Could the U.S. Have Another Great Depression?
According to Federal Reserve Chairman Ben Bernanke, the stock market crash of 1929 was actually caused by contractionary monetary policies of the Federal Reserve, which tightened the money supply while the country was going through a recession in the summer of 1929. The Fed continued to raise the Fed Funds rate throughout the ensuing economic decline, trying to defend the value of the dollar. Banks collapsed, and finally people took their remaining dollars and stuffed them under the mattress.
The Depression was only cured by the advent of World War II, which employed people again in defense-related jobs.
Could it happen again? Bernanke says no, since today's Fed has a better understanding of the importance of expansionary monetary policy in stimulating the economy.
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Comments
It won’t happen again the same way, but someone needs to ask him why my dollar is worth $.03 when compared to the dollar when the Fed took over. The fed is to blame for the housing bubble and will be to blame when it comes crashing down. If you don’t believe me, read Rep. Paul’s view
Thanks for your commments. I’ve heard Rep. Paul’s viewpoints before from other sources, as well. There is certainly more focus on the Fed Funds rate than on money supply, so I think I will write a couple of articles on the role of the Fed as well as the Treasury in the money supply, See also How Do Bonds Affect Interest Rates?
Kimberly Amadeo,
I have to agree with b, given the huge increase in mortgage defaults we’re seeing, and the ease that one can buy houses in the US these days, the crash will start there–if it doesn’t start by the US losing its goldmine in Petrodollars (and the “deficit doesn’t matter when the dollar is propped up by the oil trade” mentality) when the Middle East starts trading oil for Euros.
james
Hello Kimberly,
Just wanted to say welcome. I’m the Rodeo guide here on About.com. I’d like to say thank you for the fantastic articles on the Great Depression.
As someone who’s family was partially effected by the GD (and really who’s family wasn’t) I enjoy learning about that time in history and the effects of the economy today.
In fact a part of Stockton, California (near where I grew up) is still euphemistically called “Oakieville.” Unfortunately my family still has a sort of ‘mattress mentality’ when it comes to money so growing up we didn’t get a lot of guidance in that area.
I’m looking forward to reading your site regularly and learning about a subject I’ve always been fascinated by but have been a little fearful of.
Keep up the good work!
First, lets look at the supply and demand of the US and China. As you all know, China imports alot of stuff you and I buy. The problem is the US made our economy a global economy without first resetting our currency. The dollar is decreasing in value. Why? Well it has lot to do with the China’s slave labor and outsourcing of jobs.
Two things happen when we do this. First, someone in the US loses a good middle class job and has to A. go to college, or B. find another job that will pay him less of a wage. Second, the business reaps huge rewards and forces everyone that doesn’t get the same slave labor out of business.
Back to the first reason. When someone is forced to either go to college or get paid less, the cost of college increases and the wages after college decrease, or they get stuck with a bad paying job. This means no matter what this person does, he gets paid less. This means no matter what this people have less pay and therefore, demand less products and items.
Back to the second reason. When suppliers are pushed out of business, everyone know that means prices go higher.
Put both reasons together and you get high prices, low supply, and low demand. These are the exact opposite of a free trade economy that is doing really well. Therefore, the dollar has to weaken to withstand the demand for China’s cheap labor. When our currency weakens, their wage ratio with ours increases to reduce demand for their cheap labor. Also, We are here right now or going to be very soon.
Soon the prices will be too high to buy stuff and worker wages will be too low to even afford the cost of living. With demand low, prices high and wages so low people can’t afford to spend to much, a recession is coming. Their will be a great restructing of the world economy and I am sad to say our standard of living will slip to be even with everyone elses.
Those are some great observations. This is why I am personally not getting very enthused about “the Dow setting new highs.” The fundamental structure of our economy is unbalanced. Low wages + high demand = high credit. No one (in the U.S) is ready to admit they can’t buy as much as they did last year or the year before.
As far as our standard of living slipping…it had to happen eventually. Our standard of living is an aberration of our geography and winning WWII. This led to the dollar becoming a global currency and Baby Boomers fueling economic growth.
See also Why You Are Working Harder, But Feel You are Earning Less