During the 1930s and 1940s, the United States experienced a period of extreme economic instability and decline now referred to as the Great Depression. The Great Depression led to massive unemployment, insecurity around the banking system due to bank closings, and a dramatic drop in the stock market. Economists and historians around the world have pondered whether the Great Depression could happen again. This essay will discuss the events that led to the Great Depression, as well as an analysis of the likelihood that the Great Depression could happen again in the United States.
The Great Depression occurred after a period of significant economic boom in the late 1920s, particularly in the stock market where the robber-barons were making fortunes off speculations. Compounding this situation was the fact that after World War I, the gold reserves were no longer sufficient to back the money needed to run the world economy. The Federal Reserve (The Fed) wanted to raise the discount rate to slow the boom, but was slow to do so because it meant raising interest rates for businesses and individuals who needed credit. At that time, the Fed did not have the ability to set margin requirements which would have overcome this problem. In 1929, the Fed did raise the discount rate, but the destructiveness of the excessive stock market speculation had already taken its toll on the US economy. The raising of the discount rate only hastened the inevitable recession.
The US economy runs in cycles; in viewing the history of the US economy their are continuous cycles of recession and recovery which make up period of growth or periods of depression. Depression in an economy occurs when “the recession is severe and prolonged”. Thus the recession that occurred after the discount rate was raised by the Fed in 1929 was only the beginning of a long period of recession that affected the entire national economy.