WEBVTT - BrainStuff Classics: Could the Great Depression Happen Again?

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<v Speaker 1>Welcome to Brainstuff, a production of iHeartRadio.

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<v Speaker 2>Hey brain Stuff, Lauren Bogelbaum here with a classic episode

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<v Speaker 2>from our archives, But this one is about the factors

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<v Speaker 2>that led to the Great Depression and why economists are

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<v Speaker 2>concerned that a similar storm could happen again. The episode

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<v Speaker 2>originally published in June of twenty nineteen, during Trump's first presidency.

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<v Speaker 2>So a couple examples that we use refer specifically to

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<v Speaker 2>that time, but lots of them are still very relevant today.

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<v Speaker 2>So I thought it would be a good one to revisit.

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<v Speaker 1>Hey Brain Stuff, Lauren vogel Bomb here.

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<v Speaker 2>If you didn't live through the Great Depression that started

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<v Speaker 2>in the late nineteen twenties and lasted until the beginning

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<v Speaker 2>of World War Two, it's hard to imagine just how

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<v Speaker 2>rough many ordinary Americans had it.

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<v Speaker 1>At the depression's peak in.

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<v Speaker 2>Nineteen thirty three, the nation's gross domestic product had been

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<v Speaker 2>cut roughly in half, and nearly one in four American

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<v Speaker 2>workers was unemployed since they didn't have money to pay

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<v Speaker 2>their mortgages. The fore club rate more than doubled, and

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<v Speaker 2>people who lost their homes found themselves erecting cardboard and

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<v Speaker 2>scrap wood shacks and living in camps known as Hooverville's

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<v Speaker 2>on the edge of towns and cities, named after President

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<v Speaker 2>Herbert Hoover, whom many blamed for the depression. In an

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<v Speaker 2>interview published by the Federal Reserve Bank of Saint Louis

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<v Speaker 2>in two thousand and seven, two men who survived the

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<v Speaker 2>depression describe how people around them often were so desperate

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<v Speaker 2>for food that they eagerly rooted through garbage bins at

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<v Speaker 2>markets for discarded vegetables and spoiled chicken carcasses. Even after

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<v Speaker 2>Franklin Roosevelt's New Deal program eased some of the deprivation,

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<v Speaker 2>the nation's battered economy continued to struggle right up until

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<v Speaker 2>the war brought a massive surge in government spending and

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<v Speaker 2>created jobs at defense plans for those who didn't go

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<v Speaker 2>off to fight overseas. But why did the Great Depression happen?

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<v Speaker 2>And could it ever happen again? The Depression's causes have

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<v Speaker 2>been a long time subject of debate by historians and economists,

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<v Speaker 2>though there seems to be a consensus that the economic

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<v Speaker 2>disaster was the result of multiple factors, some of which

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<v Speaker 2>led to the event, while others worsened or prolonged it,

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<v Speaker 2>and while the nation's economy, the financial system, and government

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<v Speaker 2>regulation have changed considerably since the nineteen twenties and thirties,

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<v Speaker 2>experts warned that were still not immune to some of

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<v Speaker 2>the same risks that contributed to the catastrophe. Worse yet,

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<v Speaker 2>some mistakes of that era are now being repeated. At

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<v Speaker 2>the top of the list is income inequality. We spoke

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<v Speaker 2>with Robert S. McElvane, a history professor at Millsaps College

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<v Speaker 2>in Mississippi and author of The Great Depression America nineteen

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<v Speaker 2>twenty nine to nineteen forty one. He says that the

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<v Speaker 2>US shifted during the nineteen twenties to an economy heavily

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<v Speaker 2>dependent upon consumption of mass produced goods ranging from automobiles

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<v Speaker 2>to radios. While sales of those products drove up profits

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<v Speaker 2>for factory owners and retailers, most American workers' wages grew

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<v Speaker 2>much more slowly. Eventually, he notes, people didn't have enough

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<v Speaker 2>money to buy more things and keep the economy going.

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<v Speaker 2>Businesses tried to cope by extending consumer credit and allowing

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<v Speaker 2>people to gradually pay off their purchases, but they didn't

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<v Speaker 2>have enough income to keep buying new stuff as well.

