These are very good questions and to answer them is to examine where the financial position of this nation was economically prior to its arrival.
The Great Depression had developed several key economic factors prior to this historical event period. Before we address them, let us take a closer look at the time period of the Great Depression. The Great Depression occurred September 4, 1929, and there is much debate as to the end of its period since there was a steady economic decline that occurred well into 1933. Economic indicators point to 1939.
Here are the basic economic factors that occurred leading to the Great Depression and then continued afterwards:
• U.S. Gross Domestic Product (GDP). The Gross Domestic Product growth rate measures the increase in value of the goods and services produced by an economy. In the beginning GDP (factor levels and measures for then) was showing a level of 1000 billions of constant dollars, later falling to about 750. GDP slowly climbed back to 1000 prior to 1939 and then slightly above following this year. Roughly a 25 percent decline in GDP. Currently, we see the GDP in the U. S. expanded 1.9 percent in the first quarter of 2012 over the previous quarter. Historically, from 1947 until 2012, the United States GDP growth rate averaged 3.25 percent reaching an all time high of 17.2 percent in March of 1950, and a record low of -10.4 percent in March of 1958.
• Unemployment Rate. in 1929, unemployment rate estimate was about 4.9 percent and rose to about 25 percent as a result of the Smoot-Hawley Tariff bill passing on June 17, 1930. The bill originally failed in the Senate prior to motion to recommit resulting in its passage. The Tariff bill raised U.S. tariffs on over 20,000 imported goods, representing a record level for the time and is still ranked the second highest in U.S. history. The Tariff Bill resulted in the collapse of global trade. In 2011, the Bureau of Labor Statistics reported 17.8 percent of persons with a disability were employed. In contrast, the employment-population ratio for persons without a disability was 63.6 percent. As of May 2012 the unemployment rate is at 8.2 percent a decline from earlier in the year of 10 percent.
• Dow Jones Industrial. In 1929 the stock market index average was just below 400 and declined to half its average level of 200 for Black Tuesday, October 29, 1929. In 2007, the average of 14,000 dropped to 6,500 average in beginning of 2009. Current level average for 2012 is sitting a little above 12,400. Many feel that the stock market crash of 1929 was merely an end result of prevailing economic factors and not the cause of the Great Depression.
• Economic Factors. Although interest rates remained low by mid-1930 it combined with many reluctant to borrow, resulting in consumer borrowing and investing to be depressed. Automobile sales declined to levels lower than three years prior, cost of goods prices declined as salary wages remained consistent into 1930. The economic impact of the depression began to take hold when farming and commodity prices plunged, and major employment sources logging and mining also saw rising unemployment. Loggers and miners were then unable to secure other employment due to few other jobs for them. The U.S. encountered the highest unemployment change of 607 percent nearly three to five times the level found in European nations.
Monetary economists point to the fact of the U.S. Federal Reserve had contracted the money supply adding to the decline of consumer confidence with the economy. It was then advantageous for one to hold their money and would avoid further losses by staying clear of investing in the markets. As the buying power increased from holding money to buy even more goods led to the eventual drop in demand.
Combining the mistakes of reducing the money supply by the Federal Reserve and significant mistakes by policymakers, resulted in a what was thought of as a mere recession prior to now descending to a Great Depression.
Likewise, during this period other foreign currencies were linked to the U.S. dollar by the fixed exchange rate of the gold standard leading to European nations to sustain unemployment rates causing them to increase from 129 to 232 percent.
The lesson learned from the Great Depression is the Fed’s failure to manage central banks currency exchange rates on the dollar actually resulted in the U.S. importing more inflation. With interest rates on the decline currencies ended up being devalued rather than increasing in value. Global inflation was combined with global deflation as the economic barometer during this period pushed higher by devastation to commodity-export economies.
The economic offset to the Great Depression was the resulting increase in number of millionaires and its highest number on record. This was attributed to those individuals who were the owners of the primary producers for those principal beneficiaries of this time period.
Whether the U.S. is in the middle of another occurrence of the Great Depression is dependent on whether or not the Federal Chairman and Goldman Sachs have recognized these factors which led to its origination. The telling sign will be whether policymakers decide to tighten further the factors currently with the recession by the passage of bills which impact global markets. In the Great Depression policymakers were hesitant to move too quickly with additional policies for the fear of further destabilizing the position of the dollar on the global market.
With central banks currently increasing their gold reserves as eurozone nations central banks collapse on insolvency, rising unemployment in financial sectors and distrust of Wall Street global financial services blundering billions, all are sending similar messages. Namely, the consumer confidence is at another all-time low and unemployment levels are at an alarming all-time high globally.
The Gold Standard was also encountering difficult times during the Great Depression. Every major currency of the time left the gold standard as seen by Great Britain being the first. Gold reserves declined as the Bank of England began to cease exchanges of pound notes for gold, while the pound was being supported by the foreign exchange markets. Only the U.S. and Italy remained with the gold standard during 1929 to about 1933, and few of then “gold-bloc” nations remained, Switzerland, Belgium, Poland, and France. They remained in the gold standard up until about 1936. Interesting enough China, on the other hand, remained in the silver standard and avoided the depression entirely. The resulting message of the Great Depression is that the gold standard was a good predictor of the economic times and how long the economic recovery would take.
Looking at all the economic factors and policies which created the Great Depression. Are we one bill away from its return? Federal Reserve Chairman Ben Bernanke is definitely got to be wondering considering his message of keeping current interest rates low for the next several years. The noncommittal approach by the Fed Chairman is similar to the Great Depression where the Feds then were reluctant to act too quickly for fear of a further collapse of the dollar. Proposing economic policies at the moment or near future is not going to be likely, rather a response of only additional quantitative easing’s to come. For the fear still is ever present that passing an economic bill could mean devastation to the U.S. dollar on the world market.
The one strong consistent point is this. The Great Depression rose out of declining consumer confidence as a result of the Federal Reserve declining to increase the flow the dollar currency. Then the Fed’s failure to manage central banks currency exchange rates on the dollar actually resulted in the U.S. importing more inflation. So the collapse of the euro will cause U.S. pensions to decline further as stock market investments do not like any uncertainty. According to Morgan Stanley Countries Index (MSCI), the total shares of pension accounts amount to 10 percent of the actual market capital. So the occurrence of another Great Depression could certainly evolve next in eurozone nations impacting U.S. businesses abroad who depend on foreign labor to keep production costs low and profit margins high.
The next occurrence of a Great Depression could very well be globally catastrophic to many nations and currencies.