Can someone explain the Great Depression in basic terms to me?

Question

I know it has something to do with the stock market and government which were not really an interest of mine in High School. :-( From shows I have seen a company decides to put themselves on the Stock Market and people rich and not rich can buy a share of that company. Lets say one person owns 55% of Mcdonalds and the head CEO dude 40% while you a 9-5 worker 5% percent. :-) From my understanding every company in that era the 30's, when this happen the Microsoft,Pepsi,Taco Bell etc. of the world were all BROKE!


I just can't forsee this happening in todays time and yet my parents have stated about saving money incase the gloom and doom of a Depression happens. They talk of unemployment and $20 loafs of bread or not enough to meet demand. I also can't imagine the rich people of the world in Hollywood having an issue with this, they are rich! If anyone can help me I'd would appreciate it. :-)

Answer 1

Well, there was more to theGreat Depression than just the stock market; basically American money wasn't worth its full value any more, and that caused companies to go broke overnight, which put people out of work, which caused more companies to go broke, and so on, in a big circle.

And yes, this could happen again, maybe not entirely from the stock market but if you look at the purchasing power of the dollar, particularly overseas, a dollar is not worth very much any more. The exchange rate against the British pound is a really good example--- it used to "cost" about $1.30 for a British pound; now the same pound is worth close to $2.00. .

Our country really is at a risky economic state; the collapse of the sub-prime lending market (home loans written to people who might not be qualified for them) is causing all sorts of troubles, from individual people being foreclosed upon, to huge lenders and banks losing tons of money. Fortunately there are a number of ways the Federal Reserve can stimulate and support the economy. So hopefully the Feds will make some good choices in the next few months and the economy will stabilize.

But really, yes it could happen; all the rich Hollywood folks would be pretty much broke once their supply of cash was gone. The banks would (and could) run out of paper currency or go out of business all together. Once stores stop taking credit (which is a big part of a country's economic collapse), you would have to have cold hard cash and if the banks are closed, well, you're broke.

Personally I wouldn't hide all my money in my mattress. Put your money in a nicely diversified portfolio (some stocks, some bonds, some t-bills, some traditional savings, etc); you'll have plenty of warning that the economy is sliding if you are worried about having adequate cash on hand but I really doubt it will come to that. Of course, that's what they used to say in Argentina, too...

Answer 2

Three words; greed, speed, and bleed!

1. Greed: Insiders made a mint on certain stocks and bonds and 'margined' their calls too much. Get a copy of the movie 'Other People's Money' for a good explanation of how stocks can be manipulated to either buy or sell a company.

2. Speed: With the way the economy is now, on a worldwide basis, your parents are correct. You NEED to learn how to save a portion of your paycheck and 'scaleback' on credit use and purchases. Right now, we are in the midst of a recession (again) NOT because of the Iraq war BUT because of the speed at which people can get credit without having the ability to pay for their purchases in cash.

3. Bleed: In the Great Depression, while everything 'seemed' to hit at once (ie Banks collapsing, Stocks and Bond going belly up, bad weather and wrecked economic infrastructure) It has been building for several years BEFORE the market crash. The problem now; many media outlets do NOT report the 'full' news. We have had bank failures for the last several years; the market continues to LOSE money as soon as it hits another high, and overseas markets have too much in the way of US paper/debt in their coffers. All one of these countries would have to do is 'call' in their debt markers from the USA and DEMAND that the banks pay up. France did the next best thing a few weeks ago by freezing some of its assets involved in the Subprime Mortgage fiasco unfolding right now...which still triggers problems on the market today. Contrymark JUST announced laying off of a massive amount of employees!

Now, the 'market' has more safeguards today than they did back in the Great Depression. However, MASSIVE amounts of cash have been pumped into Wall Street by the US banks to keep the market afloat. Plus, if you know your Bible, much of this stuff is covered in Proverbs and in Acts...about saving, curbing lending, and watching who you will cosign for.

We are on the edge of a Depression right now. A recession is already starting to form in the fall of 2007. We are looking at a possible 'return' to the 1970s. Hope this answers your questions.

Answer 3

I am an economist, let me see if I can help.

The stock market crash did not cause the Depression, it was triggered by the same event that touched off the Depression. The crash was a warning, not a cause.

The world, at the time, was under either the gold standard, the silver standard or a bimetalic standard. Europe was mostly gold, Asia was mostly silver, Latin America varied from nation to nation and the United States was bimetalic.

Just prior to the start of World War I, the world's nations had an operational global economy. It was probably more global than it is today. Metal exchange permitted even minor nations to play on the world stage. When WWI happened, it disrupted the social contracts that the metal standards existed in. When the war ended, people tried to put everything back the way it was, as though nothing had happened. Many nations were drained of their metal reserves, many had excess, none had stable international agreements.

This persisted for about a decade. Because America was pretty much the only surviving industrial nation that was intact, gold flowed in quickly. An influx of gold is an influx of money. Inflation moves about 1:1 with changes in the amount of money. To prevent inflation, the new Federal Reserve started quarantining the gold. Prior to that, private contracts governed the banking system resulting in banking panics every one or two decades.

The Fed had no practical experience yet. Nothing bad had happened and even if something bad had happened, it did not expect it to be outside its experience.

As the Fed quarantined the gold, banks basically incurred obligations to large depositors, the IBM's of the time, but the Fed was holding the excess gold to meet those obligations and keeping it out of the economy. Likewise, foreign nations were draining gold into America and had no gold to pay their bills.

In August 1929, banks began asking for gold at increasing rates. The Fed misinterpreted this request as a heating up economy. To prevent a recession, they raised the rates. What was happening is that banks were nearing insolvency because their gold was locked away. In October a liquidity crisis formed, much like the one two weeks ago. It hit the stock market first because the stock market is the holding place of residual money. If it is a choice of eating or investing, people eat.

So the market collapsed, though this happened to be the first collapse of several, it wasn't even the worst.

As the money supply shrank, inflation became deflation. Instead of everything getting more expensive year after year, it got cheaper. The "market clearing" interest rate was negative. In other words, banks should pay people to borrow. Since that cannot happen, the whole economy froze up.

The US money supply shrank by 3%. US investment runs at about 4% of GDP. That means that the US reduced its investment in the future by 75%. To understand that impact, that is not financial wealth, that is tractors. We reduced the ability to do future production by 75%. Imagine not replacing the light bulbs or fixing an assembly line, everywhere at the same time. Unemployment hit 24%.

The reason a depression is worse than a recession is that prices fall. Imagine you are a business owner selling apples for one dollar a piece, but by the time you get them to market they are worth ninety five cents. Imagine every time you sell something, you have to sell it for less. Eventually, there is no profit, so you stop producing and fire everyone. They cannot buy things, so other producers quit and fire everyone and so forth.

People hold their money because it is more valuable held than used and you cannot know you would have a job. If no one spends, no one has a job. Recessions are structural reductions in demand, but prices do not fall on average. Profits fall because you sell less, but prices do not fall.

The firms went broke because no one was interested in their products.

A depression is not impossible, we came quite close to one a few years ago. The effects are still echoing through the worlds markets even today.

Still, I think runaway inflation is the greater risk at the moment because China has been quarantining dollars. For every dollar in America, there is twenty three in China. If they let all of that loose at once, our prices will go way up.

Answer 4

Stock market crashed; stocks were all worthless; a lot of people lost their jobs; all the rich people lost their money

The end!