Effects of the Great Depression

How It Still Affects You Today

The Great Depression of 1929 devastated the U.S. economy. Half of all banks failed. Unemployment rose to 25  percent and homelessness increased. Housing prices plummeted 30 percent, global trade collapsed by 60 percent and prices fell 10 percent. It took 25 years for the stock market to recover.

But there were some beneficial effects. The New Deal programs installed safeguards to make it less likely another depression could occur. Find out Could the Great Depression Happen Again?

Economy

Effects of the great depression
Half length portrait of a mature man with a white mustache, hat, three piece suit, and coat at the Self Help Association, dairy farm unit, California, 1936. From the New York Public Library. Photo by Smith Collection/Gado/Getty Images

The economy shrank 50 percent in the first five years of the Depression. In 1929, economic output was $105 billion, as measured by gross domestic product. That's the equivalent of $1.057 trillion today. The economy began shrinking in August. By the end of the year, 650 banks had failed. In 1930, GDP shrank another 8.5 percent. Instead, the economy shrank another 6.5 percent in 1931 and 12.0 percent in 1932. By 1933, the country had suffered five years of losses. It only produced $57 billion, half what it produced in 1929. That was partly because of deflation. Prices fell 10 percent per year.

New Deal spending boosted GDP growth10.8 percent in 1934. It grew another 8.9 percent in 1935, a whopping 12.9 percent in 1936 and 5.1 percent in 1937. Unfortunately, the government cut back on New Deal spending in 1938, and the depression returned. The economy shrank 3.3 percent. Despite growing 8 percent in 1939 and 8.8 percent in 1940. The next year, Japan bombed Pearl Harbor, and the United States entered World War II. For specifics, see GDP by Year

The economy shifted from a pure free market economy to a mixed economy. It depended much more on government spending for its success. For more, see Timeline of the Great Depression.

Political

Hoover and Roosevelt
President Herbert Hoover (left) with his successor Franklin D. Roosevelt at his inauguration. Capitol / Washington. 4th March 1933. Photograph. Photo by Imagno/Getty Images

The Depression affected politics by badly shaking confidence in unfettered capitalism. That's what Herbert Hoover advocated, and it failed badly.

As a result, people voted for Franklin Roosevelt. He promised that government spending would end the Depression. The New Deal worked. In 1934, the economy grew 10.8 percent in 1934 and unemployment started to decline. 

But FDR became concerned about adding to the $5 trillion U.S. debt. He cut back government spending in 1938, and the Depression resumed. Since no one wants to make that mistake again, politicians have become too reliant on deficit spendingtax cuts and other forms of expansionary fiscal policy. That's created a dangerously high U.S. debt.

The Depression ended in 1939 as government spending ramped up for World War II. That's led to the mistaken belief that military spending is good for the economy. Instead, here are The Four Best Real-World Ways to Create Jobs

Social

Farming in 1935
Team of two work horses hitched to a wagon, farm house visible in the background, low-angle view, Beltsville, Maryland, 1935. From the New York Public Library. Photo by Smith Collection/Gado/Getty Images

The Dust Bowl drought destroyed farming in the Midwest. It lasted 10 years, too long for most farmers to hold out. To make things worse, prices for agricultural products dropped to their lowest level since the Civil War. As farmers left in search of work, they became homeless. Almost 6,000 shanty towns, called Hoovervilles, sprang up in the 1930s. (Source: "The Great Depression and the New Deal," Stanford University. "Shanty Town Facts," American Historama.)

Wages for those who still had jobs fell 42 percent. Average family incomes dropped 40 percent from $2,300 in 1929 to $1,500 in 1933. That's like having income fall from $32,181 to $20,988 in 2016 dollars. As a result, the number of children sent to orphanages increased by 50 percent. Roughly 250,000 older children left home to find work. (Source: Encyclopedia of the Great Depression.)

In 1933, Prohibition was repealed. That allowed the government to collect taxes on sales of now-legal alcohol. FDR used the money to help pay for the New Deal.

The depression was so severe and lasted so long that many people thought it was the end of the American Dream. Instead, it changed that dream to include a right to material benefits. The American Dream as envisioned by the Founding Fathers guaranteed the right to pursue one's own vision of happiness. 

Unemployment

Depression soup line
Soup lines during the depression. Photo: Hulton Archives/Getty Images

At the beginning of the Great Depression, in the last year of the Roaring Twenties, unemployment was 3.2 percent. That's less than the natural rate of unemployment. By 1930, it had more than doubled to 8.7 percent. It skyrocketed to 15.9 percent in 1931 and 23.6 percent in 1932. By 1933, unemployment was 24.9 percent. Almost 15 million people were out of work. That was the highest unemployment during the Depression and since then. 

