Episode 45.
Great Depression (Part 2)

Question:

What Caused the Great Depression?

Key Points:

  • We went over some hilights from Part 1
  • We ended that episode on the point that the Austrian school of economics (as opposed to John Maynard Keynes) teaches that the increase in the Money Supply will eventually cause a crash in the economy. Time will tell if this is still true today
  • At the time of the stock market crash, the dollar was fixed to a gold value of $20.67 per ounce of gold.
  • FDR increased the value of gold up to $35 per ounce by the time he left office
  • In order to be sure that the government got the value of this increase rather than individual citizens, FDR first passed a law making it illegal to own gold and requiring anyone who did to turn the gold in for dollars
  • Understandably, many people considered this unethical behavior
  • FDR did this in order to try to help get out of the Great Depression because he believed that this would intentionally cause inflation which would allow entities holding other goods/commodities to more easily pay back money they had borrowed
  • So, what caused the Great Depression was massive inflation ahead of it, which then caused a massive downturn in response
  • Because people believed there was going to be a downturn (and therefore deflation), there were runs on the banks to get out cash
  • People have said for a long time that World War I got us out of the Great Depression
  • The problem with this view is that the war put America deeply into debt, which usually causes a downturn, not an upturn
  • The real thing that happened was that Consumer Confidence kept going down
  • We didn't have time to cover all of the reasons that Consumer Confidence kept decreasing, but the main reasons included the changing price of gold, tarrifs, increases in taxes, and more
  • When people are concerned about having enough money (i.e. Consumer Confidence is low), then consumers have a tendency to only buy what they need.
  • A lack of consumer confidence is really what caused the great depression to last so long.
  • When consumers started focusing on the war, then more people went to work, so this then caused an increase in consumer confidence. It was that increase in consumer confidence that really caused the great depression to last so long and therefore also why we eventually got out of it
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