The Great Depression: What Happened, What Caused It, and How It Ended

Why There Was Only One Great Depression

Image shows a graph of the Great Depression of 1929 with the index of the New York Stock Prices on the Y axis and the year on the x axis. The graph line is high during 1929 and drops to its lowest point in 1933 before edging back up in the late 1930s

The Balance / Hugo Lin

The Great Depression was a worldwide economic depression that lasted 10 years. It began in the United States on October 24, 1929, otherwise known as “Black Thursday," when panicked investors sold a record 13 million shares. Over the next four trading days, the Dow Jones Industrial Average, a popular proxy for the U.S. stock market, fell nearly 25%. It continued to decline for the next three years, losing nearly 90% between October 1929 and July 1932.

The stock market crash significantly reduced consumer spending and business investment. Consequently, U.S. GDP decreased dramatically in the first years of the Great Depression, dropping from $104.6 billion in 1929 to $57.2 billion in 1933. In comparison, GDP declined just 2% at the height of the Great Recession between 2008 and 2009.

Key Takeaways

  • The Great Depression was a worldwide economic depression that lasted 10 years.
  • There is no universally agreed-upon explanation for why the Great Depression happened, but most theories cite the gold standard and the Federal Reserve's inadequate response as contributing factors
  • GDP during the Great Depression fell by nearly half.
  • A combination of the New Deal and World War II lifted the U.S. out of the Depression.

Unemployment Reached 25%

The Great Depression affected all aspects of society. By its height in 1933, unemployment had risen from about 3% to nearly 25% of the nation’s workforce. Some workers that kept their jobs saw their wages fall, many others had to work lower paying jobs that they were often overqualified for. From 1929 to 1932 the U.S. gross domestic product was nearly cut in half, dramatically decreasing from $104.6 billion to $57.2 billion, partly due to deflation. The Consumer Price Index fell 27% between November 1929 to March 1933, according to the Bureau of Labor Statistics.

Panicked government leaders passed the Smoot-Hawley tariff in 1930 to protect domestic industries and jobs, but it actually worsened the issue. World trade plummeted 66% as measured in U.S. dollars between 1929 and 1934.

The Depression’s pain was felt worldwide, leading to World War II. Germans were already burdened with financial reparations from World War I. That caused hyperinflation. This added to the pressures that ultimately led the German people to elect Adolf Hitler’s Nazi party to a majority in 1933.

Life During the Depression

The Depression caused many farmers to lose their farms. At the same time, years of over-cultivation and drought created the “Dust Bowl” in the Midwest, destroying agricultural production in a previously fertile region. Thousands of these farmers and other unemployed workers migrated to California in search of work.

Many ended up living as homeless “hobos.” Others moved to shantytowns called “Hoovervilles," named after then-President Herbert Hoover.

What Caused It

According to Ben Bernanke, a former chairman of the Federal Reserve, the central bank helped create the Depression. It used tight monetary policies when it should have done the opposite. According to Bernanke in 2004, these were the Fed's five critical mistakes:

  1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a recession that started in August 1929. 
  2. When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government. Speculators began trading in their dollars for gold in September 1931. That created a run on the dollar. 
  3. The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for businesses. More bankruptcies followed.
  4. The Fed did not increase the supply of money to combat deflation.
  5. Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew their cash and put it under their mattresses. That further decreased the money supply.

The Fed did not put enough money in circulation to get the economy going again. Instead, the Fed allowed the total supply of U.S. dollars to fall by a third. Later research has supported parts of Bernanke's assessment.

What Ended the Great Depression

In 1932, the country elected Franklin D. Roosevelt as president. He promised to create federal government programs to end the Great Depression. Within 100 days, he signed the New Deal into law, creating 42 new agencies throughout its lifetime. They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist. They aim to help safeguard the economy and prevent another depression.

New Deal programs include Social Security, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation.

Many argue that World War II, not the New Deal, ended the Depression. Still, others contend that if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression. In the nine years between the launch of the New Deal and the attack on Pearl Harbor, FDR increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it added another $64 billion.

Reasons a Great Depression Could Not Happen Again

While anything is possible, it's unlikely to happen again. Central banks around the world, including the Federal Reserve, have learned from the past. There are better safeguards in place to protect against catastrophe, and developments in monetary policy help manage the economy. The Great Recession, for instance, had a significantly smaller impact.

Some argue that the sizes of the U.S. national debt and the current account deficit could trigger an economic crisis. Experts also predict that climate change could cause profound losses.

Frequently Asked Questions (FAQs)

When did the Great Depression end?

Although the lowest economic point of the Depression came in 1933, the sluggish economy continued for much longer. The U.S. didn't fully recover from the Depression until World War II.

