Many comparisons have been drawn between the current state of the U.S. economy and the Great Depression, but do we really know what happened? Let's go back 90 years and revisit the events that took place during the Great Depression.

The term hobo was coined during the depression. Hobos were jobseekers who hopped aboard freight trains in search of work in neighboring counties. Despite the fact that haircuts only cost a dime back then, it became commonplace for family members to cut one another’s hair. Children dressed for school in patched-up hand-me-downs and donned shoes held together with wire and cords. The formerly-affluent could be seen digging through trash cans in search of their next meal. 

Wages were cut in half during the depression. Workers who previously earned a dollar an hour received 50 cents and were happy to have it. Many families took turns eating; half the family would eat on even days and the other half on odd days. Children as young as 13 were told to leave the family home and go find work. The depression was one of the most difficult periods in U.S. history.

The 1929 Market Crash

The Great Depression began on Black Tuesday – a day that will forever live in infamy – October 29, 1929. The stock market fell hard and fast touching off a disastrous period that stretched well into the 1930s. Prior to the crash, investors made highly-leveraged stock purchases with debt-to-equity ratios as high as 10 to 1. When the market crashed, so many investors defaulted on loans that it affected the banking system.

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In the two short months following Black Tuesday, 650 banks failed. The next year would see 1,300 more bank failures. The fear of bank failures led to a run on the banks which resulted in more bank failures. Families looked on in horror as they watched their life savings vanish into thin air. In all, one-third of U.S. banks failed during the Great Depression. 

Consumer Confidence

Two-thirds of the U.S. economy is comprised of consumer spending. When people stop spending money, the economy collapses.

Between the stock market crash and widespread bank failures, consumer confidence hit an all-time low during the Great Depression. The only spending that took place was on bare necessities like food and shelter. Meat and vegetables were out of reach for many American families. They made do with meals made of cheaper ingredients such as rice and beans. 

Economic Measures

The unemployment rate peaked at 25% during the Great Depression. One in four people had no job of any kind. There was no such thing as unemployment insurance or welfare or food stamps. The country went through a deflationary period that made existing debts seem impossibly onerous compared to borrowers' wages. Tax revenue and international trade dropped by 50%, as did wholesale prices and industrial production. Widespread panic resulted in the hoarding of consumer goods which led to shortages.

Are We Headed for Another Depression?

The depression-era hoarding, shortages, and unemployment sound eerily familiar. Are we are headed for another depression?

While anything is possible, it is highly unlikely that we will ever see a repeat of the Great Depression. Many safeguards have been put in place to prevent that from happening. Banks are backed by the FDIC (Federal Deposit Insurance Corporation), which guarantees deposits to $250,000. Tighter restrictions are placed on investors that set margin requirements at 2-to-1. Most importantly, the Federal Reserve actively manages U.S. monetary policy to help maintain a healthy economy. During the Great Depression, the fed sat on their hands and let it happen.

Since the advent of the Coronavirus, the federal reserve has pumped trillions of dollars into the U.S. economy and cut interest rates to near zero. These measures help lessen the fallout and maintain liquidity in the banking system. 

The $2.2 trillion rescue package recently passed by congress provides a number of measures aimed at stimulating the economy. The bill contains $1,200 in direct payments to consumers, $600 per week in additional unemployment insurance, $500 billion in grants and loans for municipalities and corporations, $350 billion in loans for small businesses, a $25 billion airline bailout, delayed employer payroll taxes, and the suspension of federal student loan payments through September. On the heels of that, the fed just announced another $2.3 trillion lending package to further stimulate the economy.

Conclusion

Our country has experienced civil war, two world wars, and numerous tragedies such as 9/11. Through it all, we have remained strong and we’re still standing. We will get through this and be stronger for it.

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