The Great Depression Lessons from History

Newspaper headlines around the world in 2008 asked whether the world’s economies were heading for another “Great Depression.” Long-past economic history suddenly captured the attention of economists, journalists, and others. But what was this event and why—even though it occurred the best part of a century ago—does it still hold such a prominent place in our economic memories? In the early 1930s, instead of benefiting from economic growth and improved standards of living, people witnessed a huge decline in the level of economic activity. There was great economic hardship: large numbers of families struggled to obtain even basic food and shelter. Some sense of the desperation during these times can be found in oral histories. Here, for example, is one person’s story of what it was like trying to find a job:

I’d get up at five in the morning and head for the waterfront. Outside the Spreckles Sugar Refinery, outside the gates, there would be a thousand men. You know dang well there’s only three or four jobs. The guy would come out with two little Pinkerton cops: ‘I need two guys for the bull gang. Two guys to go into the hole.’ A thousand men would fight like a pack of Alaskan dogs to get through there. Only four of us would get through. I was too young a punk. [1]

The personal suffering is less apparent in the figure below, but this picture does reveal the extraordinary nature of those times. It shows real gross domestic product (real GDP) in the United States from 1890 to 1939. Three things stand out. First, the level of economic activity grew substantially during this half century. This is normal: economies typically grow over the long haul, becoming more productive and producing more output. Second, although the level of US economic activity grew substantially over this half century, there were many ups and downs in the economy during the late 19th century and early 20th century. Third—and most important for our purposes—the period from 1929 to 1937 stands out from the rest. This was not a minor blip in economic activity; the US economy suffered a collapse that persisted for many years.