When Did the Great Depression Start?
It Began Months Before the Stock Market Crash
The Great Depression started in 1929. On March 25, the stock market had a correction. Many investors were wiped out, since they had invested money that they borrowed from their stockbrokers. When the market fell, the brokers called in their loans. That wiped out some businesses, including banks. There were no laws that prevented banks from investing their customers' deposits. Families lost their entire life’s savings. Four days later, Federal Reserve Board member Charles Mitchell provided $25 million from his National City Bank to arrest the slide.
By August of that year, the economy started to contract. Retail sales had dropped, despite high levels of consumer debt. Car sales fell, driving down manufacturing. The Federal Reserve should have lowered the rates to fight the recession. Instead, it raised the discount rate from 5 percent to 6 percent to prevent inflation. It also wanted to defend the gold standard. At that time, the value of the dollar was supported by the price of gold. The U.S. Government promised to redeem any dollar for its value in gold.
The stock market continued to rise until it reached a record of 381.2 on September 3. In late September, the Hatry Case spooked investors. Clarence Hatry had used fraudulent collateral to buy United Steel. That sent the British stock market plummeting. England's Chancellor of the Exchequer called America's stock market "a perfect orgy of speculation." U.S. Secretary of the Treasury Andrew Mellon said investors "acted as if the price of securities would infinitely advance." The Dow dropped significantly on both of those days.
By late October, it had fallen 20 percent.
Stock Market Crash
The Black Thursday crash occurred on October 24. By the following Black Tuesday, stock prices had fallen 23 percent. The stock market crash of 1929 cost investors $30 billion, the equivalent of $396 billion today. That terrified the public because the crash cost more than World War I.
The crash helped turn a recession into a depression. That's because it destroyed confidence in the economy. At that time, many people thought the stock market was an accurate reflection of the state of the economy. They didn't realize it had become an asset bubble. It took 25 years for the Dow to regain its September 3 high.
After the Crash
After the crash, the remaining investors turned to the currency markets. In September 1931, they sold U.S. dollars and bought gold instead. The Fed raised interest rates again to preserve the value of the dollar. It also used open market operations to replace banks' cash reserves with U.S. Treasurys and other securities. Without enough money to lend, banks failed. Depositors panicked, withdrew their cash, and put it under their mattresses. This tight monetary policy caused a 30 percent drop in the money supply.
That sent prices down 10 percent per year. Businesses went bankrupt. This phenomenon sent millions out of work.
In early 1930, the first Dust Bowl drought hit in the Midwest. For the next 10 years, droughts destroyed the agricultural industry in America. This worsened the Depression by sending thousands of farmers into the streets to find work. They ended up, like many others, in shantytowns called “Hoovervilles."
By March 1933, the economy had shrunk 27 percent. It was the worst contraction in U.S. history, five times worse than the Great Recession. Unemployment had risen from 3 percent to 25 percent of the nation’s workforce. For those who still held jobs, wages fell 42 percent. Congress passed the Smoot-Hawley Tariff Act to protect domestic jobs. Other countries retaliated, causing world trade to plummet 65 percent.
The Great Depression started to lift in 1932, when Franklin D. Roosevelt was elected president. In his first 100 days, he signed the New Deal into law. It consisted of 42 initiatives that created jobs and supported workers. Many of them, including Social Security, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation are still here and helping to prevent another depression. Despite these precautions, many people believe the Great Depression could happen again.