The Great Depression

Introduction:
The Great Depression was the worst economic downturn in the history of the industrialized
world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which
sent Wall Street into a panic and wiped out millions of investors. Over the next several years,
consumer spending and investment dropped, causing steep declines in industrial output and
employment as failing companies laid off workers. By 1933, when the Great Depression reached
its lowest point, some 15 million Americans were unemployed and nearly half the country’s
banks had failed.
It was the longest and most severe depression ever experienced by the industrialized Western
world, sparking fundamental changes in economic institutions, macroeconomic policy, and
economic theory. Although it originated in the United States, the Great Depression caused
drastic declines in output, severe unemployment, and acute deflation in almost every country of
the world. Its social and cultural effects were no less staggering, especially in the United States,
where the Great Depression represented the harshest adversity faced by Americans since
the Civil War.
Background To Great Depression:
- It marked the beginning of involvement from the government to the country’s economy
and also the society as a whole. After almost a decade of prosperity and optimism, the US
was now exposed to a period of despair. The day when this happened is refferd to as
Black Tuesday, and it is the day when the stock market crashed. That was the official
date when the Great Depression started. The stock market prices crashed to an extend that
there was no hope for them to rise again. Many people tried to sell their stock, but,
unfortunately, no one was ready to buy.
- The 1920s witnessed an economic boom in the US (typified by Ford Motor cars, which
made a car within the grasp of ordinary workers for the first time). Industrial output
expanded very rapidly. 
- Sales were often promoted through buying on credit. However, by early 1929, the steam
had gone out of the economy and output was beginning to fall.
- The stock market had boomed to record levels. Price to earning ratios were above
historical averages.
- The US Agricultural sector had been in recession for many more years
- The UK economy had been experiencing deflation and high unemployment for much of
the 1920s. This was mainly due to the cost of the first world war and attempting to rejoin
the Gold standard at a pre-world war 1 rate. This meant Sterling was overvalued causing

1
 lower exports and slower growth. The US tried to help the UK stay in the gold standard.
That meant inflating the US economy, which contributed to the credit boom of the 1920s.
Causes and effects of Great Depression:
The most important causes:
1.Stock Market Crash of October 1929
During September and October, a few firms posted disappointing results causing share prices to
fall. On October 28th (Black Monday), the decline in prices turned into a crash that made share
prices fell 13%. Panic spread throughout the stock exchange as people sought to unload their
shares. On Tuesday there was another collapse in prices known as 'Black Tuesday'. Although
shares recovered a little in 1930, confidence had evaporated and problems spread to the rest of
the financial system. Share prices would fall even more in 1932 as the depression deepened. By
1932, The stock market fell 89% from its September 1929 peak. It was at a level not seen since
the nineteenthcentury.
Falling share prices caused a collapse in confidence and consumer wealth. Spending fell and the
decline in confidence precipitated a desire for savers to withdraw money from their banks.
2. Bank Failures

In the first 10 months of 1930 alone, 744 US banks went bankrupt and savers lost their savings.
In a desperate bid to raise money, they also tried to call in their loans before people had time to
repay them. As banks went bankrupt, it only increased the demand for other savers to withdraw
money from banks. Long queues of people wanting to withdraw their savings was a common
sight. The authorities appeared unable to stop bank runs and the collapse in confidence in the
banking system. Many agree, that it was this failure of the banking system which was the most
powerful cause of economic depression.
Because of the banking crisis, Banks reduced lending, there was a fall in investment. People lost
savings and so reduced consumer spending. The impact on economic confidence was disastrous.
After the crash, banks began to demand that people pay back the money they had borrowed to
buy stocks. When people could not repay their loans, banks ran short of money. People rushed to
banks to withdraw their savings. By March 1933, about 9,000 banks went out of business.
3.Banking panics and monetary contraction.
 Between 1930 and 1932 the United States experienced four extended banking panics, during
which large numbers of bank customers, fearful of their bank’s solvency, simultaneously
attempted to withdraw their deposits in cash. Ironically, the frequent effect of a banking panic is
to bring about the very crisis that panicked customers aim to protect themselves against: even
financially healthy banks can be ruined by a large panic. By 1933 one-fifth of the banks in
existence in 1930 had failed, leading the new Franklin D. Roosevelt administration to declare a
four-day “bank holiday” (later extended by three days), during which all of the country’s banks
remained closed until they could prove their solvency to government inspectors. The natural

