The Great Depression of 1929

What Happened During The Great Depression of 1929?

Depression Era Food Line
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What Was The Great Depression of 1929?

The Great Depression of 1929 was a worldwide depression that lasted for ten years. Its kickoff in the U.S. economy was “Black Thursday," October 24, 1929. That's when 12.9 million shares of stock were sold in one day. It was triple the usual amount. Over the next four days, stock prices fell 23%. That was the stock market crash of 1929. For more, see When Did the Great Depression Start?

Unemployment Reached 25% 

The height of the Depression was 1933. By then, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. Economic output, as measured by GDP, was cut in half, from $103 to $55 billion. That was partly because of deflation. Prices fell 10% per year. Panicked government leaders passed the Smoot-Hawley tariffs to protect domestic industries and jobs. As a result, world trade plummeted 65% as measured in dollars and 25% in the total number of units. For more, see Effects of the Great Depression.

Life During The Depression

The Depression caused many farmers to lose their farms. At the same time, years of erosion and a drought created the “Dust Bowl” in the Midwest, where no crops could grow. Thousands of these farmers and other unemployed workers looked for work in California. Many ended up living as homeless “hobos” or in shantytowns called “Hoovervilles," named after then-President Herbert Hoover.

 For more, see Timeline of the Great Depression.

What Caused It?

According to Ben Bernanke, the past Chairman of the Federal Reserve, the central bank helped create the Depression. It wrongly used tight monetary policies. Bernanke highlighted several key Fed mistakes:

  • The Fed began raising the Fed Funds rate in the spring of 1928. It kept raising it through a recession that began in August 1929. That's what caused the stock market crash in October 1929.
  • When the stock market crashed, investors turned to the currency markets. At that time, dollars were backed by gold held by the U.S. Government. Speculators began selling dollars for gold in September 1931. That created a run on the dollar.
  • The Fed raised interest rates again to preserve the value of the dollar. That further restricted the availability of money for businesses. More bankruptcies followed.
  • The Fed did not increase the supply of money to combat deflation.
  • As investors withdrew all their dollars from banks, the banks failed. That created more panic. The Fed ignored the banks' plight. It destroyed any remaining consumers’ confidence in banks. Most people withdrew their cash and put it under their mattresses. They further decreased the money supply.

Thanks to the Fed, there was just not enough money in circulation to get the economy going again. Instead of pumping money into the economy, and increasing the money supply, the Fed allowed the money supply to fall 30%.

What Ended the Great Depression of 1929?

In 1932, Franklin D. Roosevelt was elected President.

He promised to create federal government programs to end the Great Depression. Within 100 days, the New Deal was signed into law. It created 42 new agencies designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs, such as Social Security, the Securities and Exchange Commission (SEC), and the Federal Deposit Insurance Corporation (FDIC) are still here today. They help safeguard the economy and prevent another depression.(Source: Roosevelt Institute, The New Deal)

Many argue that World War II, not the New Deal, ended the Depression. However, if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression. From 1932, when the New Deal was launched, to 1941, when Japan attacked Pearl Harbor, spending only increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt, and $64 billion in 1943. If that much had been spent on the New Deal, it would have been enough to end the Depression. For more, see U.S. Debt by President.

In fact, WWII had its roots in the Depression. Financial stress made people desperate enough to elect Hitler as Chancellor in 1933. If FDR had spent enough on the New Deal to end the Depression before Hitler consolidated his power, World War II might never have happened. 

Could a Great Depression Happen Again?

A depression on the scale of that in1929 could not happen exactly the same way. Central banks around the world, including the U.S. Federal Reserve, have learned from the past. They are more sophisticated in using monetary policy to manage the economy. (Source: The Federal Reserve Board website, “Remarks by Governor Ben Bernanke at the H. Parket Willis Lecture in Economic Policy”, March 2, 2004, FDR Library Web Site.) 

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 panic. It that would be difficult for monetary policy to affect. No one knows since the current U.S. debt level is unprecedented. For more, see Could the Great Depression Happen Again? 

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