Effects of the Great Depression
How This Low Point in American History 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, international trade collapsed by 60 percent, and prices fell 10 percent per year. It took 25 years for the stock market to recover.
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, the economy shrank another 8.5 percent, according to the Bureau of Economic Analysis. GDP fell 6.4 percent in 1931 and 12.9 percent in 1932.
By 1933, the country had suffered at least four years of economic contraction. It only produced $57 billion, half what it produced in 1929. 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. Falling prices sent many firms into bankruptcy. The BLS also reported that the unemployment rate peaked at 24.9 percent in 1933.
New Deal spending boosted GDP growth by 10.8 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. But preparations for World War II sent growth up 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.
The New Deal and spending for World War II shifted the economy from a pure free market to a mixed economy. It depended much more on government spending for its success. The timeline of the Great Depression shows this was a gradual, though necessary, process.
As a result, people voted for Franklin Roosevelt. His Keynesian economics promised that government spending would end the Depression. The New Deal worked. In 1934, the economy grew 10.8 percent in 1934 and unemployment declined.
But FDR became concerned about adding to the $5 trillion U.S. debt. He cut back government spending in 1938, and the Depression resumed. No one wants to make that mistake again. Politicians rely instead on deficit spending, tax 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. But it doesn't even rank as one of the four best real-world ways to create jobs
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.
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.
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.
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, according to a review of the unemployment rate by year.
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.
People were stunned to find out that banks had used their deposits to invest in the stock market. 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. FDR created that program during the New Deal.
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. Their banks invested the money from their savings accounts.
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
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.
Here are the 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 Impact
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.
The New Deal public works programs built many of today's landmarks. Iconic buildings include 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.