2
consequence of widespread bank failures was to decrease consumer spending and business
investment, because there were fewer banks to lend money. There was also less money to lend,
partly because people were hoarding it in the form of cash. According to some scholars, that
problem was exacerbated by the Federal Reserves, which raised interest rates (further depressing
lending) and deliberately reduced the money supply in the belief that doing so was necessary to
maintain the gold standard (see below), by which the U.S. and many other countries had tied the
value of their currencies to a fixed amount of gold. The reduced money supply in turn reduced
prices, which further discouraged lending and investment (because people feared that
future wages and profits  would not be sufficient to cover loan payments).
4.The gold standard
 Whatever its effects on the money supply in the United States, the gold standard unquestionably
played a role in the spread of the Great Depression from the United States to other countries. As
the United States experienced declining output and deflation, it tended to run a trade surplus with
other countries because Americans were buying fewer imported goods, while American exports
were relatively cheap. Such imbalances gave rise to significant foreign gold outflows to the
United States, which in turn threatened to devalue the currencies of the countries whose gold
reserves had been depleted. Accordingly, foreign central banks attempted to counteract the trade
imbalance by raising their interest rates, which had the effect of reducing output and prices and
increasing unemployment in their countries. The resulting international economic decline,
especially in Europe, was nearly as bad as that in the United States. 
5.Decreased international lending and tariffs
 In the late 1920s, while the U.S. economy was still expanding, lending by U.S. banks to foreign
countries fell, partly because of relatively high U.S. interest rates. The drop-off contributed to
contractionary effects in some borrower countries, particularly Germany, Argentina, and Brazil,
whose economies entered a downturn even before the beginning of the Great Depression in the
United States. Meanwhile, American agricultural interests, suffering because of overproduction
and increased competition from European and other agricultural producers, lobbied Congress for
passage of new tarrifs on agricultural imports. Congress eventually adopted broad legislation, the
Smoot-Hawley Tariff Act (1930), that imposed steep tariffs (averaging 20 percent) on a wide
range of agricultural and industrial products. The legislation naturally provoked retaliatory
measures by several other countries, the cumulative effect of which was declining output in
several countries and a reduction in global trade.
Just as there is no general agreement about the causes of the Great Depression, there is no
consensus about the sources of recovery, though, again, a few factors played an obvious role. In
general, countries that abandoned the gold standard or devalued their currencies or otherwise
increased their money supply recovered first (Britain abandoned the gold standard in 1931, and
the United States effectively devalued its currency in 1933). Fiscal expansion, in the form of
New Deal jobs and social welfare programs and increased defense spending during the onset of
World War II, presumably also played a role by increasing consumers’ income and aggregate
demand, but the importance of this factor is a matter of debate among scholars.

3
Effects:
1.Too many poor people
 That may sound sort of goofy, but it’s a real reason. While the overall economy had soared in
the 1920s, most of the wealth was enjoyed by relatively few Americans. In 1929, 40 percent of
the families in the country were still living at or below the poverty level.
That made them too poor to buy goods and services and too poor to pay their debts. With no
markets for their goods, manufacturers had to lay off tens of thousands of workers, which, of
course, just created more poor people.
2.Farm failures
 Many American farmers were already having a hard time before the Depression, mostly because
they were producing too much and farm product prices were too low. The situation was so bad in
some areas that farmers burned corn for fuel rather than sell it.
3.Environmental disasters
 The production of vast crops during World War I and the decade that followed resulted in over-
plowing of much of America’s farmland. The prairie grasses that held topsoil in place were
stripped.
Coupled with one of the worst droughts in recorded history, the unprotected soil turned the Great
Plains into what would become known as the “Dust Bowl.” Dry winds picked up tons of topsoil
and blew it across the prairies, creating huge, suffocating clouds of dirt that buried towns and
turned farms into deserts.
4.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. 3
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 Labour Statistics.
Panicked government leaders passed the Smoot-Hawley tariff in 1930 to protect domestic
industries and jobs, but it actually worsened the issue. World trade plummeted 66% as measured
in U.S. dollars between 1929 and 1934.

