What Was the Great Depression?

What Was the Great Depression?

Let me tell you directly: the Great Depression was a brutal, extended economic recession that hit after the U.S. stock market crashed in 1929. It dragged on until 1941, right when the U.S. jumped into World War II.

This era saw multiple economic hits, like the 1929 stock market crash, banking panics in 1930 and 1931, and the Smoot-Hawley Tariff that tanked global trade. Other events and policies just kept the misery going through the 1930s.

Economists and historians point to it as the biggest economic disaster of the 20th century, and they're not exaggerating.

Important Factors Leading to the Depression

It's tough to nail down one exact cause, but economists and historians agree on several culprits: the 1929 stock market crash, sticking to the gold standard, reduced lending, tariffs, banking panics, and the Fed's contractionary moves.

The 1929 Stock Market Crash

The U.S. stock market dropped nearly 50%, and corporate profits fell over 90% during a brief depression from 1920 to 1921 that people often forget. But the economy boomed afterward in the Roaring Twenties, and Americans jumped into the stock market with both feet.

Speculation went wild in real estate and on the NYSE, fueled by loose money and heavy margin trading, pushing asset prices sky-high.

By October 1929, stock prices hit multiples over 19 times earnings, and the Dow Jones Industrial Average had surged 500% in five years. Then came the crash.

The bubble popped on Black Thursday, October 24, 1929. A short rally followed, but Black Monday and Black Tuesday brought a 20% drop in the DJIA. Overall, the market plunged almost 90% from its peak.

The fallout spread to Europe, causing crises like the collapse of Austria's key bank, and by 1931, both continents felt the full impact.

The U.S. Economy in a Tailspin

That crash wiped out huge amounts of wealth, sending the economy spiraling. Unemployment was at 3.2% in early 1929 but shot up to over 24% by 1933, staying above 18.9% even in 1938, despite massive government efforts from Hoover and Roosevelt.

The crash triggered the downturn, but it wasn't the sole cause. Historians say a mix of events and policies made it so deep and long-lasting.

Mistakes by the Young Federal Reserve

The new Federal Reserve botched money and credit management before and after the 1929 crash, as monetarists like Milton Friedman pointed out, and even former Fed Chair Ben Bernanke admitted it.

Created in 1913, the Fed stayed mostly inactive at first, then allowed big monetary expansion after the 1920-1921 depression. Money supply grew by $28 billion—a 61.8% jump—from 1921 to 1928. Bank deposits rose 51.1%, savings and loans by 224.3%, and life insurance reserves by 113.8%, after cutting reserves to 3% in 1917.

The Fed pumped up the money supply and kept interest rates low, inflating stock and real estate bubbles. After the crash, they slashed the money supply by nearly a third, causing liquidity crises for small banks and killing any quick recovery hopes.

The Fed's Tight Fist

Before the Fed, bank panics usually cleared up in weeks with big institutions lending to smaller ones, like during the 1907 Panic when J.P. Morgan stepped in. That very panic led to the Fed's creation to avoid relying on individuals.

After Black Thursday, New York banks tried buying stocks to build confidence, but it didn't last. By then, only the Fed could prop up the system, but they didn't inject cash from 1929 to 1932. Instead, they let the money supply collapse and thousands of banks fail, leading to deflation and depression.

Banking laws back then prevented diversification, making banks vulnerable to runs. Some say the Fed feared bailouts would encourage recklessness, but they arguably created the overheating and then worsened it.

Hoover's Propped-Up Prices

Hoover wasn't idle; he ramped up federal spending by 42% for public works like the Reconstruction Finance Corporation, raised taxes for new programs, and banned immigration to protect jobs.

His big worry was wage cuts, so he pushed to keep prices high for high paychecks. But after the crash, people couldn't afford high prices, and overseas trade dried up too.

Many of Hoover's moves, plus Congress's, like wage and price controls, hindered the economy's adjustment.

U.S. Protectionism

Hoover signed the Smoot-Hawley Tariff in 1930 to protect U.S. goods, slapping duties on over 880 imports despite economists' protests. It started for agriculture but ballooned, and dozens of countries retaliated. Imports dropped from $1.3 billion in 1929 to $390 million in 1932, with global trade down 66% by 1934.

By pushing high wages and prices when they should have fallen, Hoover turned a recession into a depression, especially with trade cut off.

The New Deal

When Roosevelt took office in 1933, he launched the New Deal—a bold set of programs to support business, cut unemployment, and protect people, drawing from Keynesian ideas of government stimulus.

It aimed for infrastructure, full employment, and good wages through controls on prices, wages, and production. Roosevelt built on Hoover's interventions but scaled them up, ditching the gold standard, banning gold hoarding, outlawing monopolies, and creating public works and job agencies.

He even paid farmers to reduce production, destroying excess crops while people starved. Taxes tripled from 1933 to 1940 to fund it all, hitting income, corporate, and excise taxes.

New Deal Success and Failure

The New Deal reformed and stabilized finance, boosting confidence. Roosevelt's bank holiday in 1933 stopped runs, and projects like dams and roads employed thousands.

But recovery was weak; some Keynesians say spending wasn't enough, others argue Roosevelt prolonged it by not letting the cycle bottom out naturally. Studies suggest it extended the Depression by seven years.

Businesses got scared by rapid regulations, and the public suffered mass stock losses for the first time.

The Impact of World War II

The Depression seemed to end abruptly around 1941-1942 with U.S. entry into World War II. Unemployment dropped from eight million in 1940 to one million in 1943, but that included 16 million conscripted into the military.

Living standards fell with rationing, taxes soared, and private production halved. Still, the war opened trade, ended controls, and stimulated demand, leading to a post-war boom with investments tripling.

How People Survived and Lessons Learned

People got by on government aid, community help, frugality, and growing their own food.

It taught economists and the Fed better crisis management and folks how to endure tough times.

Causes were a mix of timing, inaction, and bad reactions.

Bottom line: a combo of Fed flip-flops, tariffs, and inconsistent interventions caused it, but New Deal reforms like Social Security endure, solidifying government roles in crises.