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A thought about the great depression

  1. Nov 12, 2004 #1
    So I was sitting in class the other day and a certain statistic caught my attention, 6,000 banks closed during the great depression, along with it went thousands of factories, businesses, farms and corporations.

    Now, looking at the economic rule that price fluctuation wipes out small producers, would this have been a moment of exponential growth for the larger corporations that has ultimatly lead to controlling our society to the extent we have today? I can't see why it wouldn't have been.

    It is my understanding that it was mainly the middle class that bore the brunt of the Depression, the rich stayed rich and the poor stayed poor, but most of the middle class got poorer.
    So the wealth had to go somewhere right? It didn't go out of the country because of the huge tariffs at the time. It went to the rich and to Big Business.
     
    Last edited: Nov 12, 2004
  2. jcsd
  3. Nov 12, 2004 #2
    It is basically true that the rich will always stay rich because their wealth is not based on income but on existing property. The rich also get much richer when everyone else becomes poor because the value of their money goes way up. Not even inflation can hurt the ultra rich because the relative value of their property is unaffected.


    Now as far as the wealth having to go somewhere, no it does not. Sometimes it is lost and cannot be recovered by rich or poor or anyone. Ultimately some people were probably unaffected by the great depression but I do not think many if any one really made out during the great depression. The entire country was operating at an economic equilibrium point that was well below the production possibility curve for the country at that time. It would be hard to imagine any company really trying to expand much with so little demand.
     
  4. Nov 12, 2004 #3
    The companies wouldn't have expanded during the depression, but gradually during roosevelt's term as employment increased and the economy was getting back in shape.
     
  5. Nov 12, 2004 #4
    Depressions before Roosevelt were quick affairs since they were mostly left to the market to heal. It was only with the massive socialistic intervention of Roosevelt and Hoover that the depression was prolonged and increased to levels never seen before.

    http://www.mises.org/freemarket_detail.asp?control=258&sortorder=subject
    http://www.mises.org/fullstory.aspx?Id=1389

    The rich will certainly be affected when stocks and real estate loose much of their value in a depression. Look at Japan. They may not become poor but they will be less rich than before.
     
  6. Nov 12, 2004 #5
    It certainly didn't help when Roosevelt deliberately inflated the new paper currency after making it illegal to use gold currency, and jailing those who chose to to keep it.

    I am really curious as to how the entire world would have ended up if Coolidge had remained president for four more years.
     
  7. Nov 12, 2004 #6

    russ_watters

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    Corporations today are not "controlling our society." I don't know who is spreading that idea (the media and the democratic party?), but its a pretty basic ignorance of history and its pretty pervasive these days. Read-up on the "robber barons" of the 19th century (Carnegie, Rockefeller, etc) and compare them to what we see today. What we have today doesn't even remotely resemble the level of control over their markets and employees that companies like Standard Oil had in the 1800s.

    Microsoft comes close to the level of market control, but they are an anomoly, since they are the market - they created the business they dominate.
    Well, this is the usual wealth-is-a-zero-sum-game misconception. The stock market is not zero-sum. When someone says "the market went up," the market really did go up. Looking at stocks individually, if you buy a stock at 10 and it goes up to 20, you've doubled your money - and that does not mean someone else lost an equal amount of money.
     
  8. Nov 15, 2004 #7
    Wealthy people will be affected, certainly, but not necessarily in a negative way. It can go both ways but I would say for the most part the ultra-rich people will stay that way even through a big recession.

    Also keep in mind that wealth is a relative idea. What I mean to say is that you can gauge your overall income by its percentage of the GDP but wealth cannot be measured by income alone. A person’s standard of living, in a sense, as compared to the standard of living of others is a better measure of that person’s wealth. Of course there are those people who choose to live well below their means but I am talking about the standard of living you can afford to maintain. For example the Rockefellers may have been hurt during the great depression but I bet their overall standard of living as compared to an average US citizen at that time went way up. In fact because labor was so cheap at the time a family like the Rockefellers could easily afford more cheap servants and essentially increased their standard of living for even less than it cost them before.

    One last example of what I am trying to say. Suppose you had a job in New York making six digits. You have an average standard of living as compared to the average New York citizen. But now you take a job down in Mexico and make half as much as you did before. Dose your overall standard of living increase or decrease?



    Regards
     
  9. Nov 15, 2004 #8

    russ_watters

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    Well, to put a finer point on it, the market peaked at about 350 before the crash and sunk as low as 50 (in 1932) after the crash. It started 1929 at 300. So the average investor who had $100 at the start of 1929 saw their portfolio's value drop to $17 by 1932.

    One of the problems with a panic - the reason they call it a panic - is people become irrational. An awful lot of people broke rule #1 of investing: Buy low, sell high. Had people not kept selling from 1929-1932, not only would they have lost less individually, but the market would not have dropped as far.

    In any case, the point is that an awful lot of rich people lost an awful lot of money. Caveat: a great deal of that was "paper money" - money that only ever existed on balance sheets. But it could have become real by selling the stocks and, in any case, it was real enough for a lot of people to jump out of buildings over.
     
    Last edited: Nov 15, 2004
  10. Nov 28, 2004 #9
    You mean, "constant quantity," or "conserved quantity." I think the phrase "zero-sum game" is a Limbaughism.
    No actually, to follow your example here, say you own a share of a lumber company at 10 and it goes to 20. If the real value doesn't change and it's simply a market fluctuation i.e. suddenly 200 of your closest friends buy shares, you're right, the money does come right out of thin air. An example of that you would refer to as the "tech bubble" of 2000. However, any change in the real value must be accompanied by a loss by someone else, i.e. the lumber company purchases 10000 acres of old growth for clear-cutting, the real value of the stock goes up. The property value of the homes surrounding the 10000 acres of devastated clear cut goes down.
    I can't think of a single business without opportunity costs, can you?
     
  11. Nov 28, 2004 #10
    The 10000 acres of deforested land is noticed by a developer. Now that those pesky trees are out of the picture, a development of high-priced, upscale homes can be build. Result, the value of the surrounding middle-class homes goes up.
     
  12. Nov 28, 2004 #11

    russ_watters

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    No, it must not. Certainly there are individual cases where it might be, but as long as resources aren't fixed - and they aren't, they are constantly increasing - it will not "must" be zero-sum (or constant value if you prefer).

    The evidence for that is straightforward:
    -The stock market goes up
    -Incomes go up
    -The GDP goes up
    -Real-estate prices go up
    -The quantity of wealth available goes up
     
  13. Nov 28, 2004 #12
    The evidence for that is straightforward:
    -The stock market goes up
    -Incomes go up
    -The GDP goes up
    -Real-estate prices go up
    -The quantity of wealth available goes up.

    Is the converse true?
     
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