When Everything Broke
The Great Depression (1929-1939) was the deepest modern economic contraction: US GDP fell 30%, unemployment hit 25%, and world trade dropped by two-thirds.
The Cascade:
- Wall Street crash (1929): Destroyed wealth.
- Bank failures (1930-1933): Panics destroyed the payments system.
- Monetary contraction: The Fed tightened money.
- Fiscal austerity: Budgets were cut.
- Trade war: Smoot-Hawley tariff (1930) choked trade.
| Stage | What Broke |
|---|---|
| 1929 | Stock bubble burst |
| 1930–33 | Bank panics & runs |
| Smoot-Hawley | Trade collapsed |
Tip: Crashes had happened before. The catastrophe lived in the amplifiers: failing banks and golden handcuffs.
The Lesson Machine
Gold Standard: Countries on gold defended reserves with high rates. Left gold earlier recovered faster (Britain 1931, US 1933).
Keynesian Diagnosis: The paradox of thrift means when all save, demand collapses. where substitutes collapsed private demand.
Friedman-Schwartz: The Fed turned a recession into a catastrophe by failing as lender of last resort.
| Failure | Institutional Answer |
|---|---|
| Bank panics | Deposit insurance |
| Trade war | Multilateral rules |
| Gold deflation | Managed rates |
Tip: In 2008, Bernanke applied 1930s lessons, flooding the system with liquidity to prevent a repeat.