Overview

The worst economic disaster in history. It started with a stock market crash in 1929 and didn’t end until World War II. At its peak, 25% of Americans were unemployed. It changed how we think about the government’s role in the economy forever.

Core Idea

The core idea is Deflationary Spiral.

  1. People stop spending.
  2. Prices fall.
  3. Businesses make less money, so they fire workers.
  4. Unemployed workers spend even less.
  5. Repeat until the economy is dead.

Formal Definition

A severe worldwide economic depression that took place mostly during the 1930s. Black Tuesday: October 29, 1929. The day the stock market lost 12% of its value.

Intuition

  • The Bank Run: Imagine everyone trying to withdraw their money from the bank at the same time. The bank doesn’t have it (because they lent it out). The bank collapses. Your life savings are gone. This happened to thousands of banks.

Examples

  • Soup Kitchens: Al Capone opened one in Chicago to feed the hungry.
  • Dust Bowl: To make matters worse, a drought turned the Midwest into a desert. Farmers lost everything.
  • Hoovervilles: Shantytowns built by homeless people, named after President Hoover, whom they blamed.

Common Misconceptions

  • The Stock Market Crash caused it: The crash was the spark, but the cause was bad banking policy (The Fed let the money supply shrink) and bad trade policy (Smoot-Hawley Tariffs).
  • The New Deal: FDR’s program of “Relief, Recovery, Reform.” Social Security, FDIC (Bank Insurance), and the SEC were all created to prevent another Depression.
  • Keynesian Economics: The theory that the government must spend money to fix a depression.

Applications

  • 2008 Financial Crisis: We learned our lesson. When the banks started to fail in 2008, the government bailed them out immediately. It was unpopular, but it prevented Great Depression 2.0.

Criticism / Limitations

  • Did the New Deal work? Economists still argue. Some say it saved capitalism. Others say it prolonged the depression by interfering with the market.

Further Reading

  • Steinbeck, John. The Grapes of Wrath. (Fiction, but captures the misery).
  • Bernanke, Ben. Essays on the Great Depression.