The great depression was one of the worst economic downturns in US history, but when did it happen? What caused this great recession to happen? These are questions that many people have asked.
In this article, we will explore what led up to the great depression and how it happened.
What was the Great Depression?
The great depression was one of the worst depressions of all time. It is often referred to as a great depression because it greatly impacted the economy and more than one country. It is an event that changed not only the economy but also politics and society in general.
The Great Depression, which lasted from 1929 to 1939, was the most significant economic downturn in developed nations’ history. It all started after the Wall Street panic of October 1929, when the stock market crashed, wiping away millions of investors’ money.
As failing businesses lay off workers, consumer spending and investment fell precipitously during the next several years, producing a sharp decrease in industrial production and employment overall. A total of 15 million Americans were out of work, and almost half of the country’s banks had collapsed by 1933 during the depths of the Great Depression.
How did the Great Depression start
The United States’ economy increased fast during the 1920s, and the country’s overall wealth more than doubled between 1920 and 1929, a period is known as “the Roaring Twenties.”
Based on the New York Stock Exchange on Wall Street in New York City, the stock market was a hotbed of reckless speculation, with everyone from wealthy tycoons to cooks and janitors investing their savings.
As a result, the stock market expanded rapidly, reaching a high in August 1929.
By then, output had already fallen, and unemployment had grown, resulting in stock values that were far higher than their actual value. Furthermore, salaries were low, consumer debt was on the rise, the agriculture sector was failing due to drought and decreasing food prices, and banks had an excess of big loans that couldn’t be liquidated.
During the summer of 1929, the American economy entered a minor recession as consumer spending slowed and unsold products began to pile up, slowing factory productivity. Nonetheless, stock prices continued to soar, reaching stratospheric heights by the fall of that year that projected future earnings could not support.
Stock Market Crash of 1929
On October 24, 1929, the stock market crash that some had predicted occurred as anxious investors began dumping expensive shares in large numbers. On “Black Thursday,” a record 12.9 million shares were exchanged.
Five days later, on October 29, often known as “Black Tuesday,” approximately 16 million shares were exchanged as another wave of fear rocked Wall Street. Millions of shares were rendered worthless, and investors who had purchased equities “on margin” (with borrowed funds) were entirely wiped out.
As consumer confidence plummeted in the aftermath of the stock market crash, the drop in spending and investment caused factories and other firms to delay output and lay off people. Wages and purchasing power plummeted for those who were fortunate enough to keep their jobs.
Many Americans who were compelled to buy on credit became indebted, and the number of foreclosures and repossessions gradually increased. The United States used to be on the gold standard. That means that we had a fixed currency exchange with other countries.
Why did it happen?
The stock market meltdown that some had predicted occurred on October 24, 1929, when worried investors began dumping their overvalued shares in large numbers. On “Black Thursday,” a record-breaking 12.9 million shares were exchanged.
- Around 16 million shares were exchanged five days later, on “Black Tuesday,” when Yet another wave of fear rocked wall Street. Millions of shares were worthless, and investors who bought equities “on margin” (borrowed money) lost everything.
- Consumption fell due to the stock market meltdown, which reduced consumer confidence, causing factories and other firms to cut back on output and lay off employees. Those who were fortunate enough to keep their jobs saw their earnings decline, and their purchasing power dwindled.
- With so many Americans being pushed to buy on credit, foreclosures and repossessions have increased dramatically. The universal adoption of the gold standard, which brought together countries worldwide in fixed currency exchange, aided in spreading the United States’ economic troubles around the world, particularly in Europe.
Who was affected by the depression?
The Great Depression influenced everything in society. Between 1929 and 1933, the number of Americans without jobs increased from 3% to 25%. Those who were still employed saw their wages fall.
As a result of deflation, the GDP of the United States fell by half. It went from $103 billion to $55 billion. The CPI decreased by 27%.
The Smoot-Hawley tariff was enacted in 1930 by alarmed government officials to safeguard home businesses and employment, but it only made things worse.
World commerce fell by 66 percent in real terms between 1929 and 1934.
