Kathleen Day: What Can The 1929 Crash Teach Us About The 2020's Economic Crisis? Recessions and financial crises are woven into America's history. Kathleen Day takes us back to the Great Depression to explore what caused it and how it shaped the future of finance in the U.S.

Kathleen Day: What Can The 1929 Crash Teach Us About The 2020's Economic Crisis?

  • Download
  • <iframe src="https://www.npr.org/player/embed/945081586/945380134" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


It's the TED Radio Hour from NPR. I'm Manoush Zomorodi. And let's start today's show in the 1920s.


FRANKLIN ROOSEVELT: Let me be concrete. We have passed through a great war...

ZOMORODI: A hundred thousand Americans had died in World War I.


ROOSEVELT: ...An armed conflict which called forth every resource.

ZOMORODI: And 20 to 40 million lives were lost worldwide to the 1918 pandemic.


ROOSEVELT: I like to think that in this respect, also, we are moving forward.

ZOMORODI: And after all that devastation, people just wanted to forget about their troubles.


BEN SELVIN: (Singing) Blue skies smiling at me. Nothing but blue skies do I see.

ZOMORODI: The Roaring '20s, a time of growth and prosperity, or so it seemed.

KATHLEEN DAY: It was the first time that in the United States there were more people - as many or more people in cities rather than in rural areas, either on the farm or tied to the farm economy. You know, there was jazz. There were telephones, and people can drive cars. You have ribbons of highway that were being built and shopping malls, fast food, all of it.

ZOMORODI: This is author and journalist Kathleen Day. She studies the history of finance, especially during times of crisis, and she says that the '20s were a decade of excess, when the goal became to dress better, spend more and outdo your neighbors.

DAY: People began to start to compare themselves with each other in a way that they hadn't previously.

ZOMORODI: Like in this reenactment of a 1922 dry cleaning ad.


UNIDENTIFIED PERSON #1: So you're invited out to spend a week with Mr. and Mrs. Jones. And if there is one thing you're always striving to do, it's to keep up with the Joneses.

ZOMORODI: People started using credit like never before, spending money that they didn't have.

DAY: It began to be acceptable to borrow money for items that were not essential.

ZOMORODI: As F. Scott Fitzgerald wrote about New York City in 1926, the parties were bigger, the pace was faster, the morals were looser, and the liquor was cheaper.

DAY: It was a significant mental shift.

ZOMORODI: And part of why people were spending so much money was because of something not that sexy - war bonds.

DAY: This was Americans' first time really buying some type of security en masse. So by the end of the war, when people got repaid their money, Americans as a population had had a very good experience with investing in securities. So that kind of sets the stage for the '20s when it comes to finance.

ZOMORODI: And it also sets the stage for the biggest stock market crash of the century in 1929.

DAY: It was a recipe for disaster. It created what we now know as the Great Depression.

ZOMORODI: Depressions, recessions, bubbles and the blue skies - it can be the best of times.

TAMMY LALLY: Money became a source of happiness.

ZOMORODI: And then just a few years later...

ELIZABETH WHITE: You are running out of money.

ZOMORODI: The U.S. economy as we know it, powered by credit and consumerism, has been around for about 100 years, building up unbelievable wealth but also melting down over and over again. And you got to wonder, are we repeating the same financial mistakes? And so on this episode, we'll explore personal stories and lessons from the past and ideas about how we can learn from the current financial crisis to build a more stable future.

And so back to Kathleen Day. She says that many of our current financial systems actually came out of the Depression and that the 1920s and the 2020s have one big thing in common.

DAY: The disparity in wealth that we have today - the last time it was this great is in the '20s.

ZOMORODI: OK. So let's go to the end of the decade, 1929. The stock market crashes, but why? Where was the government and the Federal Reserve, which is supposed to keep the banks in check?

DAY: Well, it was - what happened is the Fed had raised rates at the beginning of the decade, and then it kept rates very low in the middle of the decade. And it did that with an eye to helping Europe. Remember; we'd all just come out of this war, so we're going to keep our interest rates low relative to their rates so that people will invest there.

Well, of course, that made it easier to borrow money in the United States, so there was too much borrowing of money. It was too much borrowed money chasing too few good assets, so there was a sort of no-holds-barred we'll lend you money. And if you keep lending people money to go out and buy something, you've created a demand that you can describe as artificial. So it's a bubble.

And the Fed was so worried about doing anything, of lowering rates, because they were afraid of piercing that bubble. But they had helped create it. And by allowing it to go on, they allowed it to grow bigger, so eventually it's unsustainable. And then you had Black Thursday, where you had the real bloodbath.


DAY: And when the dust had settled, stock prices had fallen 85% from their high. So it was a big drop, and people lost their shirt.

ZOMORODI: I mean, it was a total disaster, right? Wall Street just got wiped out, and that made a lot of people freak out about getting their cash from their banks. But did the government know how to stop people from having a run on the banks?

