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What’s depressing? I’m Mr. Beat
Well, I’ll tell you what’s depressing. We're still in a pandemic. It has been a global
public health crisis, and millions have died from COVID-19 over the past year.
But there’s also been a terrible economic crisis. Most of the world
has been in a recession. (doppelganger pops in)
What the heck do you want? Doppelganger: Aren’t you
going to define what a recession is? Mr. Beat: I hadn't planned on it. I think
most of my audience knows what a recession is. Doppelganger: What’s that? You said “most?” so clearly
not everyone knows. Ya gotta define it, man. Mr. Beat: Ok. Fine
(turning to camera) A recession is a period when the economy stops
growing. (turning to doppleganger) You happy? (Doppelganger begrudgingly exits)
Most economists say a recession is when the gross domestic product,
or GDP, shrinks for two quarters. Oh and GDP is the total value of
all final goods and services produced in a country over a period of time.
The economy should generally always be growing as long as the population is growing,
as it is assumed that productivity should be going up as more people are alive to produce.
So when it’s not, uh...yeah, that’s bad. During recessions, people stop buying stuff, so companies
stop producing stuff, so they lose money and have to fire workers. Well, this leads to higher
unemployment, lower income, and even less people buying stuff. This all leads to a vicious cycle.
well if people aren't spending their money then companies aren't making money and if companies
aren't making money then they have to fire workers and then workers without a job they're not making
money so they're not spending money and if they're not spending money then the companies lose money
and if the companies lose money then they have to fire their workers and if the workers are fired
they don't have money so they're not spending their money and so if people aren't spending their
money then companies don't they don't have money and so you have to fire more workers and then
the more workers don't have money and there are even more people who can't afford to spend their
money and even if more people can't spend their money on bankruptcy less than you know everybody
Goes on and it goes on and it goes on and it goes on
Anyway, economists say the current COVID-19 recession is the worst global economic crisis
since the Great Depression. The Great Depression, in fact, may indeed be the worst global economic
crisis in modern world history. Lasting from 1929 to around 1939 but maybe longer, it had
devastating effects. International trade declined by more than 65%. A third of all banks failed.
Economic output went down by 25%. Unemployment in the United States got as high as 25%,
and even as high as 33% in other countries. Housing prices went down 67%. Tens of millions
of people lost all their wealth. Literally all of it. Imagine being a 60-year old man and building
up wealth your entire life, working your butt off, only to see all of it gone and you have to start
all over from scratch. Tens of millions found themselves in this position. Anyway, long story
really short- ever since the Great Depression, governments around the world have been MUCH more
involved with trying to rescue economies and give direct aid to citizens to cope during recessions.
But what caused the Great Depression? I mean, we know what caused the current
COVID-19 recession...it was...uh, ya know...COVID-19. It's more cut and dry.
But economists and historians have debated what really caused the Great Depression for decades.
The debate is usually between the folks who favor a more limited government when it comes
to the economy and the folks who favor a government more involved with the economy.
You know what, that kind of sounds like pretty much every debate in modern history.
Anyway, when I searched “Causes of the Great Depression” on YouTube, these three videos pop up.
Let’s look at the YouTube channel EconClips first. It gives a perspective from what’s known as the
Austrian school of economics, which generally is critical of government involvement in the economy
and favors individualism and free markets. Another video that popped up when I searched “Causes of
the Great Depression” was the Crash Course U.S. History video about the entire Great Depression.
It was surprisingly more nuanced looking at what caused the Great Depression, but still leans
toward the narrative that the government wasn’t to blame as much as the dang free market was
and the irrational behavior of individuals. This is the more mainstream, “Keynesian” perspective.
Keynesian economics, named after a dude named John Maynard Keynes, who first popularized these ideas,
generally is all about doing whatever you can to increase the aggregate demand, or total demand,
and that sometimes markets can mess up aggregate demand so government and or central banking has
to come in and fix it. The third video that popped up is from an old friend-
Robert from Reading Through History. This video is probably the least biased of the three,
but I feel like he focuses too much on the stock market crashes of October 1929,
which were probably more symptoms than causes of the Great Depression.
My point for bringing up the different perspectives is that our political biases
often strongly influence what we believe actually caused the Great Depression.
After scouring as many different sources as possible over the years, I have compiled one
giant list of 18 possible causes of the Great Depression, and here they are:
Lack of economic diversity Unequal wealth distribution
Unstable banking system Bank panics
Too much credit in 1920s Not enough credit in 1930s
Money supply was too high in 1920s Money supply was too low in the 1930s
Federal Reserve raising interest rates at wrong time
The gold standard holding back economy Decreased international lending
Increased tariffs (Smoot-Hawley Tariff)
Lack of consumer confidence Trying to balance the budget
Asset bubbles Drought conditions
Overproduction of goods Government intervention with labor
You get all that? Excellent. Great. Groovy. (doppelganger pops in)
Doppelganger: No, most of that doesn’t make sense to them
Mr. Beat: Are you insulting my audience? Doppelganger: No, it's just
a confusing list for anyone who’s not an economist.
