Episode 44.
Great Depression (Part 1)

Question:

What Caused the Great Depression?

Key Points:

  • The Great Depression is the timeframe from the end of 1929 through all of the 1930s:10-12 years. During this time, the whole worldwide economy was not really working
  • Many people have blamed the great depression on the stock market crash and it is usually the marker of the begining of the Great Depression
  • Interestingly, the unemployment rate and other economic factors had started to decline much earlier in 1929
  • Then, after the crash, unemployment stopped going up for the next 4 months, but then after that it started going up quickly
  • So, what caused the stock market crash?
    • There were quite a bit of stock investing on margin: where someone can buy more stock than the money that a person puts into their stock account. This did increase the downward trend of the market because when people lost money on a stock they had to sell other stocks in order to cover that loss which caused additional losses
    • Starting in 1915, the US money supply sharply increased. This means everyone had a lot more money and led to the roaring twenties
    • The increase in the money supply, combined with the ability to invest on margin caused a large bubble in the stock market
  • When this stock market crash happened, it was in the middle of an unemployment spike that was already ongoing. This caused a decrease in consumer confidence.
  • Consumer Confidence is the overall belief of consumers that they will be able to pay for things; this confidence causes people to buy things that are not considered necessities
  • The economy did very well from 1900-1929, but this was primarily from technological innovations, i.e. the industrial revolution, not from humans actually doing more
  • Back in 1914, Henry Ford started telling people that the economy needed to be concerned about a lack of increase in consumption. This is part of the reason why Ford increased the wages of his workers
  • Per the Austrian school of economics (as opposed to John Maynard Keynes) the increase in the Money Supply will eventually cause a crash in the economy. Time will tell if this is still true today
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