What was the Great Depression?

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Definition:

The Great Depression was a severe economic downturn that affected the global economy for more than a decade, leading to widespread bank collapses, business closures, and high unemployment.

🤔 Understanding the Great Depression

The Great Depression was a severe economic downturn, in which key economic activities, such as business production and consumer spending, declined. It started in the United States in 1929 and quickly spread around the world. On Oct. 24, 1929, now known as Black Thursday, stock markets in the US suffered a massive drop. The collapse spooked consumers and cost investors roughly $14B. This led to reduced consumer spending resulting in company layoffs and a contracting economy by the following summer. Franklin D. Roosevelt won the 1932 presidential race by promising people a “New Deal,” including public infrastructure programs to put people to work. The economy didn’t begin expanding again until 1933, and even then many continued to struggle. In 1941, the US entered World War II. Wartime demand and government spending helped strengthen economic growth. Most historians attribute the end of the Great Depression to the combination of wartime jobs, which employed 17 million people, and the abandoning of the gold standard (which allowed the government to manipulate the money supply).

Example

On October 24, 1929 — A date now known as Black Thursday — the Dow Jones Industrial Average dropped by roughly 12%, wiping out billions of dollars in wealth. Traders bought and sold roughly 13M shares on Black Thursday, overloading ticker machines. Black Thursday is often cited as the start of the Great Depression; it was followed by Black Monday (October 28th), when markets plunged by nearly 13%, and Black Tuesday, when markets once again suffered steep drops. In total, US stock markets lost approximately 25% of their wealth between Oct. 24 and Oct. 29, 1929. The rapid market deterioration frightened investors, consumers, banks, and businesses. In the years to follow, thousands of companies went out of business and millions of workers lost their jobs.

Takeaway

The Great Depression was kind of like an avalanche…

Just as an avalanche builds up momentum, the Great Depression quickly evolved into a severe economic disaster. The Great Depression started as a small recession but then conditions continued to worsen, frightening investors and consumers. A recession for more than two continuous quarters becomes a depression. As the depression worsened, people withdrew money from their bank accounts, causing many to collapse. Economic demand dropped, companies laid off more employees, which reduced demand even more, overwhelming an already strained economy.

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What was the Great Depression?

The Great Depression was the most severe and longest-lasting economic slowdown in modern history. It originated in the United States and quickly spread through the global economy, affecting nearly every country. US unemployment rose to 25% by 1933, while business activity, including production and investment, declined.

A depression is a severe recession that extends for a prolonged period of time. Economists sometimes define a recession as two consecutive quarters of economic contraction (meaning the GDP shrinks). Economists sometimes use different definitions. The National Bureau of Economic Research states that a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

While recessions typically last for a few months or a year, depressions can drag on for several years. In the US, the Gross Domestic Product (GDP) shrank for four straight years between 1930 and 1933. Even after the economy started to grow again, people struggled to get by and unemployment stayed high. More than 85,000 businesses closed their doors, and hundreds of thousands of families lost their homes.

Before and throughout the 1920s, the US largely adhered to laissez-faire economic policies (the idea that the government should regulate markets as little as possible). The government rarely intervened in markets and provided little social welfare. Voters elected Herbert Hoover as president in 1929, and as the economy rapidly contracted, Hoover stuck to limited government intervention.

Hoover believed that too much intervention would threaten individualism and capitalism (an economy in which individuals, not the government, own properties and businesses). Many people lived in shanty towns that became known as Hoovervilles.

As the economy struggled and unemployment rose, public pressure for government intervention mounted. In 1932, New York Governor Franklin D. Roosevelt (FDR) won the presidency. He campaigned on the New Deal platform, promising to intervene in the economy to create jobs and provide aid. Under FDR, the federal government increasingly provided welfare and intervened in the economy.

When did the Great Depression start?

Most economists cite 1929 as the start of the Great Depression. Historians sometimes refer to the 1920s as the “roaring twenties,” owing to rapid economic growth, urbanization, and other factors. Wealth in the United States doubled between 1920 and 1929 as the economy rapidly expanded. More people invested in stock markets, which also grew rapidly, and many companies took out large loans. These factors contributed to the depression that followed.

The Great Depression started as a mild recession in the summer of 1929 but quickly worsened. On Oct. 24, 1929, now known as Black Thursday, US stock markets suffered a massive decline, wiping out wealth. This sparked panic and ushered in the Great Depression. Some consider Black Thursday the start of the Great Depression, but the economy started contracting even before then. Black Monday (Oct. 28th) and Black Tuesday (Oct. 29th) followed, when markets suffered further steep declines.

What caused the Great Depression?

Economists still debate the exact causes of the Great Depression. Many believe that several factors played a role in the depression.

1929 stock market crash: During the 1920s, stock markets in the US and elsewhere (namely the United Kingdom) grew rapidly. More people invested in stocks and other securities. Some investors overextended themselves, even mortgaging their homes to invest. As a result, the stock market formed a bubble (meaning they inflated rapidly). The bubble popped in 1929, wiping out huge amounts of wealth, and frightening investors and consumers alike.

Runs on banks: As the depression set in, many people worried banks would collapse, and began withdrawing their deposits. Many banks didn’t have the cash to fund withdrawals, having lent out reserves to speculators. As the economy worsened, companies and people struggled to pay back their loans. By 1933, about one-third of banks in the United States had failed.

