Economics Professor Answers Great Depression Questions

Hi, I'm Chris Clark.

I'm an Economics Professor at Washington State University

and I'm here to answer your questions from the internet.

This is Great Depression Support.

[steady upbeat music]

This_Caterpillar_330 asks,

was the great depression really as bad

as it's commonly portrayed to be?

Yes, it was awful.

The unemployment rate is 25%.

In the Great recession of 2009,

we maxed out at 10%.

Other places across the planet

where we see this, say Greece in 2012 also hit 25%.

Not a good time. The economy collapsed.

Industrial production fell by half.

This is a huge amount of idle resources. Folks went hungry.

It spurred us to create the first federal welfare systems.

This is where we got Social Security,

unemployment insurance, federal minimum wage,

housing subsidies all throughout the thirties trying

to address the suffering that we saw then.

BrightSherbet asks, explain it like I'm five,

what caused the Great Depression between 1929 and 1933?

In the late 1920s,

the United States financial markets were experiencing

a speculative boom.

Now the real economy was growing

and there were real profits to be shared on Wall Street,

but they started investing heavily on margins.

Now, what this means is that they would take out huge loans

and then buy stocks with those loans,

and then they would set up a different company

to buy stocks in that company again on huge loans.

So that meant an initial investment of say,

a hundred dollars could turn into a thousand

dollars worth of stock.

So any rise in the stock would be a huge boom,

but any speculative boom is eventually going to end.

The economy hit a run of the mill recession in the summer

of 1929.

The slowdown in economic activity led the market

to peak on September 3rd,

but because so many of these stocks were not held outright,

but by loan, any fall in the price meant a cascading

chain of everyone calling in their loans, which meant

by October we experienced a huge crash.

Here's a picture of Wall Street on the corner of Wall Street

and Broad showing the crowds all worried about their

falling fortunes.

Now, despite what everyone thinks,

the stock market is not the economy.

Only one to 2% of Americans at the time held any stock.

This event could have primarily just affected folks in

New York and other financial markets.

How did it start affecting the rest of the economy?

A falling stock market means there's less

wealth in the economy.

Less wealth means less consumption.

Businesses can't move goods.

They're not able to hire people, they gotta let others go.

Things start cascading into the real world once we start

seeing massive bank failures.

You see, if a bank loses a lot of their stock,

they're not going to be able to honor folks

who put their deposits in.

This is how a bank works.

You come along, you put your money in the bank,

they take it, and then they lend it out to other people.

But if those loans aren't being paid back then the bank

can't pay their depositors back, which means you

as a depositor are only gonna get there if you are first.

And how do you get there first?

You gotta be the number one person in that line.

If you're too far back, the banks ran out of cash

and they're not gonna be able to pay you back.

The bank doesn't have any loans available

because the people who owe them

money are now going bankrupt.

And so banks are starting to fail.

It's not just one or two banks here and there.

It's 10,000 banks

that are collapsing across these years.

One of the reasons is because all these banks are forced

to be really small, so if you get a modest shock,

they don't have the resources to ensure themselves

or to draw on other regions.

Surprisingly, just north of the border,

Canada only had 10 banks served in the entire country

and they didn't experience runs.

This was unique to the United States

and our fractured banking system.

Year by year, things kept getting worse.

By 1932,

the unemployment rate had reached 25%.

That meant one out of every four people can't find work

who want to find work.

Men would line the streets advertising themselves

for work, relief efforts set up soup kitchens

to serve the unemployed.

Economists still today debate on

what are the ultimate causes of the Great Depression,

but these are the primary events that got us along the way.

thenamesdrjane asks, when does a great depression start

and who declares it?

A great depression is gonna involve a lot

of economic collapse, not just production,

but we'll have high unemployment.

All across the board,

we're gonna see a slowdown in economic activity

and the period between 1929

and 1933 was the worst economic decline in the

United States history.

Now, who declares it?

That's the National Bureau of Economic Research.

They're actually not part of the government.

They're a nonprofit research group based in Massachusetts.