How many people died during the Great Depression?

It's difficult to analyze how many people died as a result of the Great Depression. According to a 2009 study, during the course of the crisis, life expectancy actually rose by 6.2 years. This is consistent with findings that economic expansion actually tends to have more adverse health effects on the population than a recession does. However, deaths from suicide increased by 22.8% between 1929 and 1932—an all-time high.

How did the Great Depression change the role of government in America?

The Great Depression and the subsequent New Deal had a significant impact on Americans' views of the role of the government, particularly at the federal level. Polls taken in the 1930s showed strong support for the New Deal and its major government programs, interventions, and regulations. This level of broad approval for federal interventions has not stayed as high since the Depression era, however.

Article Sources

  1. U.S. Federal Deposit Insurance Corporation. “Historical Timeline – The 1920’s.” Accessed Feb. 14, 2022.

  2. Bureau of Economic Analysis. “National Income and Product Accounts Tables: Table 1.1.5. Gross Domestic Product.” Accessed Feb. 14, 2022.

  3. Bureau of Labor Statistics. "Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods," Page 51. Accessed Feb. 14, 2022.

  4. Arne L. Kalleberg, Till M. von Wachter. “The U.S. Labor Market During and After the Great Recession: Continuities and Transformations," RSF: The Russell Sage Foundation Journal of the Social Sciences. Accessed Feb. 14, 2022.

  5. Barry Eichengreen, Donghyun Park, Kwanho Shin. “Should the Dangers of Deflation be Dismissed?Journal of Macroeconomics. Accessed Feb. 14, 2022. 

  6. U.S. Bureau of Labor Statistics. “One Hundred Years of Price Change: The Consumer Price Index and The American Inflation Experience.” Accessed Feb. 14, 2022.

  7. U.S Bureau of Labor Statistics. “Clashing Economic Interests, Past and Present: A Comprehensive Account of American Trade Policy.” Accessed Feb. 14, 2022.

  8. U.S. Department of State. “Protectionism in the Interwar Period.” Accessed Feb. 14, 2022.

  9. Alessandro Roselli. “Hyperinflation, Depression, and The Rise of Adolf Hitler," Economic Affairs. Accessed Feb. 14, 2022.

  10. U.S. Library of Congress. “U.S. History Primary Source Timeline – The Dust Bowl.” Accessed Feb. 14, 2022.

  11. The Federal Reserve Board. "Money, Gold, and the Great Depression." Accessed Feb. 14, 2022.

  12. Gustavo S. Cortes, Bryan Taylor, Marc D. Weidenmier. “Financial Factors and the Propagation of the Great Depression," Journal of Financial Economics. Accessed Feb. 14, 2022.

  13. U.S. Library of Congress. “U.S. History Primary Source Timeline – President Franklin Delano Roosevelt and the New Deal.” Accessed Feb. 14, 2022.

  14. Library of Congress. "New Deal Programs: Selected Library of Congress Resources." Accessed Feb. 14, 2022.

  15. Gabriel P. Mathy. “Hysteresis and Persistent Long-Term Unemployment: The American Beveridge Curve of the Great Depression and World War II," Cliometrica. Accessed Feb. 14, 2022.

  16. Price V. Fishback, Taylor Jaworski. “World War II and US Economic Performance,” Pages 221-241. Economic History of Warfare and State Formation. Springer, 2016. Accessed Feb. 14, 2022.

  17. U.S. Treasury Department. “Historical Debt Outstanding.” Accessed Feb. 14, 2022.

  18. Francesco Bianchi. “The Great Depression and the Great Recession: A View From Financial Markets,” Journal of Monetary Economics. Accessed Feb. 14, 2022.

  19. Maria N. Ivanova. “Profit Growth in Boom and Bust: The Great Recession and the Great Depression in Comparative Perspective," Industrial and Corporate Change. Accessed Feb. 14, 2022.

  20. Yeva Nersisyan, L. Randall Wray. “Can We Afford the Green New Deal?” Journal of Post Keynesian Economics. Accessed Feb. 14, 2022.

  21. Erik Gellman and Margaret Rung. “The Great Depression," Oxford Research Encyclopedia of American History. Accessed Feb. 14, 2022.

  22. Jose´ A. Tapia Granadosa, Ana V. Diez Roux. “Life and Death During the Great Depression," Proceedings Of the National Academy of Sciences. Accessed Feb. 14, 2022.

  23. Centers for Disease Control and Prevention. "CDC Study Finds Suicide Rates Rise and Fall with Economy." Accessed Feb. 14, 2022.

  24. Pew Research Center. "How a Different America Responded to the Great Depression." Accessed Feb. 14, 2022.