According to the economic historian Christina D. Romer, a professor at the University of California, Berkeley, the great volatility of stock prices at the time also increased consumers’ feelings of uncertainty, inducing them to put off purchases until the uncertainty was resolved. Spending on consumer durable goods like autos dropped precipitously in 1930.
Next came a series of bank panics. From 1930 to 1933, more than 9,000 banks were shuttered, imposing losses on depositors and shareholders of about $2.5 billion. As a share of the economy, that would be the equivalent of $340 billion today.
The banking panics put downward pressure on economic activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses was wiser than accounts at local banks.
As they withdrew their funds, the banking system’s normal lending and money creation went into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation pushed up the real burden of households’ debts.
Second, the disappearance of so many banks made credit hard to come by. Small businesses often rely on established relationships with local bankers when they need loans, either to tide them over in tough times or for business expansion. With so many of those relationships interrupted at the same time, the economy’s ability to channel financial resources toward their best use was seriously impaired.
Together, these forces proved cataclysmic. Unemployment, which had been 3 percent in 1929, rose to 25 percent in 1933. Even during the worst recession since then, in 1982, the United States economy did not experience half that level of unemployment.
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LOOKING back at these events, it’s hard to avoid seeing parallels to the current situation. Today, as then, uncertainty has consumers spooked. By some measures, stock market volatility in recent days has reached levels not seen since the 1930s. With volatility spiking, the University of Michigan’s survey reading of consumer sentiment has been plunging.
Deflation across the economy is not a problem (yet), but deflation in the housing market is the source of many of our present difficulties. With so many homeowners owing more on their mortgages than their houses are worth, default is an unfortunate but often rational choice. Widespread foreclosures, however, only perpetuate the downward spiral of housing prices, further defaults and additional losses at financial institutions.
The Fed and the Treasury Department, intent on avoiding the early policy inaction that let the Depression unfold, have been working hard to keep credit flowing. But the financial situation they face is, arguably, more difficult than that of the 1930s. Then, the problem was largely a crisis of confidence and a shortage of liquidity. Today, the problem may be more a shortage of solvency, which is harder to solve.
In 1930s’ People panic, they didn’t spend, bank panic pissed people off put their money under mattress instead in the bank, like my brother did his pocket money some of Indian still do this because they don’t trust bank I am told! Right this instant, while I am typing this- Skype popping out, to want to chat with me has Indian name-funny!! Any way and another thing that bank made hard to credit to business so they couldn’t borrow money from the bank and people lost confidence and not much thing to sell. V Currently, by the way it is still called a “depression” really if they did it deliberately fold out? Also similar features, mortgage is bigger then house value so default and foreclosed. Make it depressed because can’t trust policy, then working hard keep money flow but not enough to pay a debt.
Aha, here is the thing economists are not fortune-tellers, but he is saying “it won’t be a same as the one 1930' but then we shouldn’t believed what he is saying!” Gosh so I say there would be no more depression because I would like to then finish off nicely! But don’t believe what I am saying OK?
Update:I feel-wishfulthinking- that everything ok as one of most beautiful orchid sick last few week, as I couldn’t understand why, considering everything what I have don right, just been bit sick, I thought well if you want to die that is ok which make me very sad but that is what you want go for, then middle of night around 2am, I don’t know why but I pulled its root out from the pot, here I found a little plastic container attached underneath and water remain there, soil couldn’t drain out, because of the thick piece of cloth warp around the pot that is why I couldn’t see the container which I put it there for sometime ago and forget. Within less then few hours it is recovering, great that is my little orchid I might have flowers too soon! wouldn’t nice if economy survival like that!
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