The Great Depression was a monumental moment in history. The decisions made during this time period would have a profound effect on economics all the way up to the modern day.
But what caused the Great Depression? Why did it occur? How did America go from the prosperous Roaring 20s to the poverty of the dustbowl within just a few short years?
Today, we’re teaching you everything you need to know about the history of the Great Depression.
What was the Great Depression?
The Great Depression was the largest economic downtown in the history of the western industrialized world. Its origins can be traced back to America, although its effects would be felt all over the world.
The dates of the Great Depression vary, depending on who you ask. Some say the Great Depression lasted just a few years, from 1929 to 1932. The general consensus, however, is that the western world was in a downturn between the crash of the stock market in 1929 to the outbreak of World War II in 1939.
In October 1929, the stock markets crashed, sending Wall Street into a panic. Over the coming years, consumer spending and investment dropped. This led to steep declines in industrial output and skyrocketing levels of unemployment. Failing companies laid off workers, and soon enough, 1 in 4 Americans were unemployed.
By 1933, the Great Depression was at its peak (or bottom, depending on your point of view). During this time, nearly half of the country’s banks had failed, and 13 to 15 million Americans were out of work.
It was during this time that President Franklin Delano Roosevelt enacted changes that would alter the course of world history. FDR’s New Deal proposed a controversial way to get out of the recession: spend money – and lots of it.
The New Deal helped to lessen the worst effects of the Great Depression. However, it wasn’t until the outbreak of World War II in 1939 when the American industrial economy would follow recover.
Now that you know the basic background behind the Great Depression, let’s take a closer look at the individual events and pieces that led up to the infamous time period.
The Roaring Twenties and the Leadup to the Great Depression
In order to understand the Great Depression, it’s helpful to understand the time period leading up to the 1930s. Throughout western countries, this time period was known as the Roaring Twenties. Residents of the United States, Canada, and most western European countries were experiencing a sustained period of economic prosperity.
Prosperity was shared around the world. Germany was paying off its debts from the First World War, and western countries in turn were investing in German re-development. Other countries were paying off war debts to Washington, and prosperity was widespread.
The good times came to a sudden end, unfortunately, in October 1929.
The Wall Street Crash of 1929
The good times of the Roaring Twenties came to a sudden and devastating end in October of 1929. Also known as Black Tuesday, the stock market plummeted heavily on October 29 of that year. It remains the most devastating stock market crash in the history of the United States.
The leadup to Black Tuesday started the previous Thursday, on October 24, when the market lost 11% of its value at the opening bell. The huge volume of trading on the floor that day meant that ticker tape in brokerage offices across America was hours late in arriving, contributing to the widespread confusion and panic. Investors wanted to sell their stocks, but had no idea what most stocks were actually trading for.
Interestingly, a number of Wall Street bankers got together that Thursday and agreed to purchase large blocks of US stocks at above-market prices in an attempt to stop the slide. Their strategy worked, and the market closed down only 6.38 points on that day. The rally continued on Friday, October 24, and everything looked to be okay.
Unfortunately, that rally didn’t last. Investors across America decided to sell out on Monday after reading about the market’s instability in all of the weekend newspapers. On Black Monday, October 28, the Dow closed down 13%. The next day, Black Tuesday, the Dow lost an additional 12% of its value – and the stock market had officially crashed.
A month before the Wall Street crash, there were indications of economic trouble. In September, the London Stock Exchange crashed, and some historians point to this as the start of the Great Depression. We’ll talk about more causes of the crash down below.
Why Did Wall Street Crash in 1929?
Why did Wall Street suddenly crash after a decade of prosperity throughout the 1920s? What factors caused the Great Depression? We know today that the crash was related to a number of key factors, including:
- After World War I, many Americans were lured by the promises of work in the big city. This led to an ever-growing expansion of America’s industrial sector. However, at the same time, the overproduction of agricultural produce outside the cities “created widespread financial despair among American farmers throughout the decade.” This would later be blamed as one of the key factors in the crash (source). For many farmers, the Great Depression didn’t start in the 1930s: it started in the 1920s.
- Speculation is another commonly-cited reason behind the crash. Many people believed that the stock market would just continue to rise forever. The Federal Reserve noticed this problem in March 1929 and issued a warning about the dangers of excessive speculation. Two days after this warning, a miniature crash occurred, which gave some investors an idea of how shaky the market would be.
- The American economy was showing other signs of trouble. Steel production was declining, construction was slow, automobile sales were down, and consumers were racking up huge amounts of debt due to the availability of easy credit.
- The London Stock Exchange crash of September 1929 weakened American optimism in overseas markets, and also led to a decline in confidence in the stability of America’s stock market. Americans saw how quickly an industrialized nation could be weakened due to its stock markets.
Overall, the market’s growth throughout the latter half of the 1920s was considered to be unsustainable. Even after the miniature stock market crash of March 1929, the market continued to grow unabated and showed no signs of slowing down. Between June and September of that year, the Dow Jones gained an average of more than 20%.
This market growth led some economists to make infamous statements, like Irving Fisher who famously proclaimed that, “Stock prices have reached what looks like a permanently high plateau.”
Overall, stocks rose about 40% in price between May 1928 and September 1929, and the boom was largely artificial.
The Hoover Administration’s Response
Herbert Hoover had become president in 1929. Following the crash, President Hoover assured American investors that the crisis would run its course, and that the economy would be back on track shortly enough.
Unfortunately for Hoover, that didn’t happen. The recession continued to get worse over the next 3 years. In 1930, 4 million Americans were unemployed with little chance of finding a job. In 1931, that number had risen to 6 million (America’s population at the time was around 125 million).
At the same time, industrial production was plummeting across the nation. There were a growing number of bread lines, soup kitchens, and homeless people.
