What was the Great Depression?
“Great Depression” is the most prolonged and worst economic slump in modern history. The Great Depression lasted from 1929 until 1941, when the U.S. entered World War II. Several economic contractions, such as the 1929 stock market crash and financial panics in 1930 and 1931, significantly impacted this period.
Economists and historians consider the Great Depression one of the worst economic disasters of the 20th century.
How did the Great Depression end?
Some economists argue that the Great Depression could have ended earlier without the U.S.’s reliance on New Deal job creation and government investment in the private sector to prepare for World War II.
Stock Market Crash
During the Forgotten Depression (1920–1921), the U.S. stock market dropped by about 50%, and corporate earnings dropped by over 90%. The rest of the decade saw strong U.S. growth. The Roaring Twenties were when Americans discovered the stock market and dived in headfirst.
The NYSE and real estate markets were both impacted by speculative mania. Investors’ large margin trading and loose money supply fueled an extraordinary asset price surge.
Equity prices reached record highs of 19 times after-tax corporate earnings before October 1929. Combining this with a 500% increase in the Dow Jones Industrial Index (DJIA) in five years led to the stock market meltdown.
After the NYSE bubble broke on October 24, 1929, known as Black Thursday, a brief bounce occurred on Friday, October 25, and a half-day session on Saturday, October 26. Next week, October 28 and 29, were Black Monday and Tuesday. Those two days saw the DJIA drop almost 20%.Post-1929 stock prices fell over 90%.
Europe had financial problems, including the failure of Austria’s central bank, Boden-Kredit Anstalt, due to ripples from the Atlantic Ocean disaster. The 1931 economic crisis impacted both continents hard.
U.S. Economy Falling
The 1929 stock market crash destroyed corporate and private wealth, causing a downward spiral in the U.S. economy. In early 1929, the U.S. unemployment rate was 3.2%. Growth had exceeded 25% by 1933.
In 1938, the unemployment rate remained at 18.9% despite enormous government involvement and expenditure by the Hoover and Roosevelt administrations. When the Japanese destroyed Pearl Harbor in late 1941, real per capita GDP was below 1929 levels.
Most historians and economists believe the collapse did not cause the Great Depression, although it may have triggered a decade-long economic depression. It doesn’t explain why the recession was so deep and long—various events and actions exacerbated and prolonged the Great Depression in the 1930s.
Young Federal Reserve mistakes
The new Federal Reserve mishandled money and credit supplies before and after the 1929 catastrophe. Monetary experts like Milton Friedman and former Federal Reserve Chair Ben Bernanke agree.
The Federal Reserve Bank, established in 1913, was dormant for its first eight years. The Fed authorized considerable monetary expansion once the economy recovered from the 1920–1921 downturn. From 1921 to 1928, the money supply rose by $28 billion, or 61.8%. Bank deposits are up 51.1%, savings and loan shares are up 224.3%, and net life insurance policy reserves are up 113.8%. All this happened when the Federal Reserve lowered the minimum reserve to 3% in 1917. Treasury and Fed gold reserve gains were $1.16 billion.
During the decade before the crash, the Fed caused rapid expansion by boosting the money supply and keeping interest rates low—much of the extra money supply increase fuelled stock and real estate bubbles.
Following the bubble bust and market catastrophe, the Fed reversed direction by reducing the money supply by about a third. Due to this decline, many local banks had liquidity issues and lost faith in a speedy recovery.
World War II trade channels helped the market recover during the Great Depression.
Fed Tight First
In a November 2002 lecture, Bernanke stated that bank panics were often handled within weeks before the Fed. Large private financial institutions lend to stronger, smaller banks to ensure system integrity. This situation occurred 20 years prior, during the Panic of 1907.
Investment banker J.P. was involved in the NYSE stock market crash and bank run. Morgan intervened to encourage Wall Street to transfer cash to underfunded banks. Ironically, the government created the Federal Reserve to reduce its dependence on individual financiers like Morgan due to fear.
Following Black Thursday, New York bank leaders acquired significant blocks of blue-chip stocks at above-market prices to boost confidence. These measures sparked a temporary bounce Friday, but panicky sell-offs began Monday. In the decades since 1907, the stock market has outpaced human efforts. Only the Fed could support the U.S. banking system.
A monetary infusion by the Fed between 1929 and 1932 was unsuccessful. Instead, it witnessed the money supply fall and hundreds of bank failures. The collapse of the financial sector and banks caused deflation and depression. In the past, banking restrictions hindered institutions’ growth and diversification, making it challenging to withstand a large deposit withdrawal or a bank run.
Although unclear, the Fed’s stern response may have been due to concerns that bailing out reckless banks would lead to fiscal irresponsibility. Some historians believe the Fed led the economy to overheat, worsening an already grave position.
Hoover’s Boosted Prices
Although known as a “do-nothing” president, Herbert Hoover acted after the catastrophe.
His 1930–1932 actions included:
- Federal spending increased by 42%, including a significant public works program like the Reconstruction Finance Corporation (RFC).
- Taxes for new programs
- The 1930 immigration restriction aimed to prevent low-skilled people from overwhelming the job market.
Hoover worried most about pay cuts after the recession. He believed prices must remain high to achieve high wages across all businesses. Higher pricing would require customers to pay more.
The crash burned the public, leaving many unable to spend on goods and services freely. Foreign commerce was unreliable for American enterprises since foreign nations were not ready to acquire pricey American goods.