4
The Depression’s pain was felt worldwide, leading to World War II. Germans were already
burdened with financial reparations from World War I. That caused hyperinflation. As a result,
the people became desperate enough to elect Adolf Hitler’s Nazi party to a majority in 1933.
5.Global Downturn
America had lent substantial amounts to Europe and the UK, to help rebuild after first world war.
Therefore, there was a strong link between the US economy and the rest of the world. The US
downturn soon spread to the rest of the world as America called in loans, Europe couldn't afford
to pay back. This global recession was exacerbated by imposing new tariffs such as Smoot-
Hawley which restricted trade further.

What Ended the Great Depression

Franklin Roosevelt (1882–1945) was elected as president in 1932, and when he took office in
early 1933, he brought hope with his massive New Deal social and economic recovery programs.
He promised to create federal government programs to end the Great Depression. Within 100
days, he signed the New Deal into law, creating 42 new agencies throughout its lifetime. They
were designed to create jobs, allow unionization, and provide unemployment insurance.
Roosevelt took immediate action to address the country’s economic woes, first announcing a
four-day “bank holiday” during which all banks would close so that Congress could pass reform
legislation and reopen those banks determined to be sound. He also began addressing the public
directly over the radio in a series of talks, and these so-called „fireside charts” went a long way
towards restoring public confidence.
In addition, Roosevelt sought to reform the financial system, creating the Federal Deposit
Insurance Corporation (FDIC) to protect depositors’ accounts and the Securities and Exchange
Commission (SEC) to regulate the stock market and prevent abuses of the kind that led to the
1929 crash.

The New Deal: A Road to Recovery

Among the programs and institutions of the New Deal that aided in recovery from the Great
Depression were the Tennessee Valley Authority (TVA), which built dams and hydroelectric
projects to control flooding and provide electric power to the impoverished Tennessee Valley
region, and the Works Progress Administration (WPA), a permanent jobs program that employed
8.5 million people from 1935 to 1943.
After showing early signs of recovery beginning in the spring of 1933, the economy continued to
improve throughout the next three years, during which real GDP (adjusted for inflation) grew at
an average rate of 9 percent per year.
A sharp recession hit in 1937, caused in part by the Federal Reserve’s decision to increase its
requirements for money in reserve. Though the economy began improving again in 1938, this

5
second severe contraction reversed many of the gains in production and employment and
prolonged the effects of the Great Depression through the end of the decade.
Depression-era hardships had fueled the rise of extremist political movements in various
European countries, most notably that of Adolf Hitel’s Nazi regime in Germany. German
aggression led war to break out in Europe in 1939, and the WPA turned its attention to
strengthening the military infrastructure of the United States, even as the country maintained its
neutrality.

Great Depression Ends and World War II Begins

With Roosevelt’s decision to support Britain and France in the struggle against Germany and the
other Axis Powers, defense manufacturing geared up, producing more and more private sector
jobs.
The Japanese attack on Pearl Harbour in December 1941 led to America’s entry into World War
II, and the nation’s factories went back in full production mode.
This expanding industrial production, as well as widespread conscription beginning in 1942,
reduced the unemployment rate to below its pre-Depression level. The Great Depression had
ended at last, and the United States turned its attention to the global conflict of World War II.

The Conclusion of the Great Depression:

The Great Depression became a huge blow to the economies of many countries. A lot of people,
companies, and businesses suffered from this economic crisis. Everybody experienced big
losses.. The Great Depression broke the confidence of the American people as well as their
leaders. The future of their economy was unclear and shaky strategies were used in order to
attempt to recover. After the Great Depression, the United States government sought to remove
systems that did not work for them in order to protect the country from any possible
complications that could arise in the economy. After the Great Depression, the United States
were more careful in what could stay and what had to go.The Great Depression was the result of
an unlucky combination of factors—a flip-flopping Fed, protectionist tariffs, and inconsistently
applied government interventionist efforts. It could have been shortened or even avoided by a
change in any one of these factors.
While the debate continues as to whether the interventions were appropriate, many of the
reforms from the New Deal, such as Social Security, unemployment insurance, and agricultural
subsidies, exist to this day. The assumption that the federal government should act in times of
national economic crisis is now strongly supported. This legacy is one of the reasons the Great
Depression is considered one of the seminal events in modern American history.

Bibliography:

6
1. www.history.com
2. America’s Gretest Depression by Lester Chandle
3. Essays on the Great Depression by Ben Bernanke
4. The Great Depression: America 1929-1942 by Robert S. McElvaine
5. https://www.britannica.com/event/Great-Depression