Examining the Great Depression reveals not just a period of catastrophic economic collapse between 1929 and 1933, but a defining moment that forged modern American governance and social safety nets. On the WIRED channel, Professor Christopher Clarke, an economics professor at Washington State University, provided a comprehensive analysis, emphasizing the true severity of the crisis and the complex factors that led to the worst economic decline in United States history.
The suffering during the Depression was "awful". The unemployment rate peaked at 25% by 1932, meaning "one out of every four people can't find work who want to find work". In comparison, the Great Recession of 2009 maxed out at 10% unemployment. Industrial production fell by half, representing a "huge number of idle resources". Professor Christopher Clarke noted that "Folks went hungry," and this severe suffering spurred the creation of the first federal welfare systems, including Social Security, unemployment insurance, federal minimum wage, and housing subsidies.
The crisis began with a speculative boom in U.S. financial markets in the late 1920s. Investors were "investing heavily on margins," using huge loans to buy stocks. A modest "run-of-the-mill recession" hit in the summer of 1929, causing the market to peak on September 3rd. Because so many stocks were held by loan, any fall in price resulted in a "cascading chain of everyone calling in their loans," leading to the massive crash by October. Despite common assumptions, only 1 to 2% of Americans held any stock at the time, meaning the crash initially affected only financial markets.
The decline transitioned into a national catastrophe through massive bank failures. Banks were unable to honor deposits when loans were not repaid by borrowers who were often going bankrupt. Professor Christopher Clarke stated that an astonishing 10,000 banks collapsed across those years. This issue was unique to the United States because its fractured banking system forced banks to be "really small," lacking the resources to insure themselves. Surprisingly, Canada, which had only 10 banks serving the entire country, "didn't experience runs".
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A key debated cause that worsened the crisis was the Smoot-Hawley Act, signed by President Hoover in 1930. This act imposed a large increase in tariffs. The intent was to protect U.S. businesses, but the effect on the large U.S. economy was modest estimated to be a decline of maybe a couple of percentage points. However, the global response was disastrous: other countries retaliated by raising their own tariffs, initiating a Kinderberg cycle where tariffs got higher and higher, and global trade shrunk every year throughout 1932 and 33.
Another factor was the failure of the Federal Reserve to intervene, a problem stemming from the rigid Gold Standard. Professor Christopher Clarke cited Nobel Prize economist Milton Friedman, who argued that the Depression was largely the fault of the central bank in part for trying to hold on to the Gold Standard. This standard tied the Fed’s hands, preventing it from increasing the money supply to help collapsing banks and businesses. Once countries got off the gold standard—including the U.S. in 1933—their depression stopped, and growth returned. To fully abandon the standard, President Franklin D. Roosevelt (FDR) required citizens holding more than $100 worth of gold to sell it back to the government.
The crisis was visually compounded by the Dust Bowl, a major environmental disaster. This was caused by severe drought combined with poor agricultural practices: mechanization in the 1920s led migrants to plow up "millions of acres of native prairie grass," which had deep root systems that kept the soil in place. When drought hit in 1931, the soil turned to dirt, leading to massive windstorms that spread dust to Chicago and Washington DC by 1935. While harmful to the panhandle region of Oklahoma, Colorado, Kansas, and northern Texas, the effect on the macroeconomy was "relatively minor".
The response to the crisis was transformative. President Herbert Hoover initially did "not do much" against his instinct, following the advice of his advisor Andrew Melon, who believed recessions were "healthy and necessary" to liquidate bad businesses. Hoover later regretted his lack of action. FDR then implemented the New Deal. Crucial initiatives included the FDIC (Federal Deposit Insurance Corporation), which guaranteed deposits and immediately stopped the bank runs. Public works programs like the WPA (Works Progress Administration) hired the unemployed for public works such as schools and libraries, giving employees "dignity and... purpose". FDR’s Fireside Chats, using the new technology of the radio, allowed him to communicate with "their own voice to nearly everybody," providing needed optimism.
Ultimately, the unemployment rate, which was 9% at the start of World War II, came down to 2% by the end of the war, validating the ideas of economist John Maynard Keynes, who argued that the government needs to "step in and be the spender of last resort" during a recession through deficit spending.
Professor Christopher Clarke concludes that today, the US is not seeing anything close to the magnitude of the Great Depression. The existence of federal deposit insurance and social assistance programs provide necessary buffers. However, current debates over rising tariffs and the moral role of the wealthy—who, unlike the rich in the 1930s, had their wealth largely preserved during the 2008 and COVID crises—echo the concerns of the Depression era.
