Why There Was Only One Great Depression
The Great Depression was a worldwide economic depression that lasted 10 years. It began on “Black Thursday,” Oct. 24, 1929. Over the next four days, stock prices fell 22% in the stock market crash of 1929. That crash cost investors $30 billion, the equivalent of $396 billion today. That terrified the public because the crash cost more than World War I. The Depression had begun earlier in August when the economy contracted.
- The Great Depression was a worldwide economic depression that lasted 10 years.
- The depression was caused by the stock market crash of 1929 and the Fed’s reluctance to increase the money supply
- GDP during the Great Depression fell by half, limiting economic movement.
- 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 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell. U.S. gross domestic product was cut in half, from $103 billion to $55 billion, due partly to deflation. The Consumer Price Index fell 27% between November 1929 to March 1933, according to the Bureau of Labor Statistics.
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.
What Caused It
According to Ben Bernanke, a past 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, these were the Fed’s five critical mistakes:
- 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.
- 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.
- The Fed raised interest rates again to preserve the dollar’s value. That further restricted the availability of money for businesses. More bankruptcies followed.
- The Fed did not increase the supply of money to combat deflation.
- 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.
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.12 Within 100 days, he signed the New Deal into law, creating 42 new agencies throughout its lifetime.13 They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist. They help safeguard the economy and prevent another depression.
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.
But monetary policy can’t offset fiscal policy. 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.
- Virginia Commonwealth University.”Stock Market Crash of October 1929,” Accessed April 22, 2020.
- Bureau of Labor Statistics. “Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods,” Page 2, Table 1. As of July 1 of each year. Accessed April 22, 2020.
- The University of Missouri. “Prices and Wages by Decade: 1930-1939,” Accessed April 22, 2020.
- Bureau of Economic Analysis. “National Income and Product Accounts Tables,” Table 1.1.5. Nominal GDP. Select “Modify,” Select “First Year 1929,” Select “Series Annual,” Select “Refresh Table.”Accessed April 22, 2020.
- Bureau of Labor Statistics. “Consumer Price Index Database, All Urban Consumers,” Select “Top Picks,” Check “U.S. city average, All items,” Retrieve Data, Select “More Formatting Options,” Select “12-month percent change” and “Range between 1913 to present,” Retrieve Data. Accessed April 22, 2020.
- Federal Reserve Bank of St. Louis. “Tariff of 1930 (Smoot-Hawley Tariff),” Accessed April 22, 2020.
- Economic History. “Smoot-Hawley Tariff,” Accessed April 22, 2020.
- Office of the Historian. “Protectionism in the Interwar Period,” Accessed April 22, 2020.
- University of California, Davis. “Dust Bowl Migration,” Accessed April 22, 2020.
- The Federal Reserve Board. “Money, Gold, and the Great Depression,” Accessed April 22, 2020.
- San José State University.” The Money Supply and the Banking System Before and During the Great Depression,” Accessed April 22, 2020.
- Roosevelt Institute. “The New Deal As New Pragmatism,” Accessed April 22, 2020.
- Franklin D. Roosevelt Presidential Library and Museum. “Great Depression Facts,” Accessed April 22, 2020.
- The Foundation for Economic Education. “If FDR’s New Deal Didn’t End the Depression, Then It Was World War II That Did,” Accessed April 22, 2020.
- Treasury Department. “Historical Debt Outstanding,” Select time frame, then select year. Accessed April 22, 2020.
- CNN Money. “Great Depression vs. Great Recession,” Accessed April 22, 2020.
- The University of Melbourne. “The Great (Climate) Depression,” Accessed April 22, 2020.