Great Depression Definition
The Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939. The Federal Reserve’s failure to regulate the money supply, credit availability and interest rates also contributed to this worldwide economic catastrophe.
The economic downturn severely affected industries in the West and around the world. Global GDP decreased due to reduced consumption, erroneous government policies, and the gold standardGold StandardThe gold standard was a monetary term used when gold exchange was used instead of paper currency.. Eventually, nations faced extreme unemployment and deflationDeflationDeflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy.. However, the introduction of the New Deal and World War II helped the world economy recover from it.
Table of contents
- The Great Depression was the most severe financial crisis in modern history. It began on October 29, 1929, with the Wall Street Crash in the United States that continued for ten years until 1939.
- The failure of the Federal Reserve to regulate the money supply, credit availability, and interest rates is considered the leading cause of the global economic meltdown.
- During the economic depression, the unemployment rate in the U.S. rose from 3% to 25%, affecting about 15 million Americans and halving the national GDP.
- The rest of the world also suffered from the economic crisis due to the gold standard, reduced consumption, poor government policies, and lower industrial productivity in construction, mining, agriculture, and manufacturing.
Understanding The Great Depression Of 1929
The Great Depression of 1929 began in the United States due to its strict monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc. to curtail stock market speculation. In the 1920s, the country experienced remarkable growth due to strong investor confidence and consumer expenditure. It prompted banks to provide consumers and businesses with easy financing and profit from it. However, it later became the cause of rising consumer and domestic debts. This decade of prosperity was known as the Roaring Twenties.
Americans started to invest heavily in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price., leading to a constant rise in stock prices, reaching an all-time high in 1929. Subsequently, the Federal Reserve increased credit interest rates to slow down this price rise. But the decision badly impacted the construction and manufacturing industries. Additionally, a slight decline in stock prices in October 1929 made investors lose confidence, causing the stock market bubbleStock Market BubbleA stock market bubble is a phenomenon in which the prices of a company's stock are inflated and cannot be supported by the company's actual performance, resulting in a divide between the real and financial economies caused by irrational exuberance of market participants, herd mentality, or any other similar reason. to burst.
The day it began, October 24, 1929, is known as “Black Thursday,” with prices plummeting by more than 20% by October 29, 1929. When the first decline in stock prices occurred, investors panicked. And in a streak of desperate decisions, the stock market crashed, wiping over $30 billion at once. While high margin trading by traders caused asset price increase, panic selling forced investors to liquidate their equities. It threw the New York Stock Exchange (NYSE) into a tailspin, resulting in a bank run.
The U.S. government tried everything to control the situation. But unfortunately, a series of uncertain events followed one after another, like the Dust Bowl, stretching the Great Depression years. All of this resulted in job losses, lower industrial productivity, and a drop in GDP. It forced world nations to restructureRestructureRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc. their economic institutions and policies. Finally, the removal of the gold standard and subsequent monetary growth aided the recovery from the economic depression.
Video Explanation of Black Tuesday
Causes Of Great Depression
When exploring the Great Depression period, there was more than one reason behind it. The Great Depression years started after 1928 when the U.S. stock market witnessed an enormous expansion. People purchased stocks from the money borrowed from banks. After stock prices soared in early October 1929, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. panicked and tried to liquidate their investments. It caused the consumer price index to decline by more than 30%. Thus, the infamous stock market crashStock Market CrashA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst. occurred on October 29, 1929.
The U.S. Federal Reserve was equally culpable for mismanaging the money supply, credit allocation, and interest rates during the 1920s. The increase in money supply led to stock market expansion and bubble, while a decrease following the market crash and bubble burst caused liquidity issues and panic among banks. By the end of 1933, more than 650 banks were closed.
Another significant cause was the diminishing confidence of investors. Furthermore, a reduction in global trade due to low levels of production, lower wages, and unemployment worsened the condition. At the same time, thousands of farmers lost their farms as they could not afford to harvest crops. So they migrated to California and other regions, which created the Dust Bowl, a key event in the economic depression.
Although economic experts blame governments of that time for being too slow or unwilling to adjust their economic policies, two popular theories explaining causes of the Great Depression are:
- Monetarist TheoryMonetarist TheoryMonetarists refer to the believers of the monetarism school of thought, which propagates controlling the money supply to achieve economic stability. Economist Milton Friedman was the major advocate of monetarism theory. – This theory suggested the failure of the Federal Reserve to implement measures during the recession, leading to the banking crisis and loss of wealth.
- Keynesian TheoryKeynesian TheoryKeynesian Economics is a theory that relates the total spending with inflation and output in an economy. It suggests that increasing government expenditure and reducing taxes will result in increased market demand and pull up the economy out of depression. – This theory held governments responsible for not running deficits, increasing public sector expenditure, cutting taxes, and boosting the employment rate during the recession.
