What was the Great Depression?

Jennifer E. Engen

The Great Depression, which began in 1929 and ended around 1939, is the longest and most severe U.S. economic downturn in modern history.

The downturn began with the U.S. stock market crash in 1929 and eventually spread outside of the U.S. to other economies. During the Great Depression, the U.S. economy saw sharp declines in industrial production, extreme price deflation and a spike in banking panics and failures. The U.S. population also experienced a steep increase in poverty and homelessness throughout the 1930s.

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The 1920s in the U.S. became known as the Roaring ’20s, largely because of a booming economy that sent stock prices soaring and doubled the nation’s total wealth from 1920 to 1929. Unfortunately, stock market euphoria led to rampant market speculation and a stock market bubble that violently burst in October 1929.

On Monday, October 28, 1929, the Dow Jones Industrial Average dropped 12.8% in a single day. The following day, the sell-off continued with another 11.7% loss. The two infamous days on Wall Street are often called Black Monday and Black Tuesday.

Unemployment started to rise, and the uneasy economic climate in the U.S. at the time triggered the first of several waves of banking panics in 1930. Bank customers became concerned about bank solvency, so they began withdrawing cash from their bank accounts, draining bank liquidity and forcing banks to liquidate loans. Between 1930 and 1933, about 9,000 U.S. banks failed.

Because the U.S. was on the gold standard at the time, the government could not easily increase the amount of paper money in circulation. When banks started to fail, Americans began to hoard gold. Great Britain and other European countries began abandoning the gold standard starting in 1931, but the U.S. would not drop the gold standard until 1933.

Finally, Congress passed the Smoot-Hawley Tariff Act in 1930, which raised import duties on a wide range of agricultural and industrial goods by roughly 20%. The new tariffs made imports so expensive that they became unaffordable for many Americans. Foreign countries implemented retaliatory tariffs on U.S. exports in response, and international trade dropped by about 65% from 1929 to 1934.

Even though a U.S. depression hasn’t happened in roughly 80 years – partially due to the economic lessons learned from the period – there is no guarantee that it won’t happen again. And the issues stemming from the market crash cost many people their economic stability. During the worst of the Great Depression, U.S. industrial production dropped 47% and real gross domestic product declined 30% from peak levels. The Dow Jones Industrial Average dropped nearly 90% from its peak during the worst of the Great Depression, and it didn’t make it back to its 1929 highs until 1954. The U.S. unemployment rate peaked at 24.9%, as measured in December 1933.

One of the ways U.S. President Franklin D. Roosevelt combated the Great Depression and stimulated the economy in the 1930s was via his New Deal government programs. Roosevelt’s most popular New Deal programs included the creation of the Civilian Conservation Corps, the Civil Works Administration, the Federal Housing Administration, the Home Owners’ Loan Corporation and the Tennessee Valley Authority. The Social Security Act of 1935 created Social Security, a government program that still provides income to retired wage earners to this day.

Roosevelt also spearheaded programs that could help prevent the circumstances that led to the Great Depression in the first place. The Securities and Exchange Commission, or SEC, was created in 1934 to be a stock market watchdog. The Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corp., or FDIC, which federally insured Americans’ bank deposits in the event of a bank failure.

The combination of the New Deal and the beginning of World War II eventually ended the Great Depression. In the nine years between the launch of the New Deal and the Japanese attack on Pearl Harbor in December 1941, the U.S. added about $3 billion to its national debt. Military spending added about $23 billion to the debt in 1942 and another $64 billion to the debt in 1943 after the U.S. officially joined the war.


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