The effects of the Great Depression were felt all across the world, which sparked World War II. Germans were already struggling economically as a result of World War I reparations. Because of this, there was hyperinflation. People grew so desperate that in 1933 they elected Adolf Hitler’s Nazi party to power in Germany.
Life During the Great Depression
Many farmers lost their operations as a result of the Great Depression. The “Dust Bowl” in the Midwest, caused by years of over-cultivation and drought, decimated agricultural productivity in what had previously been a productive region.
Hundreds of thousands of farmers and other jobless people made the journey to the Golden State in quest of new employment opportunities.
What are some of the effects of this event?
The economy dropped by half in the first five years of the slump. The gross domestic product (GDP) was $105 billion in 1929. That’s more than $1 trillion in today’s money.
In August 1929, the economy began to contract. Six hundred fifty banks had collapsed before the conclusion of the year. The economy fell by an additional 8.5% in 1930.
In 1931, GDP decreased by 16.1%, and in 1932, it plummeted by 23.2%. The United States had been in a recession for at least four years by 1933. It only generated $56.4 billion, less than a tenth of what it did in that year.
Unemployment peaked at 4.2% in 1928, the last year of the Roaring Twenties. That’s lower than the average rate of joblessness. More than doubling to 8.7% by 1930. It had risen to 23.6 percent by 1932.
It reached its zenith in 1933 when it topped out at approximately 25%. There were over 15 million unemployed Americans. This is the most significant level of unemployment in the history of the United States.
As a result of the New Deal’s efforts, unemployment fell to 21.7% in 1934, 20.1% in 1935, 16.9% in 1936, and 14.3% in 1937. However, less substantial government expenditure in 1938 resulted in a return of 19 percent unemployment.
According to an analysis of the data by year, the unemployment rate stayed above 10% until 1941.
The Great Depression had an impact on politics by shattering people’s faith in capitalism as a whole. President Herbert Hoover had a laissez-faire approach to economics, but it had failed.
As a consequence, Franklin Roosevelt received a majority of the vote. His Keynesian theory of government spending promised to end the Great Depression.
There’s no doubt that the New Deal was a success. The economy expanded by 17% in 1934, as unemployment fell.
A third of the country’s banks collapsed during the Great Depression. Four thousand banks had collapsed by the end of the financial crisis in 1933. Thus, depositors suffered a $140 billion loss.
People were astounded to learn that banks had invested their cash on the stock market instead of lending it to them. Before it was too late, they hurried to withdraw their funds. Even reputable banks were driven out of business by these “runs.” Fortunately, this doesn’t happen very often these days.
What Ended the Great Depression?
Franklin D. Roosevelt was elected president of the United States in 1932. He pledged to implement federal government initiatives to help alleviate the effects of the Great Recession on the country’s economy. As soon as he could, Franklin D. Roosevelt signed the New Deal into law, resulting in 42 new agencies.
To produce jobs, unionization, and unemployment insurance, these policies were put in place. The vast majority of these initiatives are still in existence. They contribute to keeping the economy safe and averting another downturn.
The Social Security Administration, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation are New Deal institutions established under the New Deal.
Many people believe that World War II, and not the New Deal, was the catalyst for the end of the Great Depression in the United States. On the other hand, others believe that FDR might have prevented the Great Depression if he had spent as much on the New Deal as he did on the war effort.
FDR added $3 billion to the national debt between the start of the New Deal and the attack on Pearl Harbor. Defense spending racked up $23 billion in interest payments by 1942. It increased by a further $64 billion in 1943.
Reasons Why a Great Depression Couldn’t Happen Again
The odds are against this happening again. The Federal Reserve and other central banks across the world have taken lessons from the past.
Better protections are in place to protect the economy from a catastrophe, and monetary policy changes assist in managing it. For example, the Great Recession had a far lesser impact.
Fiscal policy, on the other hand, cannot be neutralized by monetary policy. Large US national debt and current account imbalance might lead to economic disaster, according to some. Furthermore, climate change experts expect significant losses as a result of their research and predictions.