Great Depression: Causes, Effects and Timeline

STEVE FIORILLO · JUL 24, 2019 10:04 AM EDT

The United States has seen its share of recessions in its 242 years as a country, but none quite
compares to the Great Depression and the nancial devastation it left in its wake.

The Great Depression is said to have lasted from 1929-1941, though some also say its true end was
at the end of World War II. It is seen as the greatest nancial catastrophe of the entire 20th century,
the only event even approaching its disastrous nature being the Great Recession of the late 2000s.
How could such a monumental collapse of the economy occur?

What Caused the Great Depression?

As a massive recession that devastated the country (and subsequently the entire world), it's hard to
pin down one single fault for the Great Depression. It was a number of factors all coalescing into
more than a decade economic misery.

There are several theories as to how the economy was able to collapse, but the most obvious
occurrence that portended doom and started the depression was the stock market crash that
happened in October of 1929.

1929 Stock Market Crash

Oct. 24, 1929 became known as Black Thursday. Early on that day, the Dow Jones Industrial
Average dropped 11%. Panicked investors began selling their shares in an unprecedented volume;
the Dow had been gradually declining since its peak in early September of that year and investors
feared the worst.
Black Thursday wasn't the worst, though. That Thursday the Dow closed at 299.47. On October 28,
known as Black Monday, it fell 13% to 260.64. Further panic set in, and the next day - Black Tuesday
- the market fell even further. Pandemonium ensued on the New York Stock Exchange, and nothing
was able to stop the panic and immediate impulse for investors to sell their shares lest it fall further.

Over 16 million shares were traded that day, and the market fell another 12%. On that Monday and
Tuesday alone, over $30 billion in share value was lost. The Dow would continue to decline for 3
years in the wake of these three disastrous days.

Con dence in the economy was shattered. Wall Street and the banks were no longer seen as
reliable. Many refused to put money into stocks, choosing instead to buy gold.

Had one looked, there were signs that the market of the Roaring Twenties was unsustainable.
Manufacturing was starting to slow, and unemployment was starting to rise. But the same thing that
caused these problems was the same thing that helped the corporate pro ts that led people to
believe in the stock market: income inequality.

Income Equality
Of course, a stock market crash doesn't just happen on its own, completely out of nowhere. There
were several problems with the economy that many didn't see and, more importantly, many others
ignored.

One major economic issue of the time is one that still greatly affects America today: Income
inequality. Research from UC Berkeley professor Emmanuel Baez suggests that Americans in the
top 1% of income in 2012 had the highest percentage of the nation's income since 1928. In 1928,
the top 1% made a whopping 19.6% of the nation's income.

Economic growth would inevitably stall. The Roaring Twenties meant great employment numbers
throughout the decade as industries expanded rapidly, but the wages of workers did not increase to
the same degree that corporate pro ts increased. Products were being made, but many were no
longer able to afford them. Spending slowed, playing a part in stock prices declining.

Smoot-Hawley Tariff Act

Tariffs. Sound familiar? The Smoot-Hawley Tariff Act was rst introduced to Congress in 1929 and
became of cial law in 1930 after the stock market crash.

This act was meant to help protect America's farmers from overseas competition by putting in a
protectionist policy, but it back red tremendously. The tariffs were warned against before being
signed into law, immediately unpopular, and were quickly retaliated against. Other countries
increased their tariffs as well, and trade between nations plummeted for several years.

The fallout from the Smoot-Hawley Tariff Act hurt not just the U.S. but the world economy, and may
have made the depression worse.

Federal Reserve
Some economists believe, in hindsight, that some decisions made by the Federal Reserve played a
role in the economy worsening, former Federal Reserve Chairman Ben Bernanke being one.

