Welcome to brain Stuff production of iHeart Radio. Hey brain Stuff, Lauren vogelbam here. If you didn't live through the Great Depression that started in the late nineteen twenties and lasted until the beginning of World War Two, it's hard to imagine just how rough many ordinary Americans had it. At the depressions peak in nineteen thirty three, the nation's gross domestic product had been cut roughly in half, and nearly one in four American workers was unemployed since they didn't
have money to pay their mortgages. The foreclosure rate more than doubled, and people who lost their homes found themselves erecting cardboard and scrap wood checks and living in camps known as Hooverville's on the edge of towns and cities, named after President Herbert Hoover, who many blamed for the depression.
In an interview published by the Federal Reserve Bank of St. Louis in two thousand seven, two men who survived the depression describe how people around them often were so desperate for food that they eagerly rooted through garbage bins at
markets for discarded vegetables and spoiled chicken. Carcasses. Even after Franklin Roosevelt's New Deal program eased some of the depper nation, the nation's battered economy continued to struggle right up until the war brought a massive surge in government spending and created jobs at defense plans for those who didn't go off to fight overseas. But why did the Great Depression happen?
And could it ever happen again? The depressions causes have been a long time subject of debate by historians and economists, though there seems to be a consensus that the economic disaster was the result of multiple factors, some of which led to the event, while others worsened or prolonged it. And while the nation's economy, the financial system, and government regulation have changed considerably since the nineteen twenties and thirties, experts warned that we're still not immune to some of
the same risks that contributed to the catastrophe. Worse yet, some mistakes of that era are now being repeated. At the top of the list is income inequality. We spoke with Robert S. McElvaine, a history professor at Millsap's College in Mississippi and author of The Great Depression America nine ninety one. He says that the US shifted during the nineteen twenties to an economy heavily dependent upon consumption of
mass produced goods ranging from automobiles to radios. While sales of those products drove up profits for factory owners and retailers, most American workers wages grew much more slowly. Eventually, he notes, people didn't have enough money to buy more things and keep the economy going. Businesses tried to cope by extending consumer credit and allowing people to gradually pay off their purchases, but they didn't have enough income to keep buying new
stuff as well. In the summer of nineteen twenty nine, to avoid having inventory pile up, factories started cutting back on production and laying off workers. Those workers then couldn't buy things, which meant even more products piled up. That started the economy on a downward spiral that contributed to a four day stock market crash in late October of ninety nine, which erased a quarter of the value of the Dow Jones industrial average, wiping out investors and severely
damaging public confidence. Circle nineteen twenties, income inequality was exacerbated by a series of tax cuts pushed through Congress by Secretary of the Treasury Andrew W. Mellon, ostensibly to stimulate the economy. As one of the world's richest men, Melon personally benefited from the cuts more than practically all the
taxpayers in the state of Nebraska. As one political opponent of the bill pointed out ninety years later, income inequality is growing and it's a threat to an economy which depends upon personal consumption of two thirds of its economic output. And Congress in seventeen passed a massive tax cut package which most Americans see themselves as not benefiting from. In addition to income inequality, there was a lot of investment
speculation going on. There's a difference between investing and speculating, which Investipedia defines as putting your money into high risk investments in hopes of making a killing. But in the nineteen twenties, when everything seemed to be booming, investors often were a bit too trusting. We also spoke with Todd Noope, a professor of economics and business at Cornell College in
Mount Vernon, Iowa. He said, many people think of the dust bowl or the stock market crash as the proximate cause of the Great Depression, but in reality it was caused by the same factors the have caused financial crises throughout history in the U S and elsewhere. Debt financed speculation. In other words, when people find it too easy to borrow other people's money to speculate on risky ventures, stock spawn, subprime housing, etcetera. Than people risk too much and prices boom,
only to eventually bust decades later. Unfortunately, we're still vulnerable to that psychological flaw, Noop said. Markets are prone to thinking that this time it's different, only to find out again and again that it is usually not. In the nineteen twenties, the United States was also dealing with some bad Federal Reserve policy. Today, we're accustomed to thinking of the Federal Reserve the nation central bank as the guardian
of the economy. That's because it's board could use monetary policy control of the supply of money and credit to stimulate the economy when it needs a boost, or to put on the brakes when inflation is starting to creep upward. But in a two thousand four lecture, former FED Chairman Ben Bernanke detailed his theory that ninety years ago, the FED dropped the ball with policy blunders that helped cause
and prolong the Great Depression. Starting in the FED, hoping to put the brakes on Wall Street, speculators who were investing borrowed money, started raising interest rates. That policy succeeded a little too well, as evidenced by the stock markets catastrophic drop in October of nine. But then, even after the stock market collapsed, the FED kept increasing interest rates. The reason was that the US, like many other countries, was on the gold standard, meaning that the dollar was
redeemable in gold and pegged to its value. When panicked investors started trading their dollars for gold, the FED moved to thwart them, Bernankey explained in his speech. To stabilize the dollar, the Fed once again raised interest rates sharply, on the view that currency speculators would be less willing to liquidate dollar assets if they could earn a higher rate of return on them. But the high interest rates made it tough for businesses to borrow to weather the
hard times, and many went bankrupt as a result. At the same time, according to Bernanke, the FED also didn't do enough to protect the nation's banks, leading depositors to out their savings and hoard the cash, further worsening the economic crisis. The US wasn't the only country with such problems. We also spoke with Nathaniel Klein, an assistant professor of economics at the University of Redlands an expert on economic history. He said the gold standard helped things along by limiting
the policy responsive nations around the world. Things like lower interest rates and government deficit spending were made much more difficult. In addition, while Great Britain provided global economic leadership before World War One, after the war, the US essentially refused to lead despite being the new center of the world economy. Fortunately, this is one area where policymakers learned their lesson, Klein said.
In the end, countries dropped the gold standard and many engaged in deficit spending and monetary policy, and the US established its leadership under the Breton Woods Agreement. That pact created the World Bank and the International Monetary Fund, as well as eliminating the gold standard internationally. On the other hand, and as a candidate, Donald Trump said that bringing back the gold standard quote would be very hard to do, but boy would it be wonderful. As president, he considered
nominating to the FED Board. Herman Kaine, who wrote in twelve in The Wall Street Journal that the dollars should be redefined as quote a fixed quantity of gold, though in a recent interview came backed away from that position, and Stephen Moore, another past gold standard advocate, told CNN that he now favored pegging the currency to a quote whole basket of commodities. Both later withdrew from consideration in the face of political opposition. One of the other big
factors that led to the depression was trade wars. The Smoot Holly Act, which was written in early nine when the economy was still going strong, but became law after the Wall Street Crash, raised US tariffs by an average of sixteen The idea was to keep other countries from hurting US manufacturers by flooding the market with lower priced products, but when those countries responded by imposing their own tariffs, the result was a ruinous global decline in trade. The
deepened and lengthened the Great Depression. That bit of history worries many people today due to President Trump's fondness for imposing tariffs in an effort to protect US industries. So many of the factors that contributed to the Great Depression are still risks. Whether they will ever combine in an economic perfect storm is a harder question to answer. Today's episode was written by Patrick J. Tiger and produced by Tyler clayg. Brain Stuff is a production of I Heart
Radio's How Stuff Works. From more on this and lots of other economical topics, visit our home planet, howstuff Works dot com, and for more podcasts from my heart Radio, visit i Heart Radio app, Apple Podcasts, or wherever you listen to your favorite shows.