And after some time for research purposes,

the committee gets together and they decide what month

and year a contraction starts,

and then when does the economy start growing again.

A Reddit user asks,

why do Americans call the 1930s depression they had great?

Wasn't it bad? What are they stupid?

It was bad.

Actually, the term depression

goes all the way back to James Monroe.

This is the term that they would use

for any economic downturn was depression.

And they actually called the episode

in the early twenties, a great depression.

It started having capital letters as the Great Depression,

by about the mid thirties, we have Lionel Robbins,

an economist who wrote a book called The Great Depression.

In the subsequent years,

we capitalized it, called it The Great Depression.

zoppytops asks,

what effect did the Smoot-Hawley Act have

on the Great Depression?

The Smoot-Hawley Act was a large increase in tariffs.

One of the hypothesized reason

for the Great Depression at the time was not enough economic

activity at home and a greater need

for protection from abroad.

The idea was if you increase the tariffs here,

it'll protect our businesses

and they'll be able to succeed more,

and that'll get us out of the depression.

Unfortunately, economists have long known and argued

and warned at the time that trade is one

of the ultimate secrets for long run economic growth.

Trade allows a country to specialize.

It allows more economic activity, more diversity,

and more options across the world.

Now, how much effect did this have?

It was signed into law by President Hoover in 1930,

just as we were getting started on the Depression.

Now, the effect on the American economy was modest, largely

because the US economy was one of the biggest on the globe,

and the role of international trade was relatively small.

Economists have estimated it declined our economy

by maybe a couple of percentage points,

but the effect on Smoot-Hawley was bigger across the globe.

Other countries seeing

that we were no longer playing fair raised their own

tariffs, their own retaliatory tariffs,

and we started to begin

what we call this kinder bird's cycle,

where the tariffs got higher and higher across the world

and global trade shrunk and shrunk and shrunk

every year throughout 1932 and 33.

CarbonCaptureShield asks, what caused the Great

Dust Bowl of the 1930s?

A drought,

but we get droughts all the time.

The Dust Bowl was one

of the worst environmental disasters in the

United States history.

In the 1920s,

we start seeing mechanizations spread across agriculture.

We get tractors

and other machinery to help us till up the land.

In the late twenties, a huge increase in migrants

to the Oklahoma Panhandle area, Colorado, Kansas,

and in northern Texas dug up millions of acres

of prairie grass.

The rain was great those years,

and they got bumper harvest crops.

1931, we get a drought. 1932, the drought continues.

It goes for year after year.

The area experiences drought from time to time before,

but the native grasses had a deep root system

that would keep the dirt in place when it would dry out.

But this all got plowed up, so without the rain,

the wheat wasn't growing

and we were left with huge fields of dirt.

So you'd get a real big windstorm come in,

it would kick up the dust and spread.

By 1935, they called the Black Sunday.

The dust was being spread to Chicago, to Washington DC,

so the government started doing things about it.

They told 'em to plow in a way that would reduce erosion.

They planted trees

to help put a windbreaker all across the Great Plains.

They bought hundreds of thousands of acres

to turn back into Prairie Land.

Now, the effect on the macro economy was relatively minor.

It affected around a hundred million acres.

For reference, the United States had around a billion acres

of agricultural land.

Also, only 20%

of the economy's workers were in the agricultural sector

by 1930.

So it was hugely harmful for that panhandle region,

but for the nation as a whole,

it wasn't a cause of the Great Depression.

The local pain

that we did witness was a large migration outward.

This is where we get the famous novel, The Grapes of Wrath

by John Steinbeck.

It's also where we get the most famous

picture for the Great Depression.

This was taken by Dorothea Lang,

and this is a family of migrants

that came from the Dust Bowl,

Oklahoma region into California.

And in California,

these migrants were living in very, very,

very poor conditions,

and the United States government hired photographers to go

around and take pictures

of these stories to help document it.

And when Dorothea Lang saw this family,

she took them in a bunch of different poses.

Taking the snapshot that tells the story for the ages.

DullSwing135 asks,

how was the military affected during the Great Depression?