Some have even argued that the Fed is the reason it became a depression at all, and that had they
been more active and aggressive, it could have been held to a recession. The Federal Reserve did
not give aid to banks and thousands of smaller ones collapsed, in part because the Fed declined to
create more cash as the money supply tightened. This was far different than the Fed of the Roaring
Twenties, which increased money supply plenty throughout the decade.
Effects of The Great Depression
For many years, as one economic malady after another befell the country, American citizens were
left in awful conditions, with poor jobs and wages. Many no longer had savings. A severe drought
struck the Southern Plains, causing the infamous Dust Bowl. This meant many U.S. farmers, in
addition to being hurt by the tariffs and trade decline, no longer even had usable land for farming.

What were some of the other major effects that happened in the wake of the Great Depression
years?

Unemployment Skyrockets
As mentioned earlier, wages for a lot of workers weren't exactly high right before the depression.
With banks unable to provide savings for people and companies falling apart, unemployment levels
rose to worrying rates.

The Great Depression started with the unemployment rate rising, but still under 10%. As the
depression reached its nadir, though, it worsened signi cantly. It blew past 20% in 1932 and by
1933, it was approximately 25%.

The unemployment level never hit quite as dire a level for the remainder of the depression, but the
rate was still over 10% until the early '40s, when the U.S. entered World War II.

Banks Failed
After the market crash, con dence and belief in the U.S. nancial system was practically
nonexistent, and that affected banks greatly. Many Americans began pulling what money they had
left out of the banks, preferring to hoard it or buy gold instead. Bank accounts were being withdrawn
en masse, and the banks did not have the cash on hand necessary to cover all withdrawals.

Bank runs like these are done by depositors in the hopes of getting their money back before the
banks completely collapse in a worst-case scenario; in this case, the worst-case scenario became
real life and over 9,000 banks failed. The result was billions of dollars that bank depositors were not
able to recoup.

Election of Franklin Delano Roosevelt

It would be dif cult to pin an economic collapse on one single gure, but as president during the
stock market crash, the Smoot-Hawley Tariff Act and 9,000+ banks failing, Herbert Hoover was a
pretty easy gure to point at.

As the face of a country in major turmoil, Hoover had an uphill battle for re-election and was
defeated easily by Franklin Delano Roosevelt. Roosevelt campaigned on change, and after a Hoover
administration of depression, the American people were ready for it.

What Ended the Great Depression?

There are multiple theories as to what ended the Great Depression, one of which is that when
Roosevelt entered of ce, he immediately began implementing policies that were part of what would
be known as the "New Deal."

New Deal
The rst New Deal began in 1933 and focused on economy, the banks and farmers in an attempt to
strengthen them at their weakest. The Emergency Bank Act attempted to stabilize the banking
system after thousands of failures, while the Agricultural Adjustment Act and the Emergency Farm
Mortgage Act aimed to save farmers, their farms and their crops. The rst New Deal also helped put
an end to prohibition and put together public works projects like the Civilian Conservation Corps.

After a couple of years of passing initiatives to help save businesses and industries, in 1935 the
"Second New Deal" began. These initiatives sought to help poor, unemployed struggling Americans.
Some programs continued to help farmers, even paying them to plant speci c crops. Other sought
to improve conditions for workers, like the National Labor Relations Act. Perhaps most importantly,
though, the Second New Deal implemented the Social Security Act. In FDR's second term, several
programs were colloquially known as part of a "Third New Deal." Programs here would help fund
affordable housing and give workers overtime pay.

These programs, and the many others that FDR would go on to implement, stimulated the economy
and helped lower the unemployment rate.

World War II
Still, some say that it was instead World War II that ended the Great Depression. Government
spending went up signi cantly when the U.S. joined the war, and unemployment dipped below 1
million unemployed Americans. American soldiers returned home to an economic boom.

Great Depression Timeline

The Great Depression lasted over a decade, though the worst of it was from 1929-33. The New Deal
policies steadily helped lead the economy back - albeit with a brief recession in 1937.

The years of the Great Depression presented great turmoil for the country and the world. After that
struggle, lessons had to be learned by the government and the Federal Reserve on how to avoid
letting a recession turning into a depression of that magnitude ever again.

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