As we study and examine the current economic depression in the early 21st century, it is wise to look back at the time known as “The Great Depression.” As we learn about the great depression, we will start to see similarities between then and now. This time period primarily in the 1930s was a time of extraordinary economic difficulties. Unfortunately, like most historic events, the causes, effects and lessons learned from this time period have been skewed over time and are vastly misunderstood by many people.
The Start: The 1929 Crash
In October of 1929, the stock market crashed – interestingly, the market really crashed in 2008 during the month of October as well. The decade of the 20s known as the “Roaring 20s” was a time of excess, wealth and great speculation (similar to the 2000s). Like all major crashes, the crash came at a time when all “experts” predicted the bull market to continue.
On, Monday, October 28th, the Dow lost 13%. The next day on October 29th, the market lost another 12%. To put this in perspective: with the Dow at 10,000 (a number we’re used to), this would be the equivalent of the market dropping 1300 points on Monday and then another 1044 points on Tuesday. This is a staggering loss!
Widespread Depression
Exports in America decline massively from 1929 to 1933. While volume declined, so did prices. Prices of commodities got slaughtered especially in products like wheat and other agricultural products. As such, farmers got hit hard and defaulted on loans. This help instigate runs on the banks which further hurt the financial sector. It was truly a spiraling deflationary depression.
Money Supply Contraction
A controversial topic in the Great Depression is the shrinking of the money supply, measured by M2. During 1929-1932, the supply dropped by a third. This is a very important aspect of the Great Depression because many academics and current leaders believe the contraction of the money supply is the main reason the Depression was so severe – thus, it is to be avoided at all costs today. Hence, the Fed printing more and more today.
Glass-Steagall Act
The Glass-Steagall Act was enacted in 1933 which mandated that commercial banks that accept deposits be separate from investment banks. This was an effort to manage systemic risk in the financial sector. Unfortunately, the Glass-Steagall Act was repealed in 1999.
Unemployment
Amazingly, throughout the 1930s, unemployment remained high. Even after the government intervention efforts of FDR, the unemployment rate was still 15% in 1940 although the high was around 25% in 1935 (a full 11 years and 6 years after the initial market crash).
World War II
Many accept the theory that World War 2 ended the Depression. While the employment definitely improved with sending millions to war, the idea that an economy benefits from war itself is absurd. Destroying life and productivity for war is not an improvement on an economy. With that said, there were some interesting results from World War 2 that led America to a place where it grew its economy greatly and resulted in massive prosperity for many Americans. For example, destroying much of the infrastructure in Europe, America became a source for the world’s goods which made America a powerful export economy. Similarly, the manufacturing capabilities that were created due to the war were now flipped to manufacture goods for the world. Another big time influence on the prosperity after this time.