After World War I, the veterans were promised a bonus

that was gonna be paid out in the 1940s,

but because of the severity of the depression,

these veterans were unemployed

and asked for that support to be paid earlier.

And over the course of months,

they organized a march all the way on Washington DC setting

up camps to sit there

and ask that their promised support could be paid

early during this depressive era.

Congress was slow to act.

Hoover didn't want to do it,

and due to some local strives between some of these camps

and the local police, Hoover directed General Douglas

MacArthur to forcibly remove these veterans.

MacArthur came in with force

and bayonets, set the camps on fire

and force these veterans out.

eragon233 asks, are we following in the footsteps

of the Great Depression?

There's always parallels.

There's always worry that it could happen again.

It could, but we're not seeing anything anywhere

close to that magnitude today.

During the 2022, 2023 inflation period, a lot

of people on social media asked if we were living in another

silent Depression, we weren't.

Home ownership rates are way higher than they were then.

People own cars at way higher rates than they did then.

The food stamp program and other assistance didn't exist.

In 2008, we did experience another major financial crisis,

arguably bigger than the collapse that we saw in 1929.

Yet the Federal Reserve acted in a way

to preserve the financial system

and prevent that spread from going further

into the deeper economy.

Today, people are worried about an increase in tariffs.

It's true we are raising tariffs to the levels

that we last saw in the 1930s.

We do trade a whole lot more today,

the United States, compared to

what the US was trading in the thirties,

the economic harm from tariffs will be worse

today than what it was.

But the difference is the tariffs of the 1930s caused one

to two percentage points of the Great Depression.

Today, the tariffs might harm the economy

one to two percentage points again.

Magic-karma asks, The Great Depression was awful,

but it wasn't as bad for some of the rich.

What business receptors held their own

or improved during the Great Depression?

How did the rich stay rich during that time?

Well, most of the rich held their wealth in the stock market

and the stock market collapsed.

So the rich actually didn't do that well.

This is a period of a huge decrease in inequality.

Now, this is one of the episodes

of decreasing in inequality that's not so hot.

Destruction is not a good way

to make the economy more equal.

The difference today is during 2008

and during the COVID crisis, the wealthy were saved.

Their wealth was preserved,

and this has led to a lot of debates about the moral role

of the wealthy in society.

In previous crises,

all the way back to the Black plague of the 1300s

to the Great Depression of the 1930s,

the rich experienced pain along with everybody else

and so worked to get everybody back on board again.

Today, the sentiment feels different

and that can explain movements from Occupy and others.

historydefined asks, shanty towns,

what was life like in the Hoovervilles

of the Great Depression?

The depression was so severe that the quantity

of homeless and unsheltered increased drastically

and in every major city in America, they started

to set up makeshift homes either out of corrugated tin

or cardboard or loose construction materials

or digging holes in the ground for Hovels.

We've never seen homelessness at that scale

before, and the United States wasn't even

collecting statistics on it.

After FDR was elected, he hired a sociologist

to go out and measure it.

He came up with an estimate of 1.5 million homeless out

of a total population of 120 plus million.

That comes out to about 1.2% of the population.

For reference today, the homeless population is

around 700,000.

This is a quarter of a share of the population compared to

what was experienced in 1933.

A Reddit user asks,

how much did Herbert Hoover's policies contribute

to the Great Depression?

President Hoover largely didn't do much,

and it was somewhat against his instinct.

On his path to the presidency,

he served in the post World War I reconstruction.

He was a humanitarian, he was an engineer,

and he wanted the best for the country.

His advisor, Andrew Mellon, told him

that recessions are healthy and necessary in an economy.

They cut out the fat.

If you're a business that has a bad model,

a recession cleans it out

so we can use our resources more effectively.

After the depression, Hoover in his memoirs, lambasted

that previous view and completely regretted his

lack of action.

He complained that Mellon simply wanted to liquidate labor,

liquidate investment, liquidate wall Street,

liquidate everything,

and clearly you can't liquidate an entire economy.

This sets up a debate.

