To better understand the economic theories behind the Great Depression, one must first know about the Great Depression. The Great Depression was the worst economic fall in the industrial world. It initiated in the Stock Market crash of October 1929. Though it briefly bounced back in April 1930, the Great Depression lasted until 1939. There are many theories as to what contributed to the Great Depression, and this blog seeks to explore only one theory.

This blog intends to explore the idea that as the stock market crashed in October 1929, banks experienced customer panics in which customers removed their savings, causing the banks to run out of money. In addition to the bank panics, the problem was exacerbated because the United States functioned financially on the Gold standard at pre-war rates.

According to David C. Wheelock, Group Vice President and Deputy Researcher at the St. Louis Federal Reserve, banking panics result from customers losing confidence, thus causing bank runs. The runs themselves drank the bank of their reserves, which causes a loss of reserves forcing backs to contract loans. The contraction of loans then causes the money stock to fall, which results in reduced spending. Reduced spending, in turn, equates to unemployment, deflation, and lower output of production.[1]

Economists Ben Bernake and Milton Friedman both argue that the bank runs of 1930 that followed the crash of 1929 are what made the Great Depression. They believe that the Federal Reserve could have stepped in to offset the fall.[2]  However, they differ on what caused or contributed to the collapse of the economic system. Friedman contends that the money stock changes resulted in the contraction of income.[3] While Bernake agrees with Friedman, he does take a different approach explaining why bank runs caused prolonged depression.

Bernake contends that there are two primary issues in the financial collapse. The first was a loss of confidence in financial institutions such as commercial banks, and the second widespread debtors’ insolvency.[4]  Bernake argues that the closure of over nine thousand banks during the bank runs contributed significantly to the overall interruption of credit flow, contributing to output contraction.[5]

So what does this mean in laymen’s terms? It means that when the stock market crashed in 1929, people around the country got nervous and started pulling their money out of the banks.  This is known as a run on the bank. It caused banks to have to liquidate their assets in order to cover their customers’ deposits. Banks did not often keep large sums of money in their safes; most invested it for their customers. When banks could not liquidate their assets quickly or received lesser than their value, it would often force them to shut down completely. Added to this was the devaluation of their assets by multiple banks attempting to liquidate at one time.

As banks collapse, the amount of money in circulation decreases, resulting in individuals choosing to spend less money. A decrease in consumer spending meant that factories had to either layoff employees or reduced their wages. It also causes a rapid deflation of currency to occur. In the case of the Great Depression, some 15 million people were without jobs. People from all classes went bankrupt and failed to pay their debts or mortgages, which also contributed to the bank failures.  Homelessness and a lack of food touched many Americans during this time. There were long lines of people waiting at bread lines and the soup kitchen.

However, as with all things, there are exceptions to the rule. Though the Great Depression touched nearly 15 million people, not every area was affected as hard. Milton S. Hershey did what he could to protect his town and employees from feeling the effects of the Great Depression. Significantly, Hershey embarked on a massive building project that included the Hershey Hotel, Catherine Hall, The HersheyPark Arena, two theaters, and the Windowless Hershey’s Office Building.[6]  At a time when Hershey could have laid off employees, he purposefully chose to keep his employees working. Hershey hired some six hundred unemployed due to the depression to work on the construction projects.

Bibliography

Primary Sources

Frank, Glenn. “Fourteen Points on the Market Crash.” St. Louis Post Dispatch. October 25, 1929.

Mccutcheon, John T. , Artist, Publisher Chicago Tribune, and Copyright Claimant Chicago Tribune. A Wise Economist Asks a Question. , ca. 1931. Photograph. https://www.loc.gov/item/2016683751/.

Secondary Sources

“Milton S. Hershey – Chocolate Maker and Altruist,” June 25, 2020. https://www.mhskids.org/about/history/milton-s-hershey/.

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, no. 3 (1983): 257-76. Accessed November 27, 2020. http://www.jstor.org/stable/1808111.

Hummel, Jeffrey Rogers. “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner.” The Independent Review 15, no. 4 (2011): 485-518. Accessed November 27, 2020. http://www.jstor.org/stable/24562480.

Wheelock, David C. “The Role of Bank Failures and Panics.” Federal Reserve Bank at St. Louis. Lecture presented at the Economic Education Workshop. Accessed November 27, 2020. https://www.stlouisfed.org/the-great-depression/curriculum/economic-episodes-in-american-history-part-6

^{[1]  David C. Wheelock, “The Role of Bank Failures and Panics,” Economic Education Workshop, Lecture presented at the Economic Education Workshop, accessed November 27, 2020.}

^{[2] Jeffrey Rogers Hummel, “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner,” The Independent Review 15, no. 4 (2011): 485. Accessed November 27, 2020. http://www.jstor.org/stable/24562480.}

^{[3] Ibid. 486.}  

^{[4]  Ben S.Bernake, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” The American Economic Review 73, no. 3 (1983): 258. Accessed November 27, 2020. http://www.jstor.org/stable/1808111.}

^{[5] Hummel, 486.}

^{[6] “Milton S. Hershey – Chocolate Maker and Altruist,” June 25, 2020, https://www.mhskids.org/about/history/milton-s-hershey/.}