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<v Speaker 2>In the summer of nineteen twenty nine, To avoid having

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<v Speaker 2>inventory pile up, factories started cut out back on production

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<v Speaker 2>and laying off workers. Those workers then couldn't buy things,

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<v Speaker 2>which meant even more products piled up. That started the

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<v Speaker 2>economy on a downward spiral that contributed to a four

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<v Speaker 2>day stock market crash in late October of nineteen twenty nine,

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<v Speaker 2>which erased a quarter of the value of the Dow

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<v Speaker 2>Jones industrial average, wiping out investors and severely damaging public confidence.

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<v Speaker 2>Circa nineteen twenty's, income inequality was exacerbated by a series

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<v Speaker 2>of tax cuts pushed through Congress by Secretary of the

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<v Speaker 2>Treasury Andrew W. Mellon, ostensibly to stimulate the economy. As

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<v Speaker 2>one of the world's richest men, Melon personally benefited from

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<v Speaker 2>the cuts more than practically all the taxpayers in the

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<v Speaker 2>state of Nebraska. As one political opponent of the bill

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<v Speaker 2>pointed out ninety years later, income inequality is growing, and

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<v Speaker 2>it's a threat to an economy which depends upon personal

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<v Speaker 2>consumption of two thirds of its economic output. And Congress

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<v Speaker 2>in twenty seventeen passed a massive tax cut package which

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<v Speaker 2>most Americans see themselves as not benefiting from. In addition

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<v Speaker 2>to income inequality, there was a lot of an investment

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<v Speaker 2>speculation going on. There's a difference between investing and speculating,

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<v Speaker 2>which Investipedia defines as putting your money into high risk

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<v Speaker 2>investments in hopes of making a killing. But in the

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<v Speaker 2>nineteen twenties, when everything seemed to be booming, investors often

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<v Speaker 2>were a bit too trusting. We also spoke with Todd Noupe,

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<v Speaker 2>a professor of economics and business at Cornell College in

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<v Speaker 2>Mount Vernon, Iowa.

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<v Speaker 1>He said many people think of.

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<v Speaker 2>The dust bowl or the stock market crash as the

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<v Speaker 2>approximate cause of the Great Depression, but in reality it

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<v Speaker 2>was caused by the same factors that have caused financial

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<v Speaker 2>crises throughout history in the.

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<v Speaker 1>US and elsewhere. Debt financed speculation.

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<v Speaker 2>In other words, when people find it too easy to

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<v Speaker 2>borrow other people's money to speculate on risky ventures, stocks, bond,

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<v Speaker 2>subprime housing, etc. Then people risk too much and prices boom,

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<v Speaker 2>only to eventually bust decades later. Unfortunately, were still vulnerable

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<v Speaker 2>to that psychological flaw. Noop said, markets are prone to

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<v Speaker 2>thinking that this time it's different, only to find out

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<v Speaker 2>again and again that it is usually not. In the

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<v Speaker 2>nineteen twenties, the United States was also dealing with some

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<v Speaker 2>bad Federal Reserve policy. Today, we're accustomed to thinking of

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<v Speaker 2>the Federal Reserve the nation central bank, as the guardian

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<v Speaker 2>of the economy. That's because its board could use monetary

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<v Speaker 2>policy control of the supply of money and credit, to

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<v Speaker 2>stimulate the economy when it needs a boost, or to

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<v Speaker 2>put on the brakes when inflation is starting to creep upward.

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<v Speaker 2>But in a two thousand and four lecture, former FED

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<v Speaker 2>Chairman Ben Bernanke detailed his theory that ninety years ago,

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<v Speaker 2>the FED dropped the ball with policy blunders that helped

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<v Speaker 2>cause and prolong the Great Depression. Starting in nineteen twenty eight,

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<v Speaker 2>the FED, hoping to put the brakes on Wall Street

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<v Speaker 2>speculators who were investing borrowed money, started raising interest rates.

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<v Speaker 2>That policy succeeded a little too well, as evidenced by

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<v Speaker 2>the stock market's catastrophic drop in October of nineteen twenty nine.

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<v Speaker 1>But then, even after.

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<v Speaker 2>The stock market collapsed, the FED kept increasing interest rates.

