Effects of the Great Depression

How This Low Point in American History Still Affects You Today

© The Balance, 2018

The Great Depression of 1929 devastated the U.S. economy. Half of all banks failed. Unemployment rose to 25% and homelessness increased. Housing prices plummeted 30%, international trade collapsed by 65%, and prices fell 10% per year. 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 that the Depression could happen again.

Economy

Effects of the great depression
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During the first five years of the depression, the economy shrank 50%. 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 1929. By the end of the year, 650 banks had failed. In 1930, the economy shrank another 8.5%, according to the Bureau of Economic Analysis. GDP fell 6.4% in 1931 and 12.9% 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.

Part of the contraction was due to deflation. The Consumer Price Index fell 27% 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% in 1933.

New Deal spending boosted GDP growth by 10.8% in 1934. It grew another 8.9% in 1935, a whopping 12.9% in 1936, and 5.1% in 1937.

Unfortunately, the government cut back on New Deal spending in 1938. The depression returned and the economy shrank 3.3%.

Preparations for World War II sent growth up 8% in 1939 and 8.8% 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.

Political

Hoover and Roosevelt
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The Depression affected politics by shaking confidence in unfettered capitalism. That type of laissez-faire economics is what President Herbert Hoover advocated, and it had failed.

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% 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 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. But it doesn't even rank as one of the four best real-world ways to create jobs

Social

Farming in 1935
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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 shantytowns, called Hoovervilles, sprang up in the 1930s. 

Wages for those who still had jobs fell 42%. Average family incomes dropped 40% 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.

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

1930s UNEMPLOYED MEN...
 Getty Images/Charles Phelps Cushing/ClassicStock

In 1928, the final year of the Roaring Twenties, unemployment was 3.2%. That's less than the natural rate of unemployment. By 1930, it had more than doubled to 8.7%. In 1931, it skyrocketed to 15.9% in 1931 and, in 1932, to 23.6%. By 1933, unemployment was 24.9%. Almost 15 million people were out of work. That's highest unemployment rate ever recorded in America.

New Deal programs helped reduce unemployment to 21.7% in 1934, 20.1% in 1935, 16.9% in 1936 and 14.3% in 1937. But less robust government spending in 1938 sent unemployment back up to 19%. It remained above 10% until 1941, according to a review of the unemployment rate by year.

Banking

Failed American Union Bank in New York
 Getty Images/Archive Photos/FPG

During the Depression, half of the nation's banks failed. In the first 10 months of 1930 alone, 744 failed. That was 1,000% 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 before it was too late. These “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.

Stock Market

stock market crash
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The stock market lost 90% of its value between 1929 and 1932. It didn't recover for 25 years. 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. 

Trade

Unemployed men during the Depression
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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 66% as measured in dollars and 25% in the total number of units. By 1939, it was still below its level in 1929.

Here's what happened to U.S GDP for the first five years of the Depression:

  • 1929: $103.6 billion
  • 1930: $91.2 billion
  • 1931: $76.5 billion
  • 1932: $58.7 billion
  • 1933: $56.4 billion

Deflation

migrant family
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Prices fell 30% between 1930 and 1932. Deflation helped consumers, whose income had fallen. It hurt farmers, businesses, and homeowners. Their mortgage payments hadn't fallen 30%. 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

New Deal Program
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The success of the New Deal made American expect that the government would save them from any 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 precedent for President Richard Nixon to end it completely in 1973.

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. Other Depression-era public works include La Guardia Airport, the Lincoln Tunnel, and Hoover Dam. Also, three entire towns were constructed: Greendale, Wisconsin; Greenhills, Ohio; and Greenbelt, Maryland.