WEBVTT - Could the Great Depression Happen Again? 0:00:01.920 --> 0:00:07.080 Welcome to brain Stuff production of iHeart Radio. Hey brain Stuff, 0:00:07.120 --> 0:00:09.840 Lauren vogelbam here. If you didn't live through the Great 0:00:09.840 --> 0:00:12.280 Depression that started in the late nineteen twenties and lasted 0:00:12.320 --> 0:00:14.640 until the beginning of World War Two, it's hard to 0:00:14.680 --> 0:00:17.880 imagine just how rough many ordinary Americans had it. At 0:00:17.920 --> 0:00:20.759 the depressions peak in nineteen thirty three, the nation's gross 0:00:20.800 --> 0:00:23.520 domestic product had been cut roughly in half, and nearly 0:00:23.520 --> 0:00:27.319 one in four American workers was unemployed since they didn't 0:00:27.360 --> 0:00:29.640 have money to pay their mortgages. The foreclosure rate more 0:00:29.640 --> 0:00:32.199 than doubled, and people who lost their homes found themselves 0:00:32.240 --> 0:00:35.160 erecting cardboard and scrap wood checks and living in camps 0:00:35.200 --> 0:00:37.320 known as Hooverville's on the edge of towns and cities, 0:00:37.640 --> 0:00:40.720 named after President Herbert Hoover, who many blamed for the depression. 0:00:41.600 --> 0:00:44.000 In an interview published by the Federal Reserve Bank of St. 0:00:44.080 --> 0:00:46.519 Louis in two thousand seven, two men who survived the 0:00:46.520 --> 0:00:49.559 depression describe how people around them often were so desperate 0:00:49.560 --> 0:00:52.120 for food that they eagerly rooted through garbage bins at 0:00:52.120 --> 0:00:57.160 markets for discarded vegetables and spoiled chicken. Carcasses. Even after 0:00:57.240 --> 0:01:00.280 Franklin Roosevelt's New Deal program eased some of the depper nation, 0:01:00.600 --> 0:01:03.680 the nation's battered economy continued to struggle right up until 0:01:03.680 --> 0:01:06.080 the war brought a massive surge in government spending and 0:01:06.120 --> 0:01:08.160 created jobs at defense plans for those who didn't go 0:01:08.200 --> 0:01:12.080 off to fight overseas. But why did the Great Depression happen? 0:01:12.319 --> 0:01:15.440 And could it ever happen again? The depressions causes have 0:01:15.480 --> 0:01:18.520 been a long time subject of debate by historians and economists, 0:01:18.680 --> 0:01:20.920 though there seems to be a consensus that the economic 0:01:20.959 --> 0:01:23.880 disaster was the result of multiple factors, some of which 0:01:23.920 --> 0:01:26.520 led to the event, while others worsened or prolonged it. 0:01:27.080 --> 0:01:30.160 And while the nation's economy, the financial system, and government 0:01:30.160 --> 0:01:33.320 regulation have changed considerably since the nineteen twenties and thirties, 0:01:33.560 --> 0:01:35.520 experts warned that we're still not immune to some of 0:01:35.560 --> 0:01:39.119 the same risks that contributed to the catastrophe. Worse yet, 0:01:39.400 --> 0:01:42.360 some mistakes of that era are now being repeated. At 0:01:42.360 --> 0:01:45.720 the top of the list is income inequality. We spoke 0:01:45.720 --> 0:01:48.920 with Robert S. McElvaine, a history professor at Millsap's College 0:01:48.920 --> 0:01:51.880 in Mississippi and author of The Great Depression America nine 0:01:52.680 --> 0:01:55.800 ninety one. He says that the US shifted during the 0:01:55.840 --> 0:01:58.920 nineteen twenties to an economy heavily dependent upon consumption of 0:01:58.960 --> 0:02:03.240 mass produced goods ranging from automobiles to radios. While sales 0:02:03.280 --> 