The University of Illinois's English Department explains the Great Depression.
(emphasis mine) [my comment]
The International Depression
The Great Depression of 1929-33 was the most severe economic crisis of modern times. Millions of people lost their jobs, and many farmers and businesses were bankrupted. Industrialized nations and those supplying primary products (food and raw materials) were all affected in one way or another. In Germany and the United States industrial output fell by about 50 per cent, and between 25 and 33 per cent of the industrial labor force was unemployed.
The Depression was eventually to cause a complete turn-around in economic theory and government policy [I feel another "complete turn-around in economic theory and government policy" is in the works today.]. In the 1920s governments and business people largely believed, as they had since the 19th century, that prosperity resulted from the least possible government intervention in the domestic economy, from open international relations with little trade discrimination, and from currencies that were fixed in value and readily convertible. Few people would continue to believe this in the 1930s.
THE MAIN AREAS OF DEPRESSION
The US economy had experienced rapid economic growth and financial excess in the late 1920s, and initially the economic downturn was seen as simply part of the boom-bust-boom cycle. Unexpectedly, however, output continued to fall for three and a half years, by which time half of the population was in desperate circumstances (map1). It also became clear that there had been serious over-production in agriculture [Not the case today!], leading to falling prices and a rising debt among farmers. At the same time there was a major banking crisis, including the "Wall Street Crash" in October 1929. The situation was aggravated by serious policy mistakes of the Federal Reserve Board, which led to a fall in money supply and further contraction of the economy.
The economic situation in Germany (map2) was made worse by the enormous debt with which the country had been burdened following the First World War. It had been forced to borrow heavily in order to pay "reparations" to the victorious European powers, as demanded by the Treat of Versailles (1919), and also to pay for industrial reconstruction. When the American economy fell into depression, US banks recalled their loans, causing the German banking system to collapse. [Today, the situation is reversed. Soon German banks and other lenders will recall their loans causing the US financial system to collapse.]
Countries that were dependent on the export of primary products [Primary products = Commodities produced by industries such as farming, fishing, forestry, and mining], such as those in Latin America, were already suffering a depression in the late l920s. More efficient farming methods and technological changes meant that the supply of agricultural products was rising faster than demand, and prices were falling as a consequence [This is not the case today! Consumption has exceeded worldwide food production in the last eight years]. Initially, the governments of the producer countries stockpiled their products. but this depended on loans from the USA and Europe. When these were recalled, the stockpiles were released onto the market, causing prices to collapse and the income of the primary-producing countries to fall drastically (map3).
NEW INTERVENTIONIST POLICIES
The Depression spread rapidly around the world because the responses made by governments were flawed. When faced with falling export earnings they overreacted and severely increased tariffs on imports, thus further reducing trade. Moreover, since deflation was the only policy supported by economic theory at the time, the initial response of every government was to cut their spending [Today, the polar opposite is happening: governments around the world are printing money]. As a result consumer demand fell even further. Deflationary policies were critically linked to exchange rates. Under the Gold Standard, which linked currencies to the value of gold, governments were committed to maintaining fixed exchange rates. However, during the Depression they were forced to keep interest rates high to persuade banks to buy and hold their currency. Since prices were falling, interest-rate repayments rose in real terms, making it too expensive for both businesses and individuals to borrow.
The First World War had led to such political mistrust that international action to halt the Depression was impossible to achieve. In 1931 banks in the United States started to withdraw funds from Europe, leading to the selling of European currencies and the collapse of many European banks. At this point governments either introduced exchange control (as in Germany) or devalued the currency (as in Britain) to stop further runs. As a consequence of this action the gold standard collapsed (map 4).
The gold standard linked currencies to the value of g old, and was supported by almost every country in the world. From 1931, however, countries began to leave the standard, leading to its total collapse by 1936. Although at the time this was seen as a disaster, it actually presented opportunities for recovery in many countries, allowing governments to intervene to create economic growth.
My reaction: This article highlights some key differences between 1930s and today.
1) Over-production in agriculture
In the 1930s: "It also became clear that there had been serious over-production in agriculture, leading to falling prices and a rising debt among farmers."
"More efficient farming methods and technological changes meant that the supply of agricultural products was rising faster than demand, and prices were falling as a consequence."
Today: 2008 was the eighth year in a row that the world's six billion people have consumed more food than was produced.
2) US banks recalling their international loans
In the 1930s: "When the American economy fell into depression, US banks recalled their loans, causing the German banking system to collapse."
"In 1931 banks in the United States started to withdraw funds from Europe, leading to the selling of European currencies and the collapse of many European banks."
Today: The US owes the world between 4 and 5 trillion dollars. Ironically, it might be German banks recalled their loans which causes the US financial system to collapse.
3) Large stockpiles of agricultural commodities were released onto the market
In the 1930s: In response to falling food prices, the governments of the producer countries stockpiled their products using loans from the USA and Europe. When these loans were recalled, the stockpiles were released onto the market, causing prices to collapse.
Today: The world's food stockpiles are at their lowest in 37 years (enough to feed the planet for about 55 days).
4) The gold standard
In the 1930s: "The gold standard linked currencies to the value of gold, and was supported by almost every country in the world."
Today: No currency is redeemable in gold.
5) Deflationary policies
In the 1930s: "Since deflation was the only policy supported by economic theory at the time, the initial response of every government was to cut their spending"
Today: The response of every government has been to boost spending (Keynesian economics at their finest).
The threat of deflation today is imaginary. Everything points to some serious inflation in the near future.