Still today, there is a split between economists on

how much should the government get involved in a depression.

But Hoover wasn't entirely actionless.

He brought in folks from industry

and he pled with them to keep wages high.

There are some economists who think that this effort

to keep wages at a high level prevented the economy

from self-correcting, that it encouraged monopoly practices

and that distorted the market, slowing it down even further.

dynaboyj asks,

why are Franklin Roosevelt's fireside chats more well known

than other presidential attempts at directly

connecting with the public?

Well, they were new.

The radio was new technology,

and by the end of the 1930s,

nearly everybody had a radio all across

the income distribution.

So for the first time, a president was able to communicate

with their own voice about

what is happening in Washington DC.

I mean, before the radio, the only way you'd hear

from your representatives in Congress

was through the newspaper.

This was a very serious time for the country,

and leadership is needed.

FDR was an optimist.

He had a way with people

and he encouraged and lifted them up.

iheartalpacas asks,

what role did being on the Gold Standard play

during the Great Depression?

Everything.

Monetary policy is one

of the primary tools we have to help recessions,

and Hoover and initially FDR did not want

to get off the gold standard.

The gold standard at the time said one ounce

of gold could be purchased for $20,

and that price could not fluctuate.

And the way to maintain that is to have a certain quantity

of gold on hand.

So if the value of the gold changed,

then the central bank can buy

and sell gold to maintain that dollar peg.

But the problem is, this is going to tie your hands

to respond to an economic crisis.

Nobel Prize economist, Milton Friedman

and his co-author, Anna Schwartz, published this book,

The Monetary History of the United States,

and it was monumental.

It argued that the Great Depression was largely the fault

of the Central Bank, in part, trying to hold onto

that gold standard.

The total demand in the United States economy

was collapsing.

Prices were falling.

This meant that businesses couldn't pay back their loans,

which meant you saw more

and more bank collapses,

which in turn would put more businesses out of line

and decline more and more wealth.

If you allow the currency to change,

if you get off the gold standard.

In other words, you allow the central bank to print money,

that's gonna increase the amount of cash in the economy,

that's gonna make it so the banks can stay open.

That's gonna allow the economy to start growing again.

This is such a big deal that as we see,

when each country got off the gold standard,

their depression stopped and growth returned.

The first to do this was Scandinavia way back in 30 and 31,

and then Great Britain did it in 1931,

the United States and Germany.

We did it in 1933.

And then finally, France waited all the way to 37

before their economy started recovering.

Tatem1961 asks,

in 1933, the US government seized all the gold owned

by private citizens.

Why didn't that result in a massive protest or a civil war?

I think to understand this best, we have to understand

how dire the situation was in 1933,

how desperate everybody was for drastic political change.

Herbert Hoover wanted to keep the gold standard.

FDR on the campaign said he wanted

to keep the gold standard, but it became very clear

that if we are going to have the system reset, we had

to change the currency.

And FDR was very popular. People saw the need for it.

In April of 1933, FDR signs an executive order,

changing the value of one ounce of gold from $20 to $35

and requiring that people couldn't hoard gold anymore.

If you held more than a hundred dollars worth of gold,

you were required to sell it back

to the government.

For reference,

that's the equivalent to around $10,000 worth of gold today.

And of course there were exceptions

for jewelry and coin collecting.

There were a handful of arrests across the country.

Some people didn't want to return their gold,

but the law was held up in court

and the Supreme Court ruled it okay

over multiple rulings between 34 and 36.

Darkmatter2025 asks, when did the FDIC start?

The FDIC is part

of FDR's New Deal in the whole alphabet soup.

It stands for Federal Deposit Insurance Corporation.

And this thing stopped the bank runs. Here's how it works.

You have a deposit with the bank.

As long as that bank's in business, you can go

and you can ask for your money at any time.

The bank doesn't keep all your cash in a vault.

It makes money by taking in deposits

and lending it out to other folks, businesses, mortgages,

investing it in somewhere.

Now, if those investments go sour,

if those businesses don't pay back,

if folks stop paying back their mortgages,

then the bank won't have the ability

to pay you back your deposits.

