard. So if
(24:49):
you're on a gold standard, you need to have enough gold,
but you pay for imports with gold. If you're running
low on your gold reserves, is if gold is leaving
your country, then tariffs can help because you're going to
disc courage imports and so then you're not going to
lose as much gold. So what the US should have done.
The US had a lot of gold. The countries in
Western Europe, as we said, they're uncompetitive. They can't export
(25:11):
and get more gold because their prices are elevated after
the inflation in World War One. So the US really
should have let gold flow abroad. Instead it puts on
these boot Holly tariffs, which worsens the economic crisis internationally.
So then nineteen thirty one you see a wave of
panics across the major economies of Europe, countries like Austria
and Germany, and nineteen thirty one, then the year after
(25:33):
Smooth Holly really sees perhaps the worst year macroeconomically of
the twentieth century.
Speaker 1 (25:38):
So explain it to me, like I just don't know anything.
A plus B plus C plus D equal the Great Depression.
Speaker 2 (25:46):
Well, I would love to give you that, But the
Great Depression really, like I said, you want to think
about it in terms of multiple punches. Also really have
different macroeconomic schools of thought. You've got Kaynzi and you've
got Milton Friedman style monitorists. You've got Austrian economists like
Friedrich Hayek. Marxists have their own view on the depression
(26:09):
that it's kind of the last crisis of capitalism at
the time, that's what it was looking like because the
USSR is seeing its economy really boom. It's not economically connected.
So each different school of thought has got its own views.
There's also kind of under consumptionists, the view that inequality
had gotten too high. You actually have American economists Foster
and Catchings talking about that economic inequality in the twenties
(26:32):
got too high, so then middle class people couldn't buy
enough products, which led to the Great Depression. And actually
Herbert Hoover really liked this theory a lot, though he
didn't really do much to deal with the kind of
root causes in that theory of inequality. But it's really
hard to give a pat answer. But if I had to,
I would say the flaws in the gold standard are
(26:53):
really at the cause. If you look at the recovery
the faster countries leave the gold standard, that really corresponds
to their because the gold standard is really golden handcuffs.
It really constrains your policies. You can't really cut interest
rates because then people are going to bring gold out
of your country to go to high interest rate countries.
So in terms of dealing with the crisis, then you
(27:13):
have to keep really high high interest rates to try
to attract gold, which kills your economy. You also want
to be able to depreciate your exchange rate to try
to export more. So that's what the US does in
nineteen thirty three when it leaves the gold standard under
the FDR administration and the Democratic Congress. And so it's
really the flaws in the gold standard that caused the depression.
(27:33):
And so as countries leave the gold standard, you can
see that their recoveries start. And so it's unfortunate that
at the time, you know we're getting closer to World
War two, and so unfortunately, the fascist powers like Japan
and Germany are going to leave the gold standard early.
They're going to see really rapid growth because they've got
big fiscal stimulus from all their spending on weapons which
(27:54):
they're going to use to invade the world. And then
a lot of the liberal democracies likes are going to
stay on the gold standard, their economies stay weak. And
then of course France is defeated in nineteen forty. So unfortunately,
because a lot of the liberal democracies stayed with the
gold standard, they had weaker economies. Luckily, the US leaves
the gold standard in thirty three, the UK leaves in
(28:14):
thirty one, and so they're able to recover a bit
before World War two. But really the gold standard is
the culprit there.
Speaker 1 (28:21):
What has the government done in the intervening years to
make sure this does not happen again?
Speaker 2 (28:27):
Well, there's been a lot of things done, of course,
you know, there's lots of discussion about that. There's a
famous book by the economist Hymen Minsky. Can it happen again?
Where it is the Great Depression? You know, for one thing,
we don't have the gold standard, And I would advise
not to bring it back. Those kind of arrangements are really.
Speaker 1 (28:44):
Do people talk about that? Is that on the table?
Speaker 2 (28:47):
You know, the we could talk about the modern time too,
but you know, I think some of the crypto enthusiastic
cryptocurrencies as the new gold and there's always been a
strain of thought in Austrian economics that the gold standard
has been official. There was a commission during the Reagan
administration to talk about going back to the gold standard.
But the issues with the gold standard are that they
(29:09):
really constrain policy makers in dealing with these crises in
many ways. The Euro, the European currency arrangement, the handcuffs
are even tighter in some ways because if you're the
US dollar on the gold standard, you can just say, well,
now it's more dollars per gold and that's going to
help our exports. So you don't need to reintroduce a
(29:30):
new currency. If you're on the Euro. If you're Greece
and you want to try to depreciate your currency to
try to export more and stimulate the economy, well now
you need to reintroduce the drakma, the Greek money, and
that's a lot harder. So and we saw that Greece
did see essentially a Great Depression level event, and actually
their unemployment took longer to fall than the US did
(29:52):
during the Great Depression. So in some ways, the Eurozone
was even worse than the gold Standard. Not to say
that there's not benefits, but in terms of dealing with crisis,
the Eurozone provides governments with fewer options than the Gold
Standard did in the nineteen twenties and thirties.