Farmers – many of whom had been struggling throughout the 1920s due to drought and falling food prices – could no longer afford to harvest their crops. One of the tragic ironies about the Great Depression is that crops were left to rot in the fields in rural America due to lack of available labor, while unemployed Americans in big cities starved.
1930 and the Banking Panics
Things got worse in the fall of 1930, as America would undergo four waves of banking panics. During these crises, a number of investors lost confidence in the banks.
What do you do when you lose confidence in the banks? You take out all your money and keep it at home.
Unfortunately, banks did not have enough cash to supply all of the demand. In order to meet this demand, banks were forced to liquidate loans, supplementing their already-strained cash reserves they had on-hand.
“Bank runs” continued throughout 1930, 1931, and 1932. By 1933, thousands of banks across America had no choice but to close their doors.
Franklin Delano Roosevelt is Elected as President in 1932
History typically teaches us that FDR’s New Deal is the program that brought America out of the Great Depression.
In the middle of the Great Depression of 1932, America held its federal election. Democratic nominee Franklin D. Roosevelt won an overwhelming victory.
Soon after FDR’s election victory, every US state had ordered their remaining banks to close after the fourth wave of banking panics. Making things worse was that the US Treasury didn’t even have enough cash on-hand to pay its government workers. Things looked bleak for America.
Amidst all of this, FDR was inaugurated as the 32nd president of the United States of America on March 4, 1933.
FDR’s response to the unemployment, banking crises, and widespread poverty across America became famous, saying, “the only thing we have to fear is fear itself.”
FDR would later inject confidence in the American economy with his famous “fireside chats”. During his first 100 days in office, he passed legislation aimed at stabilizing the American economy in various ways. He passed legislation to stabilize industrial and agricultural production, for example, while simultaneously creating jobs and stimulating recovery.
At the same time, Roosevelt turned his eye to America’s financial system. He realized the current system had some major flaws. In response, he created the Federal Deposit Insurance Corporation (FDIC), an organization that protected investors’ bank accounts and gave them new confidence in the ability of banks to protect their money.
FDR also changed the nature of the stock markets permanently by creating the Securities and Exchange Commission (SEC), an organization to regulate the stock market and prevent the kind of abuses that led to the 1929 crash.
FDR’s New Deal Spurs Recovery Efforts Across America
We mentioned above that FDR enacted legislation to improve recovery efforts across America. But what exactly does that mean? What did FDR actually do to kickstart America’s recovery?
FDR’s New Deal, as it was called, created valuable infrastructure projects throughout America. Led by Keynes and other economists, FDR was encouraged to use government money to “spend their way” out of the recession. Today, spending your way out of a recession is conventional wisdom, but it was seen as a controversial approach back in the 1930s.
To this day, we don’t know for certain whether FDR’s New Deal helped America totally recover from the recession – or if it was the outbreak of World War II that ended it. However, here are some of the infrastructure projects created as part of FDR’s New Deal:
The Tennessee Valley Authority
FDR saw widespread poverty in the South. Few places in America were poorer than the Tennessee Valley region. In response, the US government created the Tennessee Valley Authority (TVA), which built dams and hydroelectric projects across the area.
These dams came with multiple benefits. First, their construction employed local people across the South. Second, they controlled flooding throughout the region. And third and most importantly, they provided electrical power to a region that desperately needed it.
The Works Project Administration
The Works Project Administration (WPA) is the best-known part of FDR’s New Deal. The WPA was a permanent jobs program that employed 8.5 million people between 1935 and 1943. It led to the creation of infrastructure projects all across America. Dams, interstates, and other infrastructure projects can all be traced back to the WPA.
Did FDR’s New Deal Really Solve the Great Depression?
It’s hard to argue against the success of FDR’s New Deal. Starting in 1933, America’s economy showed signs of a fast and sustained recovery.
America’s GDP grew at an average rate of 9% for three straight years starting in 1933.
It wasn’t all perfect, however. In 1937, economic fears sprang up across America as the country entered a sharp recession. This was caused in part by the Federal Reserve’s requirement to increase its reserve money requirements, tightening spending and reducing the amount of capital America could devote to a recovery.
Although the economy began improving again in 1938, the 1937 recession reversed much of the progress America had made over the previous years in terms of production and employment, prolonging the effects of the Great Depression throughout most of America.
It wasn’t until the outbreak of World War II in September 1939, ironically enough, that things started to turn around for America.
The Outbreak of World War II and the End of the Great Depression
The Great Depression affected countries all over the world. No western country escaped the Great Depression unscathed, although America was hit particularly hard.
Different countries reacted to the Great Depression in different ways. In Germany, charismatic leader Adolf Hitler rose to power, promising to bring an era of new change to the country.
Nazi Germany, controversially, was one of the best things to happen to America in a decade. In response to the outbreak of World War II in 1939, the WPA began to focus on improving its military infrastructure. The United States continued to remain officially neutral, doing business with both Nazi Germany and the western Allies. However, public revulsion towards Nazi Germany eventually led the United States to favor France and Great Britain.
By the time the Japanese attacked Pearl Harbor in December 1941, America was in prime position to be mobilized for total war. The country’s factories entered full production mode, restoring the country’s industrial output to levels not seen since before the Great Depression.
Meanwhile, America’s widespread unemployment was cured by conscription. Widespread conscription began in 1942, reducing the unemployment rate to below pre-Depression levels.
The History of the Great Depression Has Profound Effects on the World to This Day
From the heyday of the Roaring Twenties to the devastation of World War II, the history of the Great Depression is one of the most monumental stories in all of American history. It changed America’s – and the world’s – economic and political landscape in ways that had never been seen before – and may never be seen again.