And we had three, four years of bank run after bank run.

When the FDIC came along it said, hey, hey, hey banks.

You pay a little premium into the system,

we'll guarantee a deposit of a certain amount.

If you've got your deposit in the bank,

you know they're running into some trouble.

You know that the bank might be having difficulties.

You won't need to go run to the bank

and get their last remaining cash outta their vault.

You can just wait 'cause you know

that the government is backing up the insurance.

From 1933 on, this solved the bank run problem.

BostonDrivingIsWorse asks,

what would happen if there were a run on banks similar

to 1929 today?

This is a great question

'cause it's so far out of our lifetimes.

We haven't experienced bank runs like this

because of the creation of federal deposit insurance.

What we can see are bank runs of a different type.

Not every bank is covered by deposit insurance.

In the 2008 crisis, a lot of that banking activity was bank

to bank, one investment bank to another investment bank.

This was part of the shadow banking sector.

It doesn't have the same regulation

and standards as a regular deposit consumer bank does.

So we did see a run between investment banks in 2008

that led to the collapse of Bear Stearns, Lehman Brothers,

and ultimately AIG whom the government

stepped in to bail out.

donqon asks,

did the New Deal actually help Americans or not?

And did it help during the Great Depression?

The New Deal was kind of like taking spaghetti

and throwing it on the wall

and seeing what sticks.

Some's going to,

but some of the noodles are gonna fall down the counter.

Some of the policies that were effective, such as the CCC

or the WPA, hired the unemployed

and got them working on public works.

These are pictures of my great-grandfather, Levi Bibe,

and he worked in the WPA.

He lived in rural Utah during the Great Depression

and didn't have work and had 14 children to feed.

The WPA gave him employment,

but more than just employment to be able to feed his family,

it gave dignity and it gave purpose.

Some of these public works included famous buildings such

as the Griffith Observatory in LA .

They built schools,

they built libraries,

they built town halls all across the country.

They helped improve parks.

Now, some of the criticism of the WPA

and the CCC where these were make work programs,

they had them do things that weren't needed.

For instance, my other grandpa, the WPA,

built an outhouse in their backyard.

One can say we don't need the government to come in

and build outhouses for people.

But on the other hand, we know through long re years

of economic research that the longer you're unemployed,

the more harm you have in your total lifetime earnings.

It's harder to go back into the workforce and find a job.

Another criticism comes from the very first African American

to get a PhD in economics.

Sadie Alexander Moser, she was a huge critic of the New Deal

because it was implicitly designed

to exclude African Americans.

Now there was no direct racial language in any

of these programs, but primarily most African Americans

worked either as domestic household servants

or as tenant farmers.

And programs such as the introduction of minimum wage,

explicitly excluded domestic workers.

Social Security that was set up in 1935 explicitly excluded

domestic workers as well.

She felt that African American tenant farmers were being

pushed out by the aid that was given to the large farmers,

but not to the smaller ones.

A Redditer asks, what did Americans eat

during the Great Depression?

Surprisingly,

economic productivity increased throughout the thirties.

We started getting better technology.

More households owned a refrigerator by the end

of the thirties than they did in 1930.

This meant you can eat food that spoils more.

So if you look at studies of their diet, they ate more fruit

and they ate more meat in 1940 compared to

what they were doing in 1930.

cauliflowernice asks, wait,

why did the Federal Reserve do nothing

during the Great Depression?

Where is the money? This is a really important question.

This is everything.

The Fed, some argue, basically caused the whole thing.

Milton Friedman said that the decline in the money supply

between 1929 and 1933 was a huge increase in it.

Ben Bernanke recently won the Nobel Prize

for his work on the Great Depression where he said,

when a bank collapsed, it lost information.

So say you need a loan to get your business going,

you're gonna go to the bank and ask for it.

That bank will give you a loan 'cause they know who you are.

They know you're good for it and

they know you'll pay it back.

But if that bank collapses, now you gotta go

to a new bank and now you're a stranger.

