The Great Depression

Summary

The Great Depression was a period of severe economic hardship that began in 1929 and lasted throughout most of the 1930s.  It began with the 1929 crash of the American stock market and ended with the onset of World War II (1939–1945). 

In 1933, newly elected US president Franklin D. Roosevelt (1882–1945) implemented the New Deal, which was a package of social and economic reforms to reduce unemployment and increase economic recovery. The increased industrial output made necessary by the outbreak of World War II finally ended the Depression.

CAUSES OF THE GREAT DEPRESSION

At that time, the stock market was not suitably regulated, and many Americans made reckless financial decisions. Many investors began to borrow money from banks just to buy stocks. Some only paid a small percentage of what the stock was worth and borrowed the rest of the money from the bank. Normally, this would seem to be a good thing, as it meant that money was constantly moving and helping the economy grow. All that high-risk trading, however, was beginning to weaken the American economy. Without proper government safeguards in place, the stock market system began to be abused.

On Thursday, October 24, 1929, traders working at the Wall Street-based US stock market sold almost thirteen million shares, about three times the normal volume that changed hands in a single business day. The sell-off sparked panic among investors, and within four days, the value of the American stock market fell by 23 percent.

The 1929 stock market crash triggered a series of events that led to a major economic crisis, which exposed weaknesses in the American banking system. Many banks had invested their customers’ money in the stock market only to lose it in the 1929 crash, which resulted in many people being unable to recover their savings from the banks.

With millions of people losing so much money, consumers were suddenly unable to afford to buy the enormous amount of goods being produced by American businesses. Thousands of businesses joined the estimated five thousand American banks that were forced to close during the early years of the Great Depression. This resulted in heavy job losses that worsened the already grim economic situation.

DROUGHT

In 1931, US farmers posted a record wheat crop, which carried over a trend from the 1920s that saw farmers using more and more land to grow crops. Farmers increased production to make up for losses resulting from the low crop prices following World War I (1914–1918). The record crop of 1931 caused further drops in the price of wheat, as the market was flooded with too much supply.

During the early 1930s, severe droughts affected many major American crop production centers. These droughts made conditions even worse for farmers, who were already trying to yield crops from the poor-quality farmlands they had created to try to make up for low prices during the 1920s. America’s Great Plains region was hit the hardest because food production dropped dramatically, greatly affecting the millions of people who were struggling to survive. Large numbers of farmers were forced to seek emergency assistance from the government, and banks took control of many farmlands after their owners were unable to pay to keep them.

GREAT DEPRESSION REACHED ITS PEAK

Historians and economists believe that the Great Depression reached its worst point in 1933 when unemployment rates in the United States reached 25 percent, compared to just 3 percent before the 1929 stock market crash. Many of those who were lucky enough to keep their jobs were forced to take wage reductions, which averaged about 42 percent. America’s gross domestic product (GDP), an important measure of a country’s total annual economic output, fell by more than 50 percent.

Severe losses in the amount of money circulating in the American economy resulted in deflation in which prices fell by an average of 10 percent per year. While on the surface this seemed to be positive, it actually worsened the country’s economic situation considerably because people expected further reductions in the prices of consumer goods and stopped buying items. This led to an even greater shortage of money flowing throughout the country, making it nearly impossible to grow the economy.

In search of employment, millions of people traveled across the country by hitching rides on trains, a common practice that came to known as “riding the rails.” Most were disappointed—so few jobs were available at this time that it was not unusual for one thousand people to apply for a single job listing. While searching for work, many people stayed outside of cities in “Hoovervilles,” which were hastily constructed camps named after US president Herbert Hoover (1874–1964), whom people blamed for the economic conditions that caused the Great Depression.

Internationally, many countries turned to economic strategies aimed at protecting their own industries, which led to a major slowdown in worldwide trade, creating a rippling effect that influenced the global economy. By the early 1930s, international trade had fallen by nearly two-thirds.

ROOSEVELT’S NEW DEAL

Roosevelt defeated Hoover in the 1932 presidential election and immediately tried to remedy the crippling effects of the Great Depression. He introduced a series of social and economic reforms known as the New Deal, which tried to assist farmers and reduce unemployment by putting people to work on public projects. Roosevelt also ordered the immediate closure of banks and allowed them to resume business only when they proved that they had enough available money to safely operate.

The New Deal helped ease the hardships of the Great Depression and enabled the American economy to begin a slow recovery process. However, many people argued that Roosevelt did not commit enough money to the New Deal and the program could have been more effective if the federal government put more resources into it.

END OF THE GREAT DEPRESSION

When World War II began in 1939, the countries involved had to increase their industrial output to meet the needs of their war efforts, which spurred economic growth enough to end the Great Depression. In the United States, the effects of the Depression lingered until the early 1940s, when Japanese forces bombed an American military base on the Hawaiian island of Oahu on December 7, 1941. This marked America’s entry into World War II and triggered a major increase in industrial production that had a healing effect on the country’s economy.