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Kimberly Amadeo

How the Great Depression Could Happen Again

By May 30, 2007

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A reader took exception to my recent article where I said the Great Depression of 1929 could not happen again. He noted that the government has allowed the stage to be set for another depression, and that it may not be able to stop it once it starts.

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. However, there are many indications that the U.S. economy is, quite literally, living on borrowed time. The $800 billion current account deficit, the $8 trillion Federal Debt, and the looming Social Security crisis are all unprecedented imbalances that could very easily cause a recession that could lead to another Great Depression.

What It Means to You

Read these articles to find out what it would mean to you, and tell us what you think.

More About the Great Depression and How It Happened


September 21, 2009 at 12:17 am
(1) Alex K says:

In 14 years I have not met an American who knew the cause of the Great Depression even though it is a classic case of economics.
This is a problem of OVERPRODUCTION. Due to mass production of cheap goods the moment sooner or later comes when people do not buy simply because they donít need it. When it happens on massive scale manufacturers being unable to sell their products have to lay off employees because they cannot pay them. Unemployed people cannot buy because they have no income therefore even more workers have to be laid off. It works like a lend slide. Industrial goods such as cars, TVs, refrigerators etc. serve for about 10 years until they have to be replaced. Last Great Depression continued exactly this long. Europe did not suffer depression during 1930s thanks to World War 2 during which a huge mass of good was destroyed, but now it does. Thus we have now a second Great Depression even though nobody understands it.

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