You can bring your paperwork, you can bring a letter

of recommendation, but they really don't know who you are.

And that asymmetry

in information caused even more economic decline.

Ben Bernanki became the Fed chair during 2006

and led us through the Great Recession

and his biggest thing was

to prevent more banks from falling.

We've known since 1873

in Walter Paget's book that Central Banks' jobs

are to be a lender of last resort.

If the private economy isn't lending to each other,

the central bank needs to lend to these banks.

'cause otherwise good banks who

otherwise have a great business are gonna go over just

because they're in the middle of a crisis.

So why didn't they act?

One reason is this, the Federal

Reserve was smaller back then.

Most of the banks that collapsed in the thirties were small

rural banks, not necessarily under the federal system.

And one of the changes in the thirties was

to expand the role of the Federal Reserve's influence

so that they can help save other banks.

Another one is they were constantly concerned about

staying on the gold standard.

People were worried about inflation coming along, even

as they were watching the opposite deflation coming along.

The United States Federal Reserve was created in 1913

as a response to the crisis of 1907.

The fact that the next big crisis came along

and they didn't prevent it is a huge stain on the history

and a huge lesson for us today.

niceguybadboy asks, how much truth is there

to the stories of hitherto wealthy people throwing

themselves out of windows when the market crashed in 1929?

Not a lot.

There were some international

reports that this happened.

Really gruesome stuff about bodies strewn on the ground.

But when we dig into the history, we don't really see it.

JJVMT asks,

why do massive job creation projects like FDRs Works

Progress Administration seem to have largely gone away

by the late 20th century?

When you have millions of people

who are unemployed, anybody working,

doing anything is important.

But eventually the economy recovers.

We had 25% unemployment in 32.

It comes down to about 9% in 37,

bumps up in 38 again.

By the beginning of World War II, we're back down to 9%

and by the end of World War II, we're only at 2%

unemployment.

When the rest of the economy's humming on all cylinders,

you don't need public programs to get people to work.

There is a large debate about whether the government should

always have this public jobs option

so that we reduce unemployment to zero all the time.

The debate here is about efficiency.

Markets when they function, have a huge power

to put in information from all these buyers

and all these sellers and allocate our scarce resources

to the most efficient part.

Governments are gonna be more clunky to do that,

and so if your public sector is too big, it distorts

what the economy can do.

And we underperform, leading

to less long run economic growth and prosperity.

bretth1100 asks, was World War II really

what ended the Great Depression?

The economics of war is war is bad.

War is bad for your economy.

The reason the US did so well in World War II is basically

because the fighting didn't happen here.

But you look at Europe and they collapsed.

It had two giant civil wars

during the first half of the 20th century.

Not good for their economy.

It's a whole lot better to build houses,

to build businesses than it is to build weapons and bombs.

On the other hand, World War II gave a reason

for the government to increase their spending at levels

that they hadn't seen ever in the history of the country.

And they did this through deficit spending.

That means through borrowing.

This is a relatively new idea.

Under Hoover and under FDR,

they originally wanted to balance the budget.

John Maynard Keynes was an economist back in England

and he is the most influential economist in the 1920s.

The modern study of macroeconomics

basically can get its start

looking at this guy.

When he published his book,

his General Theory in 1936,

and from his writings that he had been doing

in the years previous,

he said, during a recession, the government needs to step in

and be the spender of last resort.

And in his world, it didn't matter

what you spent on, anything is better than nothing.

This position has largely been dominant in the years since.

Every time the economy experiences a recession,

the government is going to increase its deficit spending.

During COVID, we spent $5 trillion to make sure

that folks were taken care of, and they were.

The amount of economic suffering we had in the 2020

recession was a fraction of what we saw just previously.

Studying macroeconomics

and learning how to prevent catastrophes, like recessions

and massive depressions, is one

of the most important things we can do.

We want to prevent economic suffering.

We want to encourage prosperity for everyone. And that's it.

I hope you've learned something.

I hope we can prevent these catastrophes

from ever happening again.

[steady upbeat music]