Great Depression Timeline (Dates & Years)
- 1920s: The U.S. economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society. soared, resulting in a doubling of its overall wealth between 1920 and 1929, dubbed the “roaring twenties.”
- 1929: A mild recession in the summer slowed down factory production, but stock prices continued to hike.
- October 24, 1929 (Black Thursday): With over 12.9 million shares traded on a single day, the stock market crashed as many investors started exiting the stock market by selling overvalued stocks
- October 29, 1929 (Black TuesdayBlack TuesdayBlack Tuesday refers to October 29,1929, when many investors panicked and started selling their shares. The trading volume went upto 16 million and Dow Jones dropped by more than 12% in a single day.): With over 16 million shares traded, many of which were worthless, and those who bought them with credit money perished miserably.
- 1930: Dust Bowl resulted in the migration of thousands of farmers to California and other regions. They left their farms overnight for employment or any work as they could not afford to harvest crops.
- 1931-1933: The introduction of the Smoot-Hawley Tariff Act backfired. And by the spring and fall of 1931 and 1932 to early 1933, numerous banks were utterly wiped out or ordered to shut down.
- 1932: Franklin D. Roosevelt won the U.S. presidential election amid rising unemployment. He took immediate actions to support the U.S. economy, generate employment, and stimulate industrial and agricultural production. Roosevelt created the Federal Deposit Insurance Corporation and Securities and Exchange Commission to monitor and regulate the stock market once again in a better way.
- 1933: Roosevelt introduced a series of programs and launched 40+ agencies under the New Deal, facilitating government interference in the stock market.
- 1935: Roosevelt introduced a second New Deal, which was more adamant and aggressive than the last one, in the wake of continuing economic depression. In April 1935, he opened the Works Progress Administration to create employment.
- 1933-1941: The New Deal regulations helped adjust interest rates and created small job opportunities and work programs. Roosevelt encouraged women to join the workforce by creating more secretarial positions in public offices.
- 1941: The U.S. entered World War II on December 7, 1941, as Japan attacked Pearl Harbor. The war effectively ended the economic depression by regulating industrial work.
Effects Of Great Depression
- Construction, mining, agricultural, and manufacturing industries have all taken a hit, resulting in lower consumption, income, tax revenue, profits, and prices worldwide.
- The U.S. unemployment rate spiked from approximately 3% in 1929 to almost 25% in 1933 during the economic depression. It remained above 10% in the 1940s when America went to World War II.
- Between 1929 and 1932, global GDP declined by about 15%, while U.S. GDP and industrial production decreased by half, from $103 billion to $55 billion, stifling economic activity. International tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. also declined by more than 60%.
- The U.S. stock market lost 90% of its value, and people lost all hopes of its recovery. Additionally, those who did not invest lost their money as banks eventually invested their savings accounts funds in the stock market.
- Almost 650 U.S. banks failed as investors lost confidence in the U.S. financial system after the stock market crash. Also, the Consumer Price IndexConsumer Price IndexThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark point. fell by 27% from November 1929 and remained there till November 1939. People lost faith in capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also., which brought American politics to its knees.
- The Great Depression of 1929 brought the infamous Dust Bowl. It referred to the drought-affected southern plains from Texas to Nebraska, which resulted in the loss of crops across the region, leading to deaths of its people and livestock. Many farmers lost their farms due to a drop in agricultural production.
- The Smoot-Hawley Tariff Act, adopted in 1930 to safeguard domestic industries and workers, raised food prices and indirectly contributed to World War II.
Frequently Asked Questions (FAQs)
The Great Depression was the worst financial disaster in modern history. The global economic downturn had a significant impact on sectors in the West and around the world. The global economic output and GDP have both declined. Eventually, countries experienced high unemployment and deflation.
The Wall Street Crash of 1929 played a crucial role in the economic depression. It was exacerbated by the Federal Reserve’s failure to regulate the money supply, credit availability, and interest rates, the gold standard, monetary contraction, and panic in the banking system. Further, the decline in global demand, weak government policies, fewer wages, unemployment, and lower productivity in the construction, mining, agricultural, and manufacturing industries fueled the financial crisis.
Following his election as president of the U.S. in 1932, Franklin D. Roosevelt implemented stringent policies to boost industrial and agricultural production. It helped lower interest rates and created small job opportunities. Under the New Deal, he established several initiatives and 40+ agencies, allowing the government to intervene in the stock market. The U.S. regulated industrial work during World War II in 1941 that ended the economic depression.
This has been a guide to Great Depression and its definition. Here we discuss the Great Depression of 1929, along with its causes, timeline (dates, years), and effects. You can learn more from the following articles –