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