The Great Depression, What Happened, What Caused It, How It Ended

Why There Was Only One Great Depression

© The Balance, 2018

The Great Depression was a worldwide economic depression that lasted 10 years. Its kickoff was “Black Thursday," October 24, 1929. That's when traders sold 12.9 million shares of stock in one day, triple the usual amount. Over the next four days, stock prices fell 23 percent in the stock market crash of 1929. The Great Depression had already started in August when the economy contracted.

Unemployment Reached 25 Percent 

The Great Depression affected all aspects of society. By its height in 1933, unemployment had risen from 3 percent to 25 percent of the nation’s workforce. Wages for those who still had jobs fell 42 percent. U.S. gross domestic product was cut in half, from $103 billion to $55 billion. That was partly because of deflation. The Consumer Price Index fell 27 percent between November 1929 to March 1933, according to the Bureau of Labor Statistics.

Panicked government leaders passed the Smoot-Hawley tariff to protect domestic industries and jobs. As a result, world trade plummeted 65 percent as measured in U.S. dollars. It fell 25 percent in the total number of units. 

Life During The Depression

The Depression caused many farmers to lose their farms. At the same time, years of over-cultivation and drought created the “Dust Bowl” in the Midwest. It ended agriculture in a previously fertile region. Thousands of these farmers and other unemployed workers looked for work in California. Many ended up living as homeless “hobos.” Others moved to shantytowns called “Hoovervilles," named after then-President Herbert Hoover

What Caused It

According to Ben Bernanke, the past chairman of the Federal Reserve, the central bank helped create the Depression. It used tight monetary policies when it should have done the opposite. .

  1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a recession that started in August 1929. 
  2. When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government. Speculators began trading in their dollars for gold in September 1931. That created a run on the dollar. 
  3. The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for businesses. More bankruptcies followed.
  1. The Fed did not increase the supply of money to combat deflation.
  2. Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew their cash and put it under their mattresses. That further decreased the money supply.

The Fed did not put enough money in circulation to get the economy going again. Instead, the Fed allowed the total supply of U.S. dollars to fall 30 percent.

What Ended the Great Depression

In 1932, the country elected Franklin D. Roosevelt as president. He to end the Great Depression. Within 100 days, he signed the New Deal into law. It created 42 new agencies. They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist. They help safeguard the economy and prevent another depression. 

Many argue that World War II, not the New Deal, ended the Depression. But if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression. In the nine years between the launch of the New Deal and the attack on Pearl Harbor, FDR increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it added another $64 billion. 

In fact, WWII had its roots in the Depression. Financial stress made Germans desperate enough to elect Adolf Hitler's Nazi party to a majority in 1933. If FDR had spent enough on the New Deal to end the Depression before Hitler rose to power, World War II might never have happened. 

Reasons a Great Depression Could Not Happen Again

A depression on the same scale could not happen the same way. Central banks around the world, including the Federal Reserve, have learned from the past. They know how to use monetary policy to manage the economy. 

But monetary policy can't offset fiscal policy. The sizes of the U.S. national debt and the current account deficit could trigger an economic crisis. That would be difficult for monetary policy to fix. No one can be certain what will happen since the current U.S. debt level is unprecedented.