Great Depression

It's the feeling you get after a major breakup, where you sit in front of the TV for 12 hours at a time, shoving mass amounts of Cheetos in your mouth and obsessively checking your ex's Instagram feed. One form of Great Depression.

But the Great Depression we're talking about here describes a key period in the 20th Century. Specifically, the Great Depression represents the worst economic downturn in American history. Ever wonder why your great-grandpa spent so much time burying mason jars filled with quarters in the backyard, while obsessively’ mumbling about banks?

Starting in the late 1920s, the Great Depression lasted until the early 1940s, ending just as America prepared for entry into World War II. Nothin' like a lotta European based demand for American military product to take a country out of the doldrums, right? (Thanks, Germany.)

The Depression included mass unemployment, widespread bank shutdowns, significant foreclosures, starvation, and long-lasting trauma. But first...a bit about the name.

When economic conditions are good and the economy is growing, that's called an expansion. When the economy slows down, that's known as a recession. If a recession lasts for a long time and gets particularly bad, it becomes a depression.

And when a depression goes on for over a decade and spreads throughout the world, where it contributes to mass political dislocation, which eventually feeds into the causes of World War II...then it becomes the Great Depression. Yeah…”great” not in a...good way.

Ok, so it's 1918. World War I is over. The countries of Europe have been bombed out and are now bankrupt, and the U.S. has emerged from the war as the key economic power in the world.

Now it's the 1920s. The U.S. is the center of a world economy. The Jazz Age is in full swing. Gatsby is hosting lavish parties in West Egg. Babe Ruth is partying with Charlie Chaplin in a speakeasy owned by Al Capone.

The U.S. is benefitting from a boom in consumer products and a rapid expansion of technological improvements. Radios, cars, and refrigerators are becoming common household items.

Meanwhile, financial speculation is rampant. You can make a killing in a Florida land deal. Or buy booming tech stocks, like Radio Company of America or Consolidated Flapper Hats or...whatever. But things start to get shaky toward the end of the decade. Commodity prices have been falling for some time, leaving farmers out of much of the prosperity of the 1920s.

Meanwhile, the stock market is pumped up by unstable margin trading. Basically, people have been borrowing money to bet on stocks. A trader has $1,000 in his account. His broker lets him borrow another $500 on margin.

"Margin" just means that the trader is allowed to borrow money to purchase more stock. The shares of stock become the collateral for the loan. If the broker ever wants the money back, he can make a margin call, meaning that the broker can demand that the trader sell the stock immediately in order to pay the money back.

The system works well when the stock is going up. It can lead to disaster when stocks decline quickly.

First, a look at how it works in the good times. The trader buys $1,500 of stock, purchasing 100 shares of Amalgamated Fedora Inc. at $15 each. The stock goes up to $20. The trader sells the stock for $2,000, pays back the $500 he borrowed, plus maybe $25 in interest. He keeps the additional profit. The trader made $475 from his $1,000...a 47.5% return, even though the stock only went up 33%.

The additional dough from the margin accounts further inflates the stock bubble of the 1920s. But it also makes the bubble more unstable. Margin can act to pump up the profits when the stock market rises. But it also acts to deepen the pain when stocks go down. Traders can lose more than they have...and brokers can get caught with large amounts of outstanding debt that no one can pay back.

Same trader. Same $1,000 account. Same $500 margin...all invested in 100 shares of Amalgamated Fedora at $15 a share. But now the doomsday scenario. The bubble bursts. Amalgamated Fedora drops from $15 a share to $4 a share. The broker makes a panicked margin call. The trader sells for the $400 he can get. Now he’s lost $1,100 on his $1,000 account; he still owes $100 to the broker.

Meanwhile, the broker is on the hook for that $100. But the broker’s also loaned the same margin to 100 other clients. Each of them owe $100...the broker is $10,000 in the hole.

In the economy of the 1920s, cheap credit has pumped up other parts of the financial industry. It’s not just the stock market. Speculation has run rampant, creating an unstable system susceptible to shocks.

Which brings us to 1929. The troubles culminate in a massive stock market crash. It’s not the plunge in stock prices that causes the Great Depression. But the crash acts as a curtain raiser for much of the hardships to come. Following the Wall Street bloodbath, things quickly get bad for the rest of the economy. Businesses collapse. Unemployment skyrockets. Banks start to fail. There are mass foreclosures and bankruptcies. It’s Grapes of Wrath time.

The people in charge, like President Herbert Hoover, and the Federal Reserve...don't really know how to deal with this kind of downturn. Previous economic panics have occasionally been sharp and painful, but they’ve always corrected themselves quickly. Not after 1929. Things just keep getting worse over the coming years.

Now it's 1932. Election year. President Hoover is defeated by Franklin Delano Roosevelt. FDR gets elected on the promise of a New Deal: a series of measures meant to reinvigorate the economy and regain confidence in the financial industry. FDR and a newly elected Congress immediately started passing relief actions. Banking reform. Financial regulation. Also, the government starts spending money on relief efforts and projects meant to get people back to work.

The New Deal takes its inspiration from British economist John Maynard Keynes. He theorized that governments should combat economic troubles with deficit spending in an effort to stimulate demand and give business a kick start.

After 1932, things improve, though a full recovery takes the rest of the decade. Ultimately, the preparations ahead of WWII and eventually the boost from the war-time economy pulled the U.S. out of the Great Depression.

So yeah, it uh...didn’t even need to go to counseling.