Speaker 1 (30:07):
When did I mean? I was born in nineteen seventy one.
I've always known the term great Depression. When did great
Depression come into our parlance?
Speaker 2 (30:16):
That's a good question, you know, you can start to
see it soon after. I mean, there are people talking
about the eighteen seventies, so in the nineteen thirties they
just called it the seventies because there were no nineteen
seventies yet. But I think it's roughly contemporaneous. I didn't
quite note exactly if I saw. I didn't kind of
newspaper articles. But I think it's really thinking about this
(30:39):
crisis is worse than the eighteen seventies, which is sort
of our benchmark for really bad depression, And so this
one is actually greater because it's unambiguous that the nineteen
thirties is a worse crisis than the eighteen seventies, which
is actually also a global economic crisis that you see
crises in Western Europe too.
Speaker 1 (30:56):
Sitting here listening to all this, I can't help but
that our listeners, you know, are drawing the same parallel
as I am to today. Are economists concern a depression
could happen again.
Speaker 2 (31:10):
In general, there was a lot of talk in two
thousand and eight. I mean, that was genuinely a huge
economic crisis. People thought a lot about nineteen oh seven
in terms of having another crisis with a financial panic
and a recession in the wake of the Great Depression.
You asked earlier about you know, what was done by policymakers.
There's basically a kind of less a fair system, very
(31:31):
loose regulation in the depression, things like margin borrowing, so
that's really tightly regulated by the New Deal. So they
put in place a lot of regulations to lock down
the system. You could think about the pros and cons
of that, but it definitely is going to avoid any
kind of financial crisis because there's just not much you
can do. Think about a mad men world of the
nineteen fifties. You can't buy options on robin Hood, can't
(31:53):
buy cryptocurrency. Your options are basically a checking account which
doesn't give you interest, and a savings account. There's not
even much market funds, so there's just really not very
many shenanigans you can get into. The Wall Street is
very inaccessible. You need a broker who's part of some
New England wasp family that's inherited the seat on the
board and so on. So it's a lot harder to
(32:15):
get access to things like even stock ownership. And so
because you have this really tightly regulated financial system, then
you don't get financial crises. So the recessions after World
War Two are really not going to have the same
kind of financial panic aspect. But then by the eighties
and nineties we're starting to deregulate. American policymakers say, we
regulated too much. It created inefficiencies in our economy. We
(32:39):
need to let the financial sector have more rain to
provide funds to businesses to invest and so on. We
want to let people buy stocks, have more access to
different assets. And so then the possibility of some kind
of big financial panic really reasserted itself, especially in two
thousand and eight. But I think given that we have
the Federal Reserve and other central banks, we don't have
the gold standard. So I think the prospects for another
(33:02):
Great Depression are pretty remote. Even the prospects of a
global economic shock like the kind of high tide of
Trump's reciprocal tariffs, well, that's really self inflicted. So then
you know, as the Trump administration sees the cost starting
to develop that people are forecasting recessions and so on,
the administration can reverse itself. The financial panics are not
(33:23):
self inflicted, so the politicians can't just reverse themselves. So
I think that for that reason, you know, it would
never get as bad because eventually there'll be an election
if it's a self inflicted crisis like from the tariffs,
and so I don't see it being as bad as
as it was, but you know, you never say never.
There's always that possibility lurking out there, the kind of
(33:45):
comment hitting the dinosaurs.
Speaker 1 (33:47):
I've been talking with Gabriel Matthey. He is an economic
historian at American University. He specializes in studying the Great Depression.
Thank you Gabriel for joining us today on American history.
We hope we can call on you again.
Speaker 2 (34:02):
Thanks. I would love to I've got an interest in
Huey Long, so if you ever get any questions on
Huey Long, I've got my own theory on his assassination.
Oh my gosh, be to riff with you for another hour.
Speaker 1 (34:11):
I would love to talk about you Long.
Speaker 2 (34:13):
All right, thanks so much, Thank you.
Speaker 1 (34:17):
You've been listening to American History Hotline, a production of
iHeart Podcasts and Scratch Track Productions. The show's executive producer
is James Morrison. Our executive producers from iHeart are Jordan
run Tall and Jason English. Original music composed by me,
Bob Crawford. Please keep in touch. Our email is Americanistory
(34:40):
Hotline at gmail dot com. If you like the show,
please tell your friends and leave us a review in
Apple Podcasts. I'm your host, Bob Crawford. Feel free to
hit me up on social media to ask a history
question or to let me know what you think of
the show. You can find me at Bob Crawford Bass.
(35:01):
Thanks so much for listening. See you next week.
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