DAY: Well, remember; there was no deposit insurance, so people were running to their banks and saying, we want our money. They were afraid. And so right after the crash, you had about 30 to 40% of the banks in the United States fail in about three years. And the Fed didn't exercise its authority as a lender of last resort. The Fed has this very powerful tool as a central banker where it can go in and give them cash so that when everyone comes running in and says, give me my money, give me my money, you have the cash to give them. And this is called the paradox of banking. If you can go in and get your money from the bank, and you know you can, you don't want it. But if you think there's any chance you can't get it, that's when you show up and say, fill my - fill the suitcase with my cash.

ZOMORODI: (Laughter).

DAY: Give me my money.

ZOMORODI: OK. So the Fed had the authority to give banks money, but it didn't do that. And that's when tens of thousands of banks failed and people lost their life savings.

DAY: Yes. Things were so dire - 25% unemployment, 10,000 banks failed, contraction of credit. So it was a pretty grim time.


BING CROSBY: (Singing) Once I built a railroad. Now it's done. Brother, can you spare a dime? Once I built a tower...

ZOMORODI: I mean, we've all heard stories about the Great Depression, which actually sound a lot like what people are going through today - like, so many people losing their jobs, being evicted from their homes, breadlines. But then, 1933 - right? - that was kind of a pivotal moment. Franklin Delano Roosevelt, FDR, comes into office. And there's this sort of sense that the government needs to be more responsible going forward for the health of the economy. Is that right?

DAY: Yes. Up until this point in the American psyche, people did not look to the federal government, the president - let's say the president and the Fed - as the keepers of the economy. So FDR coming along came into a crisis where the banks effectively as an industry were crippled.


UNIDENTIFIED PERSON #2: Ladies and gentlemen, the president of the United States.

ROOSEVELT: I want to talk for a few minutes with the people of the United States about banking.

DAY: And so what he did is he declared a bank holiday and said, everybody, just stop. We're just - you can't get your - we're just going to take a brief breather here...

ZOMORODI: (Laughter).

DAY: ...And let everybody calm down.


ROOSEVELT: This bank holiday, while resulting in many cases in great inconvenience, is affording us the opportunity to supply the currency necessary to meet the situation.

DAY: So much of what happens in a crisis, not all of it, but so much of it comes from the fear of not knowing what's going on. So he comes along, and all these banks have failed. And there's been this idea that's of insuring deposits at banks to prevent these runs so that people won't go and run every time there's a financial problem. They won't go and run and demand their money because they know it's guaranteed.


ROOSEVELT: After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people themselves.


ZOMORODI: And so this was the start of deposit insurance, like, that FDIC sticker that you see on the front of a bank. And it meant that if I put my money in the bank, the U.S. government will guarantee that it's safe. And that was a big deal, right?

DAY: It was a huge deal. Deposit insurance changed everything. Overnight, bank runs stopped. They stopped cold. And, you know, the bank holiday was lifted. People had deposit insurance. It literally stopped it overnight. Now, during the '30s, you also had lots of other changes that were put in place. You had the creation of the Securities and Exchange Commission. You had standardization of accounting rules. So there were a whole series of laws put into place. And deposit insurance, while it was put in - its effect is to make individuals have confidence they can get their money out of banks. But the real reason, the real purpose of deposit insurance is to keep the economy stable and prevent the kind of runs on banks that have destabilized the economy.

ZOMORODI: OK, so let's just take a pause here, though, because here we are a century later in a different kind of financial crisis. But they do keep happening. I mean, it used to be every 20 years. Now it feels like it's every 10 years. Is that why we should learn and understand what happened 100 years ago, because we never got the lesson? And I guess if not, like, what does that say about the American psyche?

DAY: I think one characteristic of Americans and of our culture is optimism. And there is this amnesia. And people believe things that if they thought about it just are too good to be true. So I think two things that are often key ingredients in financial crises are too much borrowed money - instead of making good investments, people start making riskier and riskier investments - and lack of oversight by the government. They - regulators forget their duty to taxpayers. That's who they're there for. They're supposed to regulate the system in exchange for the system getting those benefits.

So what you really want at a time like this - and it's too bad the government can't get it together to do it - but what you want is to have some kind of relief that does not follow people forever as debt does. You want to be able to give people a means to tide themselves over during this period without then coming out of it completely drowning in debt.


DAY: I mean, a pandemic is a pandemic. But the things that we keep forgetting is to - is over - using too much borrowed money, regulators forgetting their job and people just believing things that are too good to be true. If it's too good to be true, it probably is. And that's - I don't know whether we've learned that lesson.


ZOMORODI: That's journalist Kathleen Day. She's the author of the book "Broken Bargain: Bankers, Bailouts, And The Struggle To Tame Wall Street." Today on the show, a Century of Money. I'm Manoush Zomorodi, and you're listening to the TED Radio Hour from NPR.

Copyright © 2020 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.