The Great Depression

What Was The Great Depression?
The Great Depression of 1929 was a worldwide economic depression that lasted approximately 10 years. On October 24, 1929, “Black Thursday” when 12.9 million shares of stock were sold in one day, triple the normal amount prices fell 15 - 20%, causing a stock market crash.

Unemployment During The Great Depression
By 1933, the height of the depression, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. GDP was cut in half, from $103 to $55 billion. This was partly because of deflation, where prices fell 10% per year. By 1933, world trade plummeted 65% as measured in dollars and 25% in total number of units.The Depression caused many farmers to lose their farms. At the same time, years of erosion and a drought created the “Dust Bowl” in the Midwest, where no crops could grow. Thousands of these farmers and other unemployed workers traveled to California to find work. Many ended up living as homeless “hobos” or in shantytowns called “Hoovervilles”, named after then-President Herbert Hoover.

What Caused the Great Depression of 1929?
According to Ben Bernanke, the current Chairman of the Federal Reserve, the stock market crash and the subsequent Depression were actually caused by tight monetary policies that the Federal Reserve instituted at that time.Bernanke relates several key actions by the Federal Reserve: The Fed began raising the Fed Funds rate in the spring of 1928, and kept raising them through a recession that began in August 1929. This led to the stock market crash in October 1929. When the stock market crashed, investors turned to the currency markets. At that time, dollars were backed by gold held by the U.S. Government. Speculators began selling dollars for gold in September 1931, which caused a run on the dollar. The Fed raised interest rates again to try and preserve the value of the dollar. This further restricted the availability of money for businesses, causing more bankruptcies. The Fed did not increase the supply of money to combat deflation. As investors withdrew all their dollars from banks, the banks failed, causing more panic. The Fed ignored the banks' plight, thus destroying any remaining consumers’ confidence in banks. Most people withdrew their cash and put it under the mattress, which further decreased the money supply. Bottom line...thanks to the Fed, there was just not enough money in circulation to get the economy going again. Instead of pumping money into the economy, and increasing the money supply, the Fed allowed the money supply to fall 30%.

What Ended the Great Depression?
In 1932, Franklin Delano Roosevelt was elected President based on his promises to create Federal Government programs to end the Great Depression. Within 100 days the “New Deal” was signed into law. This created 42 new agencies designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs, such as Social Security, the SEC, and FDIC (Federal Deposit Insurance Corporation) are still here today, helping to safeguard the economy.However, the extent of the Great Depression was so great that government programs alone could not end it. Unemployment remained in the double-digits until 1941, when the U.S. entry into World War II created defense-related jobs.

Could a Great Depression Happen Again?
A Depression on the scale of that in 1929 could not happen exactly the way it did before. Central banks around the world, including the U.S. Federal Reserve, are so much more aware of the importance of monetary policy in regulating the economy.However, there is only so much monetary policy can do to offset fiscal policy. The incredible size of the U.S. current account deficit, and the national debt, could possibly trigger an economic panic that would be difficult for monetary policy to affect. No one really knows, since the current U.S. debt level is unprecedented.The U.S. economy has been living on borrowed money for a long time, and the economy is experiencing the unwinding of that excess currently. However, it probably won't be enough to disarm the global economy's growth, so a worldwide depression is unlikely. It could trigger a global recession in 2008 or 2009. Although the U.S. economy may see another quarter of negative GDP growth, the global economy may not even slow that much, thanks to growth in China and other emerging markets
The best course of action is to cut down on your own credit, rebalance your retirement portfolio to be more defensive, and make sure you are living within a balanced budget.