From the Great Depression to Now, What Did We Learn?

 

Hello everyone,

Today, let's take a step back and jump into the past, to the 1920s. It was right after WWI, and people were celebrating after enduring a tumultuous period. The American economy continued to grow. Music, parties, glamour. Everything was perfect, well, at least they felt perfect, until the stock market crash on October 29, 1929, the Black Tuesday. No one anticipated it coming through. Suddenly, the illusion of the perfect glamorous lifestyle was shattered. People panicked. They ran to the bank all at the same time, banging on the door, demanding their money back. And the bank? The bank does not have reserved money to return to those people. "We're screwed," everyone noticed and felt that heaviness and worries lingering in the air. Here we mark the start of the Great Depression.

Economically, Depression is a more severe form of recession. A recession occurs when the economy starts contracting, with the aggregate demand (see it as GDP) decreasing and shifting to the left on the price level vs GDP graph. Aggregate demand shifts due to changes in consumption, investment, government spending, and net exports (the amount of export minus the amount of import). The Great Depression in 1929 started with multiple flaws, and did we actually learn from them?  

First, we have the problem of people living off credit. In our everyday lives, we all know that spending money on a credit card means borrowing from the bank, and we are responsible for paying the credit card bill as a form of debt repayment. However, in the 1920s, credit cards were still in their early stage of development. Of course, they were not as well-regulated as they are now. In the 1920s, credit cards did not have interest, so a cardholder would be all good if they paid in full by the end of each month. People used credit cards excessively to buy furniture and cars, resulting in large debts. With over-consumption not based on actual money but on some imaginary value called credit, the people struggled to pay back their debt, putting strain on businesses and banks. In other words, people in the 1920s were basically taking large, expensive stuff from stores without paying, so the businesses and banks weren't actually profiting. Corresponding to the shifters of the aggregate demand curve, paying with credit contributes to a decrease in money consumption.

Next, let's cover the Hawley-Smoot tariff. To protect the domestic market, the Congress decided to enact a high tax on imported goods. Because of the high tax, the importer had to increase the price of the goods imported in order to make money. The ones that feel the consequences were obviously the people in America, who had to pay more to afford those products. This resulted in more people becoming poor due to their inability to afford products. 

You probably heard that during the Great Depression, banks took the most blame. In The Grapes of Wrath, Nobel-winning author John Steinbeck criticized the bank for scamming the money out of people during the Great Depression mainly due to bank's struggle to give people back their money. This brought up the concept of the bank's operation. Many people had the misconception that bank will keep their money stored at all time and kept the money untouched, but in reality, bank has to make money to, and purely storing their users' money does not give them profit. Usually banks reserve a certain amount based on the reserve ratio of money you save there. For the rest of the amount outside of the reserved ratio, banks would lend it to borrowers with interest and expect their borrowers to return the money on time. From this process, we know that banks don't always have your money. Still, people are able to get their money back from banks if they go on a regular day because banks can still have enough money stored to give you back your money. In contrast, during the Great Depression, when hundreds of people were demanding money all at the same time, the bank easily ran out of money to give back. This occurrence is called a bank run, and it's one of the many reasons banks close down.

With all the flaws mentioned, did we actually learn anything from them? The answer is no. Inevitably, history has to repeat itself. On March 10, 2023, the Silicon Valley Bank closed down due to a bank run. Silicon Valley Bank was a bank that lent the majority of its money to tech startups. Usually supporting tech startups' entrepreneurial ventures is high stake investment. It takes a long time for tech startups to make profit and pay back the loans to the bank. At that time, the tech industry faced an economic downturn. As a result, many clients at Silicon Valley Bank began withdrawing their funds, triggering a bank run. Fortunately, as an improvement from the Great Depression bank run, the government intervened and returned the clients' money at full price even if the FDIC insurance did not cover the full price. The government's involvement prevented the risk of losing faith in the banking industry. 

From all the things that happened during the Great Depression to the closing of the Silicon Valley Bank, there are a few things we should takeaway though the history did not takeaway the important lessons. When we are anxious about our money, please stay calm because our desperation to draw our money out will only contribute to the bank run. Trust that the bank will have your money ready once their borrowers paid back the loans. You want to split your money up so you don't put them all in the same bank; the saying of don't put your eggs in the same basket exists for a reason. 

That's all for today! Follow us on Instagram @businessnewsandmore to keep track of new articles like this. Upcoming articles: book recommendation, news updates, financial advice? Let me know what you want me to cover