Great Depression: History and Effects of the Economic Downturn

The Great Depression refers to a far-reaching economic depression that began in October 1929 on the New York Stock Exchange and lasted for an entire decade. This stood in stark contrast to the economic boom years of the prior decade (also known as the Roaring Twenties) following World War I.

The loose monetary and economic policies of the previous decade helped lay the foundation for the ruin to come. The Great Depression’s macroeconomic ramifications rang throughout the entire globe, affecting the entire international system of commerce. Herbert Hoover served as president for the first few years of the Depression, but Franklin D. Roosevelt (nicknamed FDR) led the United States through the vast majority of these tumultuous years.

By the end of FDR’s twelve-year term as president, he had paved the way for the nation to become the world’s premier military and economic superpower. Economic experimentation pioneered by his administration, as well as by other governments and central banks throughout the world, provides a guidebook to avoiding a similar protracted economic crisis to this day.

Economists dispute some of the details of what caused the Great Depression, but almost all professionals in the field agree on key reasons for the economic upheaval. Consider these main causes of the Great Depression:

• Banking panics: After the Depression was underway, people rushed to their local banks to withdraw all their money. Institutions were unable to provide money to the high volume of consumers during these bank runs, leading President Herbert Hoover to declare a bank holiday and prevent people from continuing the trend. This led to the deflation of the money supply and additional economic pain.
• The Great Crash of 1929: The stock market crash of 1929 was the inciting incident that led to a decade of economic desperation. On Black Thursday (October 24, 1929), Wall Street saw the largest sell-off in shares up to that point in history. A few days later, Black Tuesday (October 29, 1929) saw another day of frenzied trading in New York City, leading the market to lose 11 percent of its value.
• Improper Federal Reserve policies: Economists like Milton Friedman believe the banking system had the tools to combat the Depression more effectively but didn’t use them. The Federal Reserve Bank (or the Fed) relied too heavily on the gold standard, kept interest rates high, and refused to combat the deflation of the money supply through increased stimulus—all of these factors contributed to the onset and continuation of the Great Depression.
• Regressive trade policies: In response to the economic chaos of 1929, legislators in Washington, DC, passed the Smoot-Hawley Tariff Act to shore up jobs for the US economy. This wound up being one of the largest blunders of economic history. The bill codified an emphasis on protectionism and demonization of global trade, prolonging the Depression and increasing international animosity in the years leading to World War II.

The Great Depression was the greatest economic crisis in the history of the United States of America. Here are some ways it affected different arenas of the US economy:

• High unemployment: This economic collapse led to the highest unemployment rate in United States history. At the Depression’s peak, nearly a quarter of US citizens were out of work. This coincided with the advent of the Dust Bowl, a series of dust storms and droughts that ravaged American farmland and sent migrants across the country in search of new land and job opportunities.
• Homelessness: As people lost their fortunes, they lost their homes. Many wound up on the streets as they waited for better times to return. Some blamed the economic policies of President Herbert Hoover for this rise in homelessness, leading many to call the shantytowns popping up across the country “Hoovervilles.”
• Low production: Consumer spending collapsed as sharply as stock prices did throughout the Great Depression, leading to a giant dip in GDP (gross domestic product). It wasn’t until the election of President Franklin Roosevelt and the implementation of his New Deal stimulus that the course of industry began to right itself.

This historic economic downturn took well over a decade to conclude. These elements laid the groundwork for a return to prosperity:

• Experts improved monetary policy. Economists, politicians, and financial professionals studied their mistakes in the early years of the Depression and took a different course in the latter years of the downturn. People still rely on the lessons the country learned during this period to make their way through financial crises. For example, Ben Bernanke, chairman of the Fed during the Great Recession, encouraged federal government spending and adopted low interest rates and a high stimulus because of the lessons the country learned from the Depression.
• New Deal programs went into effect. President Franklin Roosevelt made the New Deal—a set of programs to spur economic recovery—a cornerstone of his presidency. His administration worked with Congress to build programs like Social Security and the unemployment insurance system, as well as agencies like the Farm Security Administration (FSA), Federal Deposit Insurance Corporation (FDIC), and Works Progress Administration (WPA) to help return the nation to prosperity. His predecessor, Herbert Hoover, built organizations like the Reconstruction Finance Corporation for a similar purpose.
• World War II started. The Allied powers went to war with the Axis of Germany, Italy, and Japan at the end of this prolonged financial crisis. The increase in domestic production and government spending World War II brought on completed the economic recovery necessary to end the Great Depression.

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