Why There Was Only Ever One Major Economic Downturn
The Great Depression of the 1930s was an economic downturn that occurred worldwide and lasted for a decade. It all started in the United States on October 24, 1929, often known as "Black Thursday," when the stock market crashed "when investors became so fearful that they dumped a record 13 million shares. The Dow Jones Industrial Average, which is often used as a gauge for the performance of the American stock market, experienced a decline of about 25 percent during the following four trading days. It continued to fall for the subsequent three years, almost 90 percent between October 1929 and July 1932, when it reached its lowest point.
The crumbling of the stock market led to a significant reduction in both consumer spending and investment by businesses. As a direct result of this, the gross domestic product of the United States experienced a significant decline in the initial years of the Great Depression, falling from $104.6 billion in 1929 to $57.2 billion in 1933. When compared, the fall in GDP between 2008 and 2009, which occurred during the worst of the Great Recession, was only two percent.
Key Takeaways
- The Great Depression was an economic collapse that occurred worldwide and lasted for a decade.
- Although there is no explanation for why the Great Depression occurred that everyone accepts, most ideas point to the gold standard and an inadequate response by the Federal Reserve as two elements that contributed to the crisis.
- The gross domestic product (GDP) fell by almost half during the Great Depression.
- The United States could pull itself out of the Great Depression because of a combination of the New Deal and World War II.
The unemployment rate reached a quarter of a million
The Great Depression affected every facet of societal life. By the time it reached its height in 1933, the unemployment rate had climbed from around 3 percent to roughly 25 percent of the workforce across the country. Some people who held their positions suffered a decrease in their income, while the Great Depression forced many others to take jobs that paid less and for which they were frequently overqualified. Due in part to deflation, the gross domestic output of the United States fell by a factor of more than two-thirds between 1929 and 1932, going from a high of $104.6 billion to a low of only $57.2 billion. According to the Bureau of Labor Statistics, the drop in the Consumer Price Index between November 1929 and March 1933 was equal to 27 percent.
In 1930, in a panicked attempt to safeguard home businesses and jobs, the leaders of the government imposed the Smoot-Hawley tariff, but this made the problem even worse. Between 1929 and 1934, there was a 66 percent drop in global trade as evaluated in U.S. dollars.
People felt the effects of the Great Depression all across the world, which ultimately led to World War II. Financial reparations stemming from World War I were already a significant burden for Germans. The result of this was hyperinflation. This contributed to the mounting tensions that, in the end, resulted in the German people voting a majority for Adolf Hitler's Nazi party in the 1933 elections.
How People Lived During the Great Depression
Many farmers had no choice but to sell their land due to the Great Depression. During the same period, years of over-cultivation and drought combined to create what is now known as the "Dust Bowl" in the Midwest, resulting in the loss of agricultural productivity in an area that had previously been extraordinarily fertile. In quest of employment opportunities, thousands of these agricultural workers and other unemployed employees relocated to California.
A significant number of them wound up living as homeless "hobos." Others settled in slums that came to be known as "Hoovervilles." "named after then-President Herbert Hoover.
What Contributed to It
Ben Bernanke, who served as the chairman of the Federal Reserve during the Great Depression, is quoted as saying that the nation's central bank was a contributing factor. It implemented a restrictive monetary policy when it should have done the reverse to stimulate economic growth. In 2004, Bernanke identified the following as the five most significant errors made by the Federal Reserve:
- In the spring of 1928, the Federal Reserve gradually initiated a process to raise the Federal Reserve funds rate. In spite of the fact that the recession had begun in August 1929, it continued to increase.
- After the stock market's collapse, investors shifted their attention to the currency markets. During that time period, the value of the dollars held by the United States government was supported by the gold standard. September 1931 was the month when speculators first started exchanging their dollars for gold. Because of this, there was a rush for the dollar.
- To maintain the dollar's value, the Federal Reserve once more increased interest rates. This resulted in an even smaller pool of available funds for commercial enterprises. The number of bankruptcies continued to rise.
- In order to fight deflation, the Federal Reserve did not raise the amount of money that was available.
- Investors took out every penny they had stashed away in banks. Panic spread as a direct result of the bankruptcy of the banks. The Federal Reserve ignored the predicament that the banks were in. Any remaining faith that customers had in financial institutions was utterly lost as a result of this catastrophe. The majority of folks withdrew their money from banks and hid it under their beds. That resulted in an even greater reduction in the available money.
In order to get the economy moving again, the Federal Reserve did not put nearly enough money back into circulation. Instead, the Fed chose to accept a reduction in the overall quantity of U.S. dollars equal to a third of the previous level. Some findings from the subsequent study provide credence to Bernanke's analysis.
What led to the end of the Great Depression?
The United States of America chose Franklin Delano Roosevelt to serve as president in 1932. He made the vow to establish new programs at the federal level to combat the Great Depression. Within the first 100 days, he gave his signature, making the New Deal a legal document, which would eventually lead to the establishment of 42 new agencies. They were conceived to produce jobs, facilitate unionization, and offer unemployment insurance. The majority of these programs are still active today. They intend to contribute to the economy's protection and to the prevention of another depression.
Social Security, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation were all programs that were established as part of the New Deal.
There is a widespread view that World War II, and not FDR's New Deal, was what brought an end to the Great Depression. Still, there are others who believe that the United States could have avoided the Great Depression if Franklin D. Roosevelt had spent the same amount of money on his New Deal program that he did in the war. FDR added an additional $3 billion to the national debt during the nine years that passed between the beginning of the New Deal and the attack on Pearl Harbor. The national debt increased by 23 billion dollars due to increased spending on defense in 1942. In 1943, it added an additional $64 billion to the total.
A Recurrence of the Great Depression Is Unlikely Due to the Following Reasons
Even while everything is conceivable, it is improbable that this will occur again. The Federal Reserve and other central banks throughout the world, notably the European Central Bank, have gained wisdom from looking to the past. The economy is easier to manage thanks to developments in monetary policy, and there are improved safeguards in place to protect against the possibility of a catastrophe. For example, the Great Recession had a considerably less severe influence.
There are others who believe that the current account deficit and the level of the national debt in the United States could lead to an economic disaster. Furthermore, experts anticipate that climate change may result in significant monetary losses.
Frequently Asked Questions (FAQs)
When exactly did the Great Depression come to a close?
The year 1933 marked the year that the economy hit its lowest point during the Great Depression; nonetheless, the slow economy persisted for a considerably more extended period of time. After the Great Depression, it wasn't until World War II that the United States finally got back on its feet economically.
How many people lost their lives due to the Great Depression?
It is challenging to estimate the number of persons that passed away as a direct effect of the Great Depression. An investigation that was conducted in 2009 found that the average lifespan increased by 6.2 years over the length of the crisis. The findings indicating an economic upswing actually has a tendency to have more negative health effects on the population than a recession does are consistent with this observation. However, between 1929 and 1932, the number of people who died by suicide reached an all-time high, having grown by 22.8%.
How did the Great Depression cause a shift in the role that the government played in the United States?
The Great Depression and the following implementation of New Deal policies greatly affected how people in the United States viewed the function of government, particularly at the national level. In the 1930s, polls showed overwhelming support for the New Deal and the enormous government programs, interventions, and restrictions entailed. However, since the time of the Great Depression, this degree of widespread acceptability for federal involvement has not remained at the same high level.