Increased protectionism: Many countries enacted tariffs (taxes on imports) and other protectionist measures to protect their domestic economies. Leaders hoped that tariffs would encourage people to buy locally-made goods, spurring economic growth and keeping people employed. When the US enacted tariffs, such as the Smoot–Hawley Tariff Act, some foreign governments responded with retaliatory tariffs. This led to a trade war and reduced economic output around the world.

What were the effects of the Great Depression?

The Great Depression was one of the most important events in the 20th century. In the United States, the depression changed how American citizens viewed their government and the role it played in society. President Franklin D. Roosevelt greatly expanded the federal government’s influence in the economy by creating jobs programs and providing social welfare. For example, Roosevelt set up the Social Security program to provide regular payments to the elderly.

Some historians argue that the Great Depression allowed the Nazi Party to rise to power in Germany, leading to World War II. Many Germans were still reeling from losing World War I, and the Great Depression hit Germany hard. Resentment, high unemployment, and a weak economy which they say helped Adolf Hilter gain power and led Germany down a path towards war.

Meanwhile, the United Kingdom struggled to support its colonial empire. Many colonies relied on exporting raw materials, and as demand broke down, their economies suffered. Short on funds, the UK also struggled to administer its vast empire.

In other countries, widespread economic malaise helped promote the spread of communism. Before the Great Depression, the Communist Parties in the US and many other countries were small, but they attracted new members as unemployment rose. FDR argued that his New Deal policies and government intervention were necessary to ward off communism and save capitalism.

Labor unions also expanded their clout during the depression. As workers and their families struggled to get by, collective bargaining, strikes, and other union activities drew broader appeal. After initially losing millions of members in the early years of the Great Depression, unions grew more powerful. The Roosevelt Administration supported the National Labor Relations Act (aka the Wagner Act), which guaranteed workers’ right to strike, organize, and form unions.

How long did the Great Depression last?

The Great Depression started in 1929, continuing into the 1930s and 1940s. While the average recession before the Great Depression lasted for two years, the depression dragged on for more than a decade. Many historians cite Black Thursday (Oct. 24th, 1929) as the start of the Great Depression, but the economy had fallen into a recession months earlier.

Over the next few years, approximately one-third of banks collapsed. Despite efforts by President Herbert Hoover to stimulate the economy through tax cuts and public works projects, the economy struggled. By 1933, the US economy had shrunk by over 25%, marking four years of straight declines. Some historians point to 1933 as the end date of the Great Depression, because the economy began growing again in 1934. But another downturn in 1937 pushed unemployment back up to 20% and many people struggled to get by.

By 1939, the economy was expanding again. By the late 1930s and early 1940s, the US’s gross domestic product finally rose back above pre-depression levels and the unemployment rate fell below 10%.

In the lead up to entering World War II in 1941, the United States ramped up military production. The US sent supplies to allies such as the United Kingdom. Leading up to and during the war, the gross domestic product grew quickly beginning in 1938, expanding by 17.7% in 1941 alone. By 1941, the Great Depression was over.

How did the Great Depression end?

Economists still debate when exactly the Great Depression ended and what caused it to end. The general consensus is that increased spending during World War II ended the Great Depression.

The United States also abandoned the gold standard in 1933 and devalued its currency, which some economists believe played an important role in ending the depression. People hoarded gold during the depression and traded in paper currency for gold. This discouraged spending and reduced aggregate demand. Abandoning the gold standard made it easier for the government to increase the money supply, which grew by over 40% between 1933 and 1937.

By 1939, the United States gross domestic product exceeded pre-Depression levels. Two years later, the unemployment rate declined to 10%. As the United States entered World War II, the Federal Reserve increased the money supply, encouraging more spending and lending. As men enlisted in military service and the government continued wartime production, more and more women joined the economy, working in factories and elsewhere. Unemployment declined as a result.

Could a shutdown cause a depression?

In the wake of the Covid-19 pandemic, the US economy officially entered a recession in February 2020, ending a record-breaking 128-month period of economic expansion. Millions of Americans have lost their jobs, and even after some local governments lifted their stay-at-home orders, many businesses remained shuttered.

It’s difficult to predict whether the pandemic will lead to a depression or prolonged economic downturn. Jerome Powell, the chairman of the Federal Reserve, has said that the downturn wouldn't last as long as the Great Depression. The Federal Reserve predicted that the unemployment rate would be at 9.3% by the end of 2020; the Congressional Budget Office forecasts it will exceed 11%.

The International Monetary Fund (IMF) has warned that the global economy could shrink by as much as 3% in 2020. (The Great Recession of 2009 resulted in a global economic shrinkage of 0.1%.) The Covid-19 pandemic may lead to the most severe global economic downturn since the Great Depression. The IMF has also stated that the world economy may rebound in 2021.

The Great Depression saw a massive collapse in aggregate demand (total spending in the economy). The COVID-19 shutdown has reduced demand, while restaurants, movie theaters, and stores have shuttered. Many companies have lost revenue and may restrain business investments. Many have also laid off employees. An estimated 28% of American workers have been laid off, and 40% have lost jobs or wages. In an effort to prevent a severe economic downturn, the federal government has implemented stimulus programs and loans to businesses. The long-term impact of the COVID-19 pandemic remains to be seen.

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