0:02:06.480 of those products drove up profits for factory owners and retailers, 0:02:06.680 --> 0:02:10.720 most American workers wages grew much more slowly. Eventually, he notes, 0:02:11.040 --> 0:02:13.560 people didn't have enough money to buy more things and 0:02:13.639 --> 0:02:17.160 keep the economy going. Businesses tried to cope by extending 0:02:17.160 --> 0:02:20.320 consumer credit and allowing people to gradually pay off their purchases, 0:02:20.520 --> 0:02:22.560 but they didn't have enough income to keep buying new 0:02:22.600 --> 0:02:26.000 stuff as well. In the summer of nineteen twenty nine, 0:02:26.040 --> 0:02:29.440 to avoid having inventory pile up, factories started cutting back 0:02:29.480 --> 0:02:33.240 on production and laying off workers. Those workers then couldn't 0:02:33.240 --> 0:02:36.600 buy things, which meant even more products piled up. That 0:02:36.720 --> 0:02:39.360 started the economy on a downward spiral that contributed to 0:02:39.400 --> 0:02:41.760 a four day stock market crash in late October of 0:02:41.840 --> 0:02:44.640 ninety nine, which erased a quarter of the value of 0:02:44.639 --> 0:02:48.079 the Dow Jones industrial average, wiping out investors and severely 0:02:48.120 --> 0:02:53.280 damaging public confidence. Circle nineteen twenties, income inequality was exacerbated 0:02:53.280 --> 0:02:55.840 by a series of tax cuts pushed through Congress by 0:02:55.840 --> 0:02:59.520 Secretary of the Treasury Andrew W. Mellon, ostensibly to stimulate 0:02:59.520 --> 0:03:02.400 the economy. As one of the world's richest men, Melon 0:03:02.520 --> 0:03:05.320 personally benefited from the cuts more than practically all the 0:03:05.320 --> 0:03:08.320 taxpayers in the state of Nebraska. As one political opponent 0:03:08.360 --> 0:03:12.280 of the bill pointed out ninety years later, income inequality 0:03:12.360 --> 0:03:14.560 is growing and it's a threat to an economy which 0:03:14.600 --> 0:03:18.320 depends upon personal consumption of two thirds of its economic output. 0:03:18.800 --> 0:03:22.320 And Congress in seventeen passed a massive tax cut package 0:03:22.400 --> 0:03:27.000 which most Americans see themselves as not benefiting from. In 0:03:27.000 --> 0:03:29.480 addition to income inequality, there was a lot of investment 0:03:29.560 --> 0:03:33.840 speculation going on. There's a difference between investing and speculating, 0:03:34.080 --> 0:03:37.160 which Investipedia defines as putting your money into high risk 0:03:37.200 --> 0:03:40.320 investments in hopes of making a killing. But in the 0:03:40.400 --> 0:03:43.760 nineteen twenties, when everything seemed to be booming, investors often 0:03:43.760 --> 0:03:47.400 were a bit too trusting. We also spoke with Todd Noope, 0:03:47.480 --> 0:03:49.920 a professor of economics and business at Cornell College in 0:03:49.920 --> 0:03:53.280 Mount Vernon, Iowa. He said, many people think of the 0:03:53.360 --> 0:03:55.840 dust bowl or the stock market crash as the proximate 0:03:55.960 --> 0:03:58.600 cause of the Great Depression, but in reality it was 0:03:58.680 --> 0:04:01.280 caused by the same factors the have caused financial crises 0:04:01.280 --> 0:04:05.520 throughout history in the U S and elsewhere. Debt financed speculation. 