The Great Depression and Today's Economy

Many people are afraid that our present economic state can pull us into another depression. Some experts say that it is not possible. Certainly, the economy today is not anywhere near what the economy was during the depression however, unemployment is very high and there doesn't seem to be any relief in sight. Additionally, many people have lost their homes and the value of others' homes have depreciated in value.

Like everything else, opinions on how our economy is doing are relative, as they depend on who you ask. If you have a good job, nice house, good food, drive a nice car, have money in the bank and can take vacations, then you would say that the economy is not bad. However, if you lost your job two years ago, ran out of unemployment benefits, have sent out 100 resumes with virtually no responses, have lost your house in a foreclosure, had your car repossessed and are getting your meals from a soup kitchen, then your opinion is that the economy is very bad.

The Great Depression was an economic depression that affected the entire world, just as there are many countries now that are suffering economically. Although the depression did not start at exactly the same time in every country, it is safe to say that it started in 1929. The depression lasted until the early 1940s and was the most severe, the longest and the most devastating economic period of the 20^th century.

Today people look back at the Great Depression to compare fluctuations in the economy. When stocks tumble in the United States many refer to the depression, and with good reason, because the depression began in the United States. Those who were alive at the time and were old enough to remember what it was like have very interesting stories to tell. No matter where they were from or what economic status they fell in, they were all affected by the depression.

Although one could say that the very beginning of the Great Depression can be traced back to September 4, 1929, when stock prices began to fall drastically, one needs to look back at what was going on in the 10-year period before the stocks started their sudden decline. The decade before the depression was referred to as ‘The New Era.’ Everyone thought that the economy was doing very well in the 1920s due to events such as the establishment of the Federal Reserve in 1913, the increase of free trade and anti-inflation measures. There was also corporate improvement due to increased worker productivity and a boom in the construction industry. The U.S. was dominating in the world economy and technology was making great advancements in radio, moving pictures and automobiles.

However, as it later became painfully obvious, the New Era had only given everyone a false sense of security. This period of time saw a tremendous increase in consumer debt, where many Americans used their new-found credit to purchase automobiles, homes and other products. Many people also used credit to purchase stocks and many stock brokers started giving margin loans to these investors.

During WWI, taxes on the wealthy had been raised. After WW I there were three consecutive Republican administrations in the U.S and all three administrations created a close relationship between big business and government. The administrations of Harding and Coolidge both rolled back the income taxes that had been raised on the wealthy, as they believed that high taxes on the rich would only serve to slow down the economy. Calvin Coolidge’s administration actually put this tax cut into place.

Normally, during difficult economic times, farmers were able to keep their heads above water, as they could live off their own crops. This was not the case during the depression. A combination of years of overgrazing and long periods of drought made the grass virtually disappear. High winds lifted the dry soil and carried it for miles. Severe dust storms destroyed crops and the land, leaving farmers with no income and no food. Due to the creation of the tractor, the need for farmer workers had already drastically been reduced. Many small farmers were already in debt before the depression and the ones who owed banks for seed could not pay back the loans. These farmers also lost their land in foreclosures.

According to Ben Bernanke, Chairman of the Federal Reserve, one of the biggest mistakes made by the U.S. government was to raise the Federal Funds rate. Banks are required to maintain a money reserve in their branches, so banks borrow money from each other to maintain these reserves. The Federal Funds rate is the rate that banks charge each other for overnight loans so that they can meet their reserve balances. This rate is controlled by the Federal Reserve, and in the spring of 1928 they raised the Federal Funds and continued to do so right through a recession that had begun in August of 1929. The high interest rate made it more and more difficult for banks to obtain loans in order to maintain the required balances in their branches. Bernanke believes that this led to the crash in October 1929, a day that is referred to as Black Tuesday.

When the stock market crashed, speculators began selling dollars for gold and that caused a run on the dollar. At that point, the Federal Reserve raised the interest rates again, assuming that this would preserve the value of the dollar. Raising interest rates had the opposite effect, making it more difficult for businesses to obtain loans. The Federal Reserve did not increase the money supply and soon investors began withdrawing their money from the banks.

Banks started to fail and people began to panic when they heard that banks did not have money. People flocked to the banks in large numbers to withdraw whatever funds they had in their accounts. This was called a ‘run on a bank.’ If you have ever seen the movie ‘It’s a Wonderful Life,’ you will remember the scene where there is a run at the savings and loan. This happened all over America.

Businesses that were able to stay afloat for a while started lowering their employees’ wages and when things got worse they started letting employees go. Unemployment became rampant as people became unemployed at an alarming rate. In the U.S, unemployment rose to an incredible 25% and in other countries it reached 33%.

People in the U.S. found themselves riding the railroad in search of employment. Young men, old men and even whole families hitched rides on the railroads in hope of finding jobs elsewhere. Herbert Hoover was the president at the time and many people blamed him for the Great Depression. His name became associated with every negative aspect of the depression. Shantytowns became known as ‘Hoovervilles’ and newspapers were called Hoover Blankets. People turned their pants pockets inside out, as they were empty, and called the hanging pockets ‘Hoover Flags.’ Broken down cars being pulled by horses were called ‘Hoover Wagons.’

When the time came to vote for president in 1932 the people quickly voted in Franklin D. Roosevelt. When President Roosevelt got into office he closed all the banks and did not allow them to open again until they were stable. He also established many new programs in an attempt to kick-start the economy. These programs may have helped the economy somewhat but the event that really brought America out of the depression was our involvement in WWII.

The bombing of Pearl Harbor on December 7, 1941 by the Japanese pulled the United States into a war that was already raging throughout the world. The need for weapons, artillery, airplanes and ships became immediate. Soldiers were needed to fight and citizens were needed to make everything for the war. People who had been unemployed and destitute suddenly had jobs. It seemed that everyone benefited from the country going to war.

Many economic experts say that it is not likely that there will be a depression such as the one in 1929. Some say that there are safeguards to prevent such a catastrophe from happening again. However, many people will tell you that their plight is just as bad as those who suffered through the depression and that, to them, it feels like a depression.

Certainly, the situation is not the same as it was in 1929 when the stock market crashed, but there are many lessons to be learned and many similarities now with what happened back in the 1920s. It makes one wonder how we will get out of the predicament we are in, and what event will pull us out of our economic woes.