One of the greatest economic downturns of the industrialized world, The Great Depression was a bleak period. Like something from a Dickens novel, it was the worst of times which lasted a decade. Gone were the excesses of the “roaring twenties'', wealth, economic success, and cosmopolitan life. This was quickly replaced by hardship, joblessness, and a slowly dwindling economy.
In the blink of an eye, millions of people were in debt, homeless, and struggling to put food on their tables. The country was in economic distress with falling companies and half of the banks had failed. By 1933, The Great Depression had reached its lowest point, and more than 15 million Americans were in debt.
What actually happened? How did a great nation on the edge of economic success and wealth suddenly tank at the end of the decade? For many who witnessed these dark days, The Great Depression was a difficult time to survive.
Although a severe and grim period, the Great Depression did come to an end bringing with it fundamental changes. How did this happen and how did the country turn around? It is time to take a deep dive into history.
Great Depression History Lesson
For many who witnessed the pangs of hunger, homelessness, debt, and suffering, the Great Depression were nightmarish years. While there are no universally agreed causes for the Great Depression, most theories often cite these reasons.
- The Stock Market Crash: The Great Depression is widely considered to have begun with the dramatic stock market crash on October 29, 1929, a day that has become known as “Black Tuesday”. On this fateful day, stock prices plummeted dramatically, with the Dow Jones Industrial Average losing over 12% of its value. This massive sell-off was the culmination of a period of rampant speculation and overvaluation in the stock market throughout the 1920s.
- The Gold Standard: Back in 1929, the United States- Like many other countries at the time-was on the Gold Standard, with the dollar redeemable in gold and pegged to its value. But after the Wall Street crash, nervous investors began to trade their dollars for gold. In 1933, President Roosevelt took the U.S. off the gold standard when he signed an executive order making it illegal for individuals and firms to possess most forms of monetary gold. People were required to exchange their gold coins, gold bullion and gold certificates for paper money at a set price of $20.67 per ounce.
- The Federal Reserve’s inadequate response: The Federal Reserve, established in 1913, is the central banking system of the United States and is responsible for setting monetary policy, regulating the banking system, and maintaining the stability of the financial system. During the Great Depression, the Federal Reserve was expected to take the lead in addressing the economic crisis and providing the necessary support to the banking system and the broader economy. However, the Federal Reserve's actions, or lack thereof, during this period have been widely criticized by economists and historians. The Federal Reserve's policies and decisions, or lack thereof, played a significant role in exacerbating the Great Depression and prolonging the economic suffering of the American people.
- Bank Failures and panics: In all. 9,000 banks failed- taking with them $7 billion in depositors’ addests. In the 1930s there was no such thing as deposit insurance-this was a New Deal reform. When a bank failed the depositors were simply left without a penny. The life savings of millions of Americans were wiped out by the bank failures. When banks sought to protect themselves, they stopped lending money. Businesses couldn’t get access to capital, and closed their doors, throwing millions of Americans out of work. November 1930 through August 1931. The U.S. appeared to be poised for economic recovery following the stock market crash of 1929, until a series of bank panics in the fall of 1930 turned the recovery into the beginning of the Great Depression.
- The drought lasted through the 1930s: The 1930s was an exceptional time to be in the High Plains. The entire region, already a semi-arid climate to begin with, endured extreme drought for almost a decade. Over the 11-year span from 1930-1940, a large part of the region saw 15% to 25% less precipitation than normal. The jet stream normally flows westward over the Gulf of Mexico and then turns northward pulling up moisture and dumping rain onto the Great Plains. During the 1930s, this low-level jet stream weakened, carrying less moisture, and shifted further south. The Great Plains land dried up and dust storms blew across the U.S. Drought. Exacerbating the problem was a massive drought that began in 1931 and lasted for eight terrible years. Dust storms roiled the Great Plains, creating huge, choking clouds that piled up in doorways and filtered into homes through closed windows.
- Ultimately, it was a combination of different factors that led to the plunge in the nation’s economy. Further devastating the economic crisis, was its spread to other parts of the world, particularly in Europe. Countries like Poland, Germany, Austria, and Great Britain were also greatly affected during these periods.
What caused the economic crisis?
As earlier explained numerous factors led to the Great Depression. With millions of Americans pouring their savings into stocks, it underwent rapid expansion reaching its peak in 1929. However, during this period, production declined, unemployment rose and stock prices were very high.
Not a good look, right? Wages were low, debts were high, and the agricultural sector was struggling due to drought.
Further exacerbating issues, the banks had an excess of large loans that could not be liquidated. Also, the gold standard which joined countries around the world to a fixed currency worsened the matter. This meant The Great Depression was spreading to other parts of the world.
All of these factors contributed to the dwindling economy. Despite these difficult obstacles, there seemed to be a saving grace.
Saving Grace 1: The Election of Franklin Delano Roosevelt
After several waves of banking panics, closed banks, and disappointed investors, America was in dire need of a saving grace. In the face of crippling economic distress and financial woes, the Hoover administration had run its course. The country needed a saving grace and President Roosevelt seemed to proffer a solution.