New Deal programs helped reduce unemployment to 21.7 percent in 1934, 20.1 percent in 1935, 16.9 percent in 1936 and 14.3 percent in 1937. But less robust government spending in 1938 sent unemployment back up to 19.0 percent. It remained above 10 percent until 1941. For more, see Unemployment Rate by Year.

Banking

banking
James Stewart and Donna Reed in a scene from the film 'It's A Wonderful Life', 1946. It depicts a depression-era bank run on the Savings and Loan. Photo by RKO Radio Picture/Getty Images

During the Depression, half of the nation's banks failed. In the first 10 months of 1930 alone, 744 failed. That was 1,000 percent more than the annual rate in the 1920s. By 1933, 4,000 banks had failed. As a result, depositors lost $140 billion. (Source: "Bank Failures," Living History Farm.)

People were stunned to find out that banks had used their deposits to invest in the stock market, so they rushed to take their money out of the bank. These bank “runs” forced even good banks out of business. Fortunately, that rarely happens anymore. Depositors are protected by the Federal Deposit Insurance Corporation, a program created during the New Deal.

Stock Market

stock market crash
After the 'Black Thursday' at the stock-market of New York the mounted police put the excited assemblage in motion, New York, USA, Photograph, 2nd November 1929. Photo by Imagno/Getty Images

The stock market lost 90 percent of its value between 1929 and 1932. It didn't recover for 25 years. That's because people lost all confidence in Wall Street markets. Businesses, banks and individual investors were wiped out. Even people who hadn't invested lost money, because the banks invested money from their savings accounts. (Source: "The Stock Market Crash of 1929," Social Welfare History Project.)  More

Trade

Unemployed men during the Depression
Unemployed men sit outside waiting dinner at Robinson's soup kitchen located at 9th and Plum streets, Cincinnati, Ohio, 1931. Photo by Felix Koch/Cincinnati Museum Center/Getty Images

As countries' economies worsened, they erected trade barriers to protect local industries. In 1930, Congress passed the Smoot-Hawley tariffs, hoping to protect U.S. jobs. Other countries retaliated. That created trading blocs based on national alliances and trade currencies. World trade plummeted 65 percent as measured in dollars and 25 percent in the total number of units. By 1939, it was still below its level in 1929. Here's world trade for the first five years of the Depression.

  • 1929: $5.3 billion
  • 1930: $4.9 billion
  • 1931: $3.3 billion
  • 1932: $2.1 billion
  • 1933: $1.8 billion

 (Source: "About the Great Depression," University of Illinois. "The Battle of Smoot-Hawley," The Economist, December 18, 2008.)

Deflation

migrant family
A migrant worker, his young wife and four children resting outside their temporary lodgings, situated on a migrant camp, Marysville, California, 1935. From the New York Public Library. Photo by Smith Collection/Gado/Getty Images

Prices fell 30 percent between 1930 and 1932.  Deflation helped consumers, whose income had fallen. It hurt farmers, businesses, and homeowners. Their mortgage payments hadn't fallen 30 percent. As a result, many defaulted. They lost everything and became migrants looking for work wherever they could find it. (Source: "Prices During the Great Depression," NBER Working Paper, November 1989.)

Here's price changes during the depression years. 

  • 1929    0.6%
  • 1930   -6.4%
  • 1931   -9.3%
  • 1932 -10.3%
  • 1933    0.8% 
  • 1934    1.5%
  • 1935    3.0%
  • 1936    1.4%
  • 1937    2.9%
  • 1938   -2.8%
  • 1939    0.0%
  • 1940    0.7%
  • 1941    9.9%

Long Term

New Deal Program
Part of a fashion parade at the largest WPA sewing shop in NY where 3,000 women produce clothing and linens to be distributed among the unemployed, New York, New York, circa 1935. They work a six day, thirty hour week on two floors of the old Siegel Cooper Building. Photo by Underwood Archives/Getty Images

The success of the New Deal and military spending created an expectation among the American people that the government would save them from any severe financial or economic crises. During the Great Depression, people relied on themselves and each other to pull through. The New Deal signaled that they could rely on the federal government instead.

FDR modified the gold standard to protect the dollar's value. That set a precedence for Richard Nixon to end it completely in 1973.

The New Deal public works programs built many of today's landmarks. Iconic buildings including the Chrysler building, Rockefeller Center and Dealey Plaza in Dallas. Bridges include San Francisco's Golden Gate Bridge, New York's Triborough Bridge and the Florida Keys' Overseas Highway. La Guardia Airport, the Lincoln Tunnel and Hoover Dam were built during the Depression. Also, three entire towns were constructed: Greendale, Wisconsin; Greenhills, Ohio and Greenbelt, Maryland. (Source: "1930s Engineering," PBS. Great Depression Facts.)