Many of his and Congress’ post-crash actions, including wage, labor, trade, and price restrictions, hampered economic adjustment and resource reallocation.
U.S. Protectionism
Hoover used laws to maintain prices and wages by preventing cheaper overseas competition. Hoover signed the 1930 Schmoot-Hawley Tariff Act, despite opposition from over 1,000 economists, in line with protectionist traditions.
The initial farm protection measure expanded into a multi-industry tariff, putting significant tariffs on over 880 imports. Nearly three dozen nations reacted, reducing imports from $7 billion in 1929 to $2.5 billion in 1932. International commerce fell 66% by 1934. As expected, global economic circumstances worsened.
Hoover’s desire to retain jobs, business, and individual income was understandable. He urged firms to increase wages, avoid layoffs, and maintain high prices during a period when they should have decreased. Previous recessions and depressions in the U.S. resulted in 1-3 years of low wages and unemployment before prices dropped and led to a recovery. The U.S. economy turned from a recession to a depression due to the inability to maintain artificial levels and the disruption of global commerce.
The New Deal
Franklin D. Roosevelt pledged tremendous change when elected in 1933. He introduced the New Deal, a groundbreaking set of domestic policies to boost American enterprise, decrease unemployment, and safeguard the public.
Based on Keynesian economics, it is believed that the government should boost the economy. The New Deal aimed to establish and sustain national infrastructure, full employment, and healthy pay—the government-controlled prices, wages, and production to achieve these aims.
Some economists believe Roosevelt expanded Hoover’s actions. He enforced price supports and minimum salaries and prohibited gold hoarding, removing the country from the gold standard. He abolished monopolies and created hundreds of public works and job-creation projects.
The Roosevelt government compensated farmers and ranchers to reduce production. One of the most upsetting issues was destroying extra harvests while thousands of Americans needed inexpensive food.
Between 1933 and 1940, federal taxes quadrupled to fund initiatives and new programs like Social Security. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, and excess profit taxes increased.
New Deal Success/Failure
Public trust increased with New Deal achievements like banking system reform and stabilization. Roosevelt ordered a week-long bank vacation in March 1933 to avert frantic withdrawals and institutional collapse. Next came a dam, bridge, tunnel, and road development. These initiatives created thousands of federal jobs.
Although the economy recovered, it was too weak to conclude that the New Deal’s programs successfully ended the Great Depression. Reasons differ between historians and economists:
- Keynesians think Roosevelt’s government-centric recovery plans were too light on federal expenditure.
- Some argue that Roosevelt, like Hoover, exacerbated the downturn by attempting quick improvement instead of allowing the economic and business cycles to recover over two years.
Two University of California, Los Angeles, academics assessed that the New Deal prolonged the Great Depression by seven years. However, the post-1929 recovery may have been slower than other post-depression recoveries. It was the first time the whole population, not just the Wall Street elite, experienced significant stock market losses.
An American economic historian, Robert Higgs, claimed that Roosevelt’s new restrictions were so quick and innovative that firms were reluctant to recruit or invest. According to Rutgers University law and economics professor Philip Harvey, Roosevelt prioritized social welfare above Keynesian-style macroeconomic stimulus packages.
New Deal Social Security programs provided unemployment, disability, old-age, and widow payments.
World War II Impact
Some say the Great Depression ended abruptly in 1941–1942. If we consider GDP and employment, when the U.S. entered World War II, unemployment declined from eight million in 1940 to a little over one million in 1943. The Armed Services conscripted over 16 million Americans. The conflict caused a rise in actual unemployment in the private sector.
Wartime rationing led to a fall in living standards and increased taxation to pay for the war effort. Private investment declined from $17.9 billion in 1940 to $5.7 billion in 1943, and private-sector production fell roughly 50%.
Although the idea that the war ended the Great Depression is false, it did help the U.S. recover. The conflict overturned price and wage limitations and unleashed international trading routes. Increased government demand for affordable items led to significant fiscal stimulus.
Private investments surged from $10.6 billion to $30.6 billion in the first year following the conflict. A bull run occurred in the stock market within a few years.
What caused the Great Depression?
The Great Depression’s cause is unclear. However, economists and historians believe that various mitigating factors caused this collapse. These include the 1929 stock market crisis, the gold standard, falling lending and tariffs, banking panics, and the Fed contraction.
When did the Great Depression begin?
After the 1929 stock market crash wiped away private and corporate nominal wealth, the Great Depression began. This devastated the U.S. economy and spread to Europe.
When did the Great Depression end?
The Depression ended in 1941. Most economists consider this the end date since unemployment declined and GDP grew around the time the U.S. entered World War II.
The Verdict
Factors like a fluctuating Fed, protective tariffs, and uneven government involvement led to the Great Depression. Changes in these things may have been shortened or averted this time.
Many New Deal measures, like Social Security, unemployment insurance, and agricultural subsidies, remain in place despite disagreement about their appropriateness. We firmly believe that the federal government should act during economic crises. This legacy helped make the Great Depression one of the most significant events in American history.
Conclusion
- Between 1929 and 1941, the Great Depression was the most prolonged and worst economic downturn in history.
- The 1929 stock market crisis destroyed much nominal wealth due to 1920s speculative market investing.
- Most historians and economists concur that the Great Depression had several causes beyond the 1929 stock market crash.
- Their causes, like Fed overaction and inaction, led to the Great Depression.
- Presidents Hoover and Roosevelt used government initiatives to lessen the downturn.