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<v Speaker 2>The reason was that the US, like many other countries,

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<v Speaker 2>was on the gold standard, meaning that the dollar was

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<v Speaker 2>redeemable in and pegged to its value when panicked investors

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<v Speaker 2>started trading their dollars for gold, the FED moved to

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<v Speaker 2>thwart them, Bernanki explained in his speech. To stabilize the dollar,

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<v Speaker 2>the Fed once again raised interest rates sharply, on the

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<v Speaker 2>view that currency speculators would be less willing to liquidate

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<v Speaker 2>dollar assets if they could earn a higher rate of

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<v Speaker 2>return on them. But the high interest rates made it

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<v Speaker 2>tough for businesses to borrow to weather the hard times,

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<v Speaker 2>and many went bankrupt as a result. At the same time,

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<v Speaker 2>according to Bernanki, the FED also didn't do enough to

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<v Speaker 2>protect the nation's banks, leading depositors to out their savings

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<v Speaker 2>and hoard the cash, further worsening the economic crisis. The

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<v Speaker 2>US wasn't the only country with such problems. We also

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<v Speaker 2>spoke with Nathaniel Klein, an assistant professor of economics at

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<v Speaker 2>the University of Redlands and an expert on economic history.

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<v Speaker 2>He said the gold standard helped things along by limiting

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<v Speaker 2>the policy response of nations around the world. Things like

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<v Speaker 2>lower interest rates and government deficit spending were made much

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<v Speaker 2>more difficult.

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<v Speaker 1>In addition, while.

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<v Speaker 2>Great Britain provided global economic leadership before World War I, one,

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<v Speaker 2>after the war, the US essentially refused to lead despite

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<v Speaker 2>being the new center of the world economy. Fortunately, this

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<v Speaker 2>is one area where policymakers learned their lesson, Klein said.

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<v Speaker 2>In the end, countries dropped the gold standard and many

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<v Speaker 2>engaged in deficit spending and monetary policy, and the US

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<v Speaker 2>established its leadership under the Breton Woods Agreement. That nineteen

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<v Speaker 2>forty four pact created the World Bank and the International

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<v Speaker 2>Monetary Fund, as well as eliminating the gold standard internationally.

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<v Speaker 2>On the other hand, as a candidate, Donald Trump said

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<v Speaker 2>that bringing back the gold standard quote would be very

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<v Speaker 2>hard to do, but boy would it be wonderful. As president,

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<v Speaker 2>he considered nominating to the FED Board. Hermann Kine, who

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<v Speaker 2>wrote in twenty twelve in The Wall Street Journal that

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<v Speaker 2>the dollars should be redefined as quote, a fixed quantity

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<v Speaker 2>of gold, though in a recent interview came backed away

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<v Speaker 2>from that position, and Stephen Moore, another past gold standard advocate,

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<v Speaker 2>told CNN that he now favored pegging the currency to

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<v Speaker 2>a quote whole basket of commodities. Both later withdrew consideration

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<v Speaker 2>in the face of political opposition. One of the other

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<v Speaker 2>big factors that led to the depression was trade wars

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<v Speaker 2>the Smoot Hawley Act, which was written in early nineteen

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<v Speaker 2>twenty nine when the economy was still going strong, but

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<v Speaker 2>became law after the Wall Street Crash raised US tariffs

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<v Speaker 2>by an average of sixteen percent. The idea was to

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<v Speaker 2>keep other countries from hurting US manufacturers by flooding the

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<v Speaker 2>market with lower priced products, but when those countries responded

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<v Speaker 2>by imposing their own tariffs, the result was a ruinous

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<v Speaker 2>global decline in trade that deepened and lengthened the Great Depression.

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<v Speaker 2>That bit of history worries many people today due to

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<v Speaker 2>President Trump's fondness for imposing tariffs in an effort to

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<v Speaker 2>protect US industries. So many of the factors that contributed

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<v Speaker 2>to the Great Depression are still risks. Whether they will

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<v Speaker 2>ever combine in an economic perfect storm is a harder

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<v Speaker 2>question to answer. Today's episode is based on the article

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<v Speaker 2>five Causes of the Great Depression? Could It Happen Again?

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<v Speaker 2>On has Stufforkstone? Written by Patrick J. Higer. Brain Stuff

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<v Speaker 2>is a production of iHeartRadio in partnership with HowStuffWorks dot

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<v Speaker 2>Com and is produced by Tyler Klang. Four more podcasts

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<v Speaker 2>from Myheartradio, visit the iHeartRadio app, Apple Podcasts or wherever

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<v Speaker 2>you listen to your favorite shows,