0:04:06.320 --> 0:04:08.600 In other words, when people find it too easy to 0:04:08.600 --> 0:04:12.040 borrow other people's money to speculate on risky ventures, stock spawn, 0:04:12.160 --> 0:04:16.280 subprime housing, etcetera. Than people risk too much and prices boom, 0:04:16.320 --> 0:04:21.440 only to eventually bust decades later. Unfortunately, we're still vulnerable 0:04:21.440 --> 0:04:25.240 to that psychological flaw, Noop said. Markets are prone to 0:04:25.279 --> 0:04:27.600 thinking that this time it's different, only to find out 0:04:27.640 --> 0:04:31.159 again and again that it is usually not. In the 0:04:31.200 --> 0:04:33.560 nineteen twenties, the United States was also dealing with some 0:04:33.600 --> 0:04:37.240 bad Federal Reserve policy. Today, we're accustomed to thinking of 0:04:37.240 --> 0:04:40.080 the Federal Reserve the nation central bank as the guardian 0:04:40.120 --> 0:04:43.200 of the economy. That's because it's board could use monetary 0:04:43.240 --> 0:04:46.200 policy control of the supply of money and credit to 0:04:46.240 --> 0:04:48.400 stimulate the economy when it needs a boost, or to 0:04:48.480 --> 0:04:50.880 put on the brakes when inflation is starting to creep upward. 0:04:51.880 --> 0:04:54.240 But in a two thousand four lecture, former FED Chairman 0:04:54.279 --> 0:04:57.640 Ben Bernanke detailed his theory that ninety years ago, the 0:04:57.680 --> 0:05:00.559 FED dropped the ball with policy blunders that helped cause 0:05:00.600 --> 0:05:05.000 and prolong the Great Depression. Starting in the FED, hoping 0:05:05.040 --> 0:05:07.040 to put the brakes on Wall Street, speculators who were 0:05:07.080 --> 0:05:11.560 investing borrowed money, started raising interest rates. That policy succeeded 0:05:11.560 --> 0:05:14.120 a little too well, as evidenced by the stock markets 0:05:14.120 --> 0:05:19.119 catastrophic drop in October of nine. But then, even after 0:05:19.160 --> 0:05:22.640 the stock market collapsed, the FED kept increasing interest rates. 0:05:23.240 --> 0:05:25.680 The reason was that the US, like many other countries, 0:05:25.760 --> 0:05:28.279 was on the gold standard, meaning that the dollar was 0:05:28.320 --> 0:05:32.080 redeemable in gold and pegged to its value. When panicked 0:05:32.080 --> 0:05:35.040 investors started trading their dollars for gold, the FED moved 0:05:35.080 --> 0:05:39.280 to thwart them, Bernankey explained in his speech. To stabilize 0:05:39.320 --> 0:05:42.000 the dollar, the Fed once again raised interest rates sharply, 0:05:42.279 --> 0:05:44.680 on the view that currency speculators would be less willing 0:05:44.720 --> 0:05:46.960 to liquidate dollar assets if they could earn a higher 0:05:47.040 --> 0:05:49.719 rate of return on them. But the high interest rates 0:05:49.760 --> 0:05:51.719 made it tough for businesses to borrow to weather the 0:05:51.720 --> 0:05:54.960 hard times, and many went bankrupt as a result. At 0:05:55.000 --> 0:05:57.839 the same time, according to Bernanke, the FED also didn't 0:05:57.839 --> 0:06:00.720 do enough to protect the nation's banks, leading depositors to 0:06:00.839 --> 0:06:03.760 out their savings and hoard the cash, further worsening the 0:06:03.839 --> 0:06:08.360 economic crisis. The US wasn't the only country with such problems. 0:06:08.600 --> 0:06:11.320 We also spoke with Nathaniel Klein, an assistant professor of 0:06:11.360 --> 0:06:14.640 economics at the University of Redlands an expert on economic history. 0:06:15.279 --> 0:06:18.280 He said the gold standard helped things along by limiting 0:06:18.279 --> 0:06:21.360 the policy responsive nations around the world. Things like lower 0:06:21.400 --> 0:06:24.680 interest rates and government deficit spending were made much more difficult. 