Lessons from the Great Depression

[one...two...tree 2,762]

The Great Depression was not a sudden total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929.^[6] Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the northern summer of 1930.

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the American economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, like the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

Causes

Recession cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a usually mild and short recession or "ordinary" business cycle into a great depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of governments to curtail widespread bank failures, the resulting panics, and reduction in the money supply. Those who believe in a large role for governments in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem.

Current theories may be broadly classified into three main points of view. First, there is orthodox classical economics: monetarist, Austrian Economics and neoclassical economic theory, all of which focus on the macroeconomic effects of money supply and the supply of gold which backed many currencies before the Great Depression, including production and consumption.

Second, there are structural theories, most importantly Keynesian, but also including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The only consensus viewpoint is that there was a large-scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods.

Third, there is the Marxist critique of political economy. This emphasizes contradictions within capital itself (which is viewed as a social relation involving the appropriation of surplus value) as giving rise to an inherently unbalanced dynamic of accumulation resulting in an overaccumulation of capital, culminating in periodic crises of devaluation of capital. The origin of crisis is thus located firmly in the sphere of production, though economic crisis can be aggravated by problems of disproportionality between spheres of production and the underconsumption of the masses.

There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Peter Temin and Barry Eichengreen) point to Britain's decision to return to the Gold Standard at pre-World War I parities (US$4.86:£1).

Debt

Debt is seen as one of the causes of the Great Depression, particularly in the United States. Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view^{[citation needed]} of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher:^{[citation needed]} in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture, and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in US unemployment rates of over 25% by 1933. Banks which had financed this debt began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en mass, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.^{[citation needed]} Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.^[8]

Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.^[8] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.

http://en.wikipedia.org/wiki/Great_Depression

Edited September 29, 2008 by Jabberwocky

[Trumplestiltskin 5,791]

Grow your own food. And get a gun

[one...two...tree 2,762]

Grow your own food. And get a gun

Actually people should NOT panic...whatever they do. Keep your money in the bank. Keep purchasing (albeit within your means).

[Trumplestiltskin 5,791]

I don't know about panic - but now is obviously the time to tighten the belt where-ever you can.

Lean times...

[AlHayatZween 2]

Grow your own food. And get a gun

yeah, man

Naw... in all seriousness, i read this same excerpt not too long ago, well... last week, when the banks came tumbling...

it just seems like the whole economic atmosphere mirrored that of the climate right before the great depression: Defaulting loans, overextending credit by the banks...

It all seems like all the experts in finance/economy/etc... should have seen this coming...

Edited September 29, 2008 by AlHayatZween

[caybee 21]

I inherited a Depression-era cookbook from my grandmother. Time to break that baby out and see what it says. Shouldn't be too scary. Most of the Coca-Cola and tomato-jello recipes came along in the 50s.

[SteveLaura 0]

Keep purchasing (albeit within your means).

Hence the panic. What is the average credit card debt? Not to bang my own drum, as it were, but I recently bought a used DVD projector for $150 from Amazon to show movies in the backyard. It's fine, but now I want a much better one. The one I have in mind costs upwards of $400, which I don't have lying around. So I'm setting aside a few $$$ each month and reckon I'll be able to buy it in time for the summer of 2010. It's a luxury, and I have something that'll do until then, so it's not worth getting into debt and paying exorbitant amounts of interest merely to have it now!

Of course, it's an over-simplification to say that consumerism is to blame ('The Two Income Trap' Book makes a great argument). But for many people, the line between 'want' and 'need' just doesn't exist.

[one...two...tree 2,762]

Keep purchasing (albeit within your means).

Hence the panic. What is the average credit card debt? Not to bang my own drum, as it were, but I recently bought a used DVD projector for $150 from Amazon to show movies in the backyard. It's fine, but now I want a much better one. The one I have in mind costs upwards of $400, which I don't have lying around. So I'm setting aside a few $ each month and reckon I'll be able to buy it in time for the summer of 2010. It's a luxury, and I have something that'll do until then, so it's not worth getting into debt and paying exorbitant amounts of interest merely to have it now!

Of course, it's an over-simplification to say that consumerism is to blame ('The Two Income Trap' Book makes a great argument). But for many people, the line between 'want' and 'need' just doesn't exist.

To a certain degree, I agree. But when it comes to home ownership, I favor the idea that hard working Americans should be able to afford to own their own home. I've been saying for years, the whole housing/mortgage industry was a sham when it is completely market driven. There has to be provisions that keep the price of homes in check. People were buying half million dollar homes that weren't worth that a fraction of that. I know that some argue the value is whatever people are willing to pay, but this whole situation we're facing today is the result from that line of thinking. The Fed needs to regulate the housing market in such a way that prevents the market from shooting up the price exponentially.