Mr. Beat: Fair enough, ok buddy. Let’s break this down. Let's simplify this.
While all of those causes are correct to a certain degree, some are less credible than others. Plus,
some of these can be combined and are definitely related. And I do get that this list might be
overwhelming, especially if you’re in 8th grade American history class watching this right now.
And so I’ve come up with a TOP FIVE LIST BABY. WOO HOO HECK YEAH. LET’S DO THIS. (awkwardly calms down) Here are the top
five causes of the Great Depression, counting down from the least biggest cause to the biggest cause.
5. An unstable banking system Between 1930 and 1933 alone,
around 9,000 banks failed in the United States.
It's a Wonderful Life clip
Because banks hold just a fraction of the value of their customers’ deposits in the form of reserves,
any sudden, surprise attempt to convert deposits into cash can leave banks short of reserves. Now,
usually banks can just borrow extra reserves from other banks or from the Federal Reserve Bank,
the central bank of the United States. However, many banks couldn’t or wouldn’t borrow from
the Federal Reserve because they either lacked good enough collateral or didn’t belong to the
Federal Reserve System. Bank deposits would be greater than the value of their assets,
and this led to banks failing. Oh, and in the early 1930s, there was no such thing as deposit
insurance. If a bank failed, you lost all your money you had in the bank.
This led to some bank panics, in which depositors pulled all their funds for fear that they might
lose all of them if the bank failed. Which in turn only made the problem freaking worse.
More and more banks failed because of it.
4. Asset bubbles First of all, an asset
is any owned resource that has value with the expectation that it will have a future benefit.
An asset bubble is when asset prices rise to unrealistic levels in a short amount of
time...meaning the assets aren’t worth that much, yo. They be inflated...ya know, like a bubble.
This happened quite a bit during the 1920s.
The stock market is a perfect example of this. Many forget that there was also
quite a real estate bubble during that time, and much of that was due to easy access to credit,
meaning it was easy for folks to borrow lots of money. But we’ll get to that more here in a bit.
3. Increasing tariffs and other taxes when people were struggling
Look, I get why President Herbert Hoover raised tariffs and taxes in those early years of the
Great Depression. He raised taxes to try to balance the budget during a time when the economy
was contracting. This was when we were still on the gold standard, ok? He signed the Hawley-Smoot
Tariff Act to boost falling agriculture prices, which had been crippling farmers for years.
(Ferris Bueller clip)
Yeah, the Hawley-Smoot Tariff Act is one of the
worst laws in American history- it led to trading partners retaliating by raising their tariff rates
and ultimately froze international trade, causing companies’ sales to drop everywhere.
Basically, raising taxes of any kind during a recession
is one of the worst things you can possibly do,
and fortunately since then governments have learned not to repeat the same mistakes.
2. Too much money supply in the 1920s, too little in the 1930s
Both the Austrian school folks and Keynesian folks agree that the Federal Reserve deserves at least
some of the blame for the Great Depression. Well I think it deserves a lot of the blame. First of
all, during the 1920s, it implemented an easy credit policy. It expanded the money supply.
It gave too much money to banks, which in turn gave too much money to companies and
consumers. This policy led to an unsustainable credit-driven boom and therefore an asset bubble,
remember that? We mentioned that earlier.
And then, in the early years of the Great Depression, particularly 1930 to 1932, the
Federal Reserve did not help the banks suffering from bank runs. It contracted the money supply
exactly when it shouldn’t have. Sure, it was trying to preserve the value of the dollar, with
the dollar still being tied to the value of gold, but we now know that did much more harm than good.
And this last one is related to number two of course...
1. Too much credit in the 1920s and too little credit in the 1930s
It’s well known that the expansion of credit- you know, buy now pay later- got a little out
of control during the 1920s. For the first time, millions of Americans were buying stuff with
money they didn’t have, but simply borrowed. They were buying new appliances, radios, cars,
and other stuff using installment plans, paying a small percentage down and the rest over a period
of months or years. By the end of the 1920s, 80% of radios and 60% of cars were paid for on credit.
Americans even bought stock using borrowed money, for crying out loud. This practice was called
buying on margin. All this buying on easy credit also led to the aforementioned asset bubbles.
But then, once the Great Depression started, there was an overreaction. The Federal Reserve raised
interest rates when they probably should have lowered them. There was a credit crunch,
meaning it was hard to borrow to invest in new ventures that would
lead to economic growth. So there was less investment, which led to lower consumption,
which led to lower production, and thus lower wages, and thus decreased demand,
and even lower prices, and aaaaahhhhh! Economists, by the way, call this a deflationary spiral.
These credit crunches led to lots of bankruptcies during the Great Depression.
So ever since, economists have constantly been trying to find that balance, and as we saw with
the Great Recession of 2008, that balance was off quite a bit again in the years before it
as it felt like the 1920s. It’s not an easy thing to figure out, even for the experts..
So in conclusion, while there is no consensus among historians and economists
regarding the exact causes of the Great Depression, perhaps my top five list will be a compromise to
bring those monetarists in the Austrian school and Keynsians together because dangit,
both sides are right to a certain degree. So congratulations to everyone.
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