With calming confidence and a pledge to create a new deal for the country, Roosevelt won the election by a landslide. Projecting optimism in the face of overwhelming crises, FDR famously declared, “the only thing we have to fear is fear itself”.
The president took to action immediately and the New Deal he had promised the people began to take shape immediately. At last, it seemed a new dawn was emerging for the nation.
Road to Recovery: The New Deal
During the inaugural address on March 4, 1933, America was on the brink of financial collapse. Banks were closed in 28 states, investors were trading their dollars for gold and the economic situation was dire. Through his optimism and reassurance, Roosevelt listed three goals to shore up capitalism through his “New Deal”.
The road to recovery was a “New Deal” aimed at promoting economic recovery and employment through federal activism. What exactly was this deal and what did it mean for the economic crises the Great Depression had caused?
The New Deal aimed to achieve three aims. They were; banking regulations, laws to curb speculation, and the establishment of a sound currency basis. Roosevelt took to immediate action declaring a four-day bank holiday, during which all banks would close.
The aim of this ‘holiday’ was to enable congress to pass reform legislation and reopen banks determined to be sound. This quick action restored faith in the banking system
The president also began to address the public directly through radio series, this went a long way in bolstering the nation’s confidence. In addition, Roosevelt sought to reform the financial system, some of the reforms included:
- The Federal Deposit Insurance Corporation to protect the account of depositors (FDIC)
- The Civilian Conservation Corps addressed unemployment and provided work for men between the ages of 18-25.
- The Tennessee Valley Authority built dams and hydroelectric projects to control flooding.
- Changes in agriculture by enlarging the role the federal government played in agriculture. Acts such as Farm Act Credit (1931), and Farm Security Administration (1937) protected the rural poor. These acts also improved farming techniques.
- The creation of the Federal Emergency Relief Administration provided money to states and municipalities. This money was meant to aid relief through massive public work projects.
Take Two: The Second New Deal
The impact of the first New Deal was mixed, and while growth did inch upward, more than eight million Americans were jobless. Many had become destitute and some were beginning to listen to Roosevelt’s opponents who criticized the New Deal.
Conservatives were worried Roosevelt's reforms were too radical and capable of ruining free enterprise. On the other hand, the Liberals felt the New Deal was insufficient in meeting the needs of the people. Further complicating matters concerning the New Deal was the U.S. Supreme Court ruling. Several key pieces of the New Deal were struck down as being unconstitutional.
Additionally, Roosevelt also faced opposition from some prominent citizens such as Upton Sinclair and Huey Long. To combat this challenge, Roosevelt unveiled another wave of legislation he called The Second New Deal. The Second New Deal had a stronger focus on social reform and legislation. These reforms and legislation were fundamental as they redefined America’s social safety net for good.
Some of the key elements of the Second New Deal were:
- The Emergency Relief Appropriation Act with the largest funding earmarked for progress administration.
- The National Labour Relations Act (1935) restored the protection and union of workers.
- The Creation of the National Labour Board to supervise union elections and certify results.
- The inclusion of African Americans, women, Catholics, and other immigrants.
In fact, some of the policies of the Second New Deal are still in place today. By 1936, the president estimated that the economy had become steady and that he could curb spending. Supporting this hope was the seeming steady increase in economic recovery.
However, curbing spending would prove to be a fatal mistake as a recession hit. Breadlines were forming again and more than a million Americans were jobless and banks were prepared to close. Most of the gains in production and employment slacked, prolonging the effects of the Great Depression.
Had the New Deal spending continued through 1937 to fund economic growth, perhaps the economic crises would have declined.
Did the Start of the World War II or the End of World War II End the Depression
While the New Deals contributed to the growth of the economy, experts have argued there were other factors. According to Professor Linda Gordon, “only World War II with its demand for massive war production which created lots of jobs ended the Depression”.
Other experts argue the president spent too much money on the war. If such monies were channeled into the New Deal, it could have ended the Depression, they say. In the 9 years between the New Deal launch and the attack on Pearl Harbor, the debt was increased by 3 billion dollars.
Why Is Another Great Depression Unlikely?
The chances of another Great Depression are low. It would take the repeat of bad economic policies of the 1920s and 1930s.The Great Depression was a unique and devastating event in economic history, shaped by a confluence of complex factors that are highly unlikely to recur in the same manner today. The modern economy is significantly more resilient, diversified, and better regulated, with stronger safeguards, improved monetary policy tools, and a more robust social safety net.
While economic downturns and recessions will inevitably occur, the risk of another Great Depression-like crisis is considered low. Policymakers, regulators, and financial institutions have learned from the lessons of the past and have implemented measures to mitigate systemic risks and promote economic stability.
That said, the global economy is not without its vulnerabilities, and vigilance is required to address emerging threats and maintain the progress that has been made. By continuing to strengthen the regulatory framework, enhance international cooperation, and foster economic resilience, we can work to ensure that the devastating events of the Great Depression remain firmly in the past.