Edited September 29, 2008 by Jabberwocky

[SteveLaura 0]

To a certain degree, I agree. But when it comes to home ownership, I favor the idea that hard working Americans should be able to afford to own their own home. I've been saying for years, the whole housing/mortgage industry was a sham when the it is completely market driven. There has to be provisions that keep the price of homes in check. People were buying half million dollar homes that weren't worth that. I know that some argue the value is whatever people are willing to pay, but this whole situation we're facing today is the result from that line of thinking. The Fed needs to regulate the housing market in such a way that prevents the market from shooting up the price exponentially.

I'm with you on that too. We've just (last month) bought our first home. We could have got a mortgage 3 times larger than we were after. We could have got a much larger house than the rather modest 3 bed ranch we fell in love with. But, the bottom line is, we knew our budget and stuck to it. I have no doubt that many, many people were conned into bad mortgages. But there are also a significant number who wanted the dream home without any thought how to pay for it.

When house prices rise dramatically but wages are constant or barely moving upwards, then, yes, you can no longer say that you house is worth half a million or whatever. The bubble was gonna burst. Who was buying? We put it off for a year to increase our downpayment stash and to see if prices would come down.

I'm all for regulation but then again, I'm pretty Socialist generally. The idea that corporations, left to their own devices, will 'do the right thing' seems bizarre.

[Trumplestiltskin 5,791]

Has anyone thought what this is likely to do to the cost of healthcare...

Bad time to be getting sick...

[caybee 21]

Has anyone thought what this is likely to do to the cost of healthcare...

Bad time to be getting sick...

My husband just got a job with bennies and consequently we just got health insurance. I sure am thinking about the what-ifs.

[Reba 2]

My husband has been unemployed for about a year and a half now, if we had a mortgage on this house, we'd have lost it long ago because we sure can't survive on my meagre wages that's for sure! Now he's fallen sick with something they can't figure out and they just keep doing more and more tests and making more and more appointments for him for this and that and the other, and all these doctor bills, even with insurance, could break us. He has a (now very) small income from stock dividends. Funny thing about the stock market though...

The company I work for at the moment is also hurting pretty bad, so I don't know for how long I'll have a job, and with unemployment at one of the highest rates in the country here in WNC, finding another job will be next to impossible I'm thinking.

We want to move north where the unemployment isn't as bad, but we need to sell our house first. Who wants to move somewhere there's no jobs?

We're kinda stuck. I was putting money away for a maybe trip to Ireland next year. Now I'm thinking it'll be our "mattress stash"

[one...two...tree 2,762]

My husband has been unemployed for about a year and a half now, if we had a mortgage on this house, we'd have lost it long ago because we sure can't survive on my meagre wages that's for sure! Now he's fallen sick with something they can't figure out and they just keep doing more and more tests and making more and more appointments for him for this and that and the other, and all these doctor bills, even with insurance, could break us. He has a (now very) small income from stock dividends. Funny thing about the stock market though...

The company I work for at the moment is also hurting pretty bad, so I don't know for how long I'll have a job, and with unemployment at one of the highest rates in the country here in WNC, finding another job will be next to impossible I'm thinking.

We want to move north where the unemployment isn't as bad, but we need to sell our house first. Who wants to move somewhere there's no jobs?

We're kinda stuck. I was putting money away for a maybe trip to Ireland next year. Now I'm thinking it'll be our "mattress stash"

Sorry to hear about your husband's illness.

[VisaJourneyLady 33]

Yes healthcare is such a worry. I don't have any right now. I worry that if McCain got in to the presidency and managed to pass that $5000 tax break for healthcare, the price of insurance would magically increase by $5000 a year. After all when govt's elsewhere have tried to make housing more affordable by giving tax breaks and tax deductions, the common response is for the market to simply calculate that money as part of the buyers budget. Hence it does no good at all, but drives up prices, and really does the opposite. True reform is needed, not a tax break. Just MHO

[rebeccajo 14]

My husband has been unemployed for about a year and a half now, if we had a mortgage on this house, we'd have lost it long ago because we sure can't survive on my meagre wages that's for sure! Now he's fallen sick with something they can't figure out and they just keep doing more and more tests and making more and more appointments for him for this and that and the other, and all these doctor bills, even with insurance, could break us. He has a (now very) small income from stock dividends. Funny thing about the stock market though...

The company I work for at the moment is also hurting pretty bad, so I don't know for how long I'll have a job, and with unemployment at one of the highest rates in the country here in WNC, finding another job will be next to impossible I'm thinking.

We want to move north where the unemployment isn't as bad, but we need to sell our house first. Who wants to move somewhere there's no jobs?

We're kinda stuck. I was putting money away for a maybe trip to Ireland next year. Now I'm thinking it'll be our "mattress stash"

Sorry to hear about your husband's illness.

Yeah, sorry to read this. Hadn't heard about it. Please keep us posted as to how he's doing.