0:06:25.160 --> 0:06:28.560 In addition, while Great Britain provided global economic leadership before 0:06:28.600 --> 0:06:31.840 World War One, after the war, the US essentially refused 0:06:31.880 --> 0:06:36.839 to lead despite being the new center of the world economy. Fortunately, 0:06:36.960 --> 0:06:40.800 this is one area where policymakers learned their lesson, Klein said. 0:06:41.120 --> 0:06:44.040 In the end, countries dropped the gold standard and many 0:06:44.080 --> 0:06:47.480 engaged in deficit spending and monetary policy, and the US 0:06:47.560 --> 0:06:52.200 established its leadership under the Breton Woods Agreement. That pact 0:06:52.279 --> 0:06:55.400 created the World Bank and the International Monetary Fund, as 0:06:55.400 --> 0:06:59.960 well as eliminating the gold standard internationally. On the other hand, 0:07:00.000 --> 0:07:02.680 and as a candidate, Donald Trump said that bringing back 0:07:02.680 --> 0:07:05.160 the gold standard quote would be very hard to do, 0:07:05.320 --> 0:07:08.839 but boy would it be wonderful. As president, he considered 0:07:08.839 --> 0:07:11.560 nominating to the FED Board. Herman Kaine, who wrote in 0:07:11.600 --> 0:07:14.040 twelve in The Wall Street Journal that the dollars should 0:07:14.040 --> 0:07:17.280 be redefined as quote a fixed quantity of gold, though 0:07:17.320 --> 0:07:19.920 in a recent interview came backed away from that position, 0:07:20.160 --> 0:07:23.760 and Stephen Moore, another past gold standard advocate, told CNN 0:07:23.840 --> 0:07:26.040 that he now favored pegging the currency to a quote 0:07:26.040 --> 0:07:30.040 whole basket of commodities. Both later withdrew from consideration in 0:07:30.080 --> 0:07:33.840 the face of political opposition. One of the other big 0:07:33.880 --> 0:07:36.600 factors that led to the depression was trade wars. The 0:07:36.600 --> 0:07:39.440 Smoot Holly Act, which was written in early nine when 0:07:39.440 --> 0:07:42.120 the economy was still going strong, but became law after 0:07:42.160 --> 0:07:45.120 the Wall Street Crash, raised US tariffs by an average 0:07:45.120 --> 0:07:48.240 of sixteen The idea was to keep other countries from 0:07:48.280 --> 0:07:52.040 hurting US manufacturers by flooding the market with lower priced products, 0:07:52.040 --> 0:07:55.000 but when those countries responded by imposing their own tariffs, 0:07:55.160 --> 0:07:57.680 the result was a ruinous global decline in trade. The 0:07:57.760 --> 0:08:01.320 deepened and lengthened the Great Depression. That bit of history 0:08:01.320 --> 0:08:04.280 worries many people today due to President Trump's fondness for 0:08:04.280 --> 0:08:08.760 imposing tariffs in an effort to protect US industries. So 0:08:09.080 --> 0:08:11.480 many of the factors that contributed to the Great Depression 0:08:11.520 --> 0:08:14.280 are still risks. Whether they will ever combine in an 0:08:14.280 --> 0:08:22.440 economic perfect storm is a harder question to answer. Today's 0:08:22.440 --> 0:08:24.680 episode was written by Patrick J. Tiger and produced by 0:08:24.680 --> 0:08:27.160 Tyler clayg. Brain Stuff is a production of I Heart 0:08:27.240 --> 0:08:29.360 Radio's How Stuff Works. From more on this and lots 0:08:29.400 --> 0:08:32.360 of other economical topics, visit our home planet, howstuff Works 0:08:32.360 --> 0:08:35.000 dot com, and for more podcasts from my heart Radio, 0:08:35.160 --> 0:08:37.920 visit i Heart Radio app, Apple Podcasts, or wherever you 0:08:37.920 --> 0:08:39.040 listen to your favorite shows.