The Great Depression

Timeline

1929 – 1941

An outlook

The Great Depression began with the Wall Street Crash of October 1929 in the United States when the market lost billions of dollars in value, which was the worst economic downturn that severely affected countries worldwide throughout the 1930s and ended during World War II in 1941.

Bank failures combined with declining consumer expenditures have led to a downward trend in industrial production, a deflationary spiral and a recession in the U.S. economy, which lately pulled down most other countries and regions.  The Depression fundamentally reshaped economic policies and laid the groundwork for social safety nets in many countries.

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What caused the Great Depression

Stock market crash

The immediate trigger was the collapse of the stock market in the United States after its peak in August 1929. Stock prices had been rising rapidly, more than the actual values. Despite the scene of reckless speculation and excessive optimism in the U.S. stock market at that time, the American economy experienced a mild recession due to slow consumer spending, risen unemployment rate and declined factory production.

When nervous investors began to sell overpriced stocks in mass volume, it caused a panic and a steep decline in prices. Millions of shares ended up worthless and those investors who had bought stocks “on margin” (with borrowed money) were wiped out completely.

Bank failures

When stock assets lost in value due to the crash, many depositors became panicked and withdrew their savings. At the same time, banks were known to have heavily invested in the stock market and loan borrowers could hardly afford to repay debts which caused the bank to face their liquidity shortages. By early 1933, thousands of banks had closed their doors.

Overproduction and Underconsumption

Industries had expanded rapidly in the 1920s, leading to overproduction of goods. However, wages did not keep pace with productivity gains, resulting in a mismatch between the supply and demand for goods, contributing to a decline in prices (deflation).

Drought and Agricultural Crisis

During the 1930s, severe drought and dust storms in the southern regions of the United States exacerbated the agricultural crisis, leading to widespread crop failures and rural poverty.

Protectionist Policies

During the Great Depression, countries implemented protectionist measures, such as tariffs and trade restrictions to shield their economies from the effects of the global economic downturn, which further reduced global trade exacerbated the severity and prolonged the duration of the crisis

Impacts of the Great Depression

Unemployment

Unemployment soared to unprecedented levels during the Great Depression. In the United States, unemployment peaked at around 25% in 1933 with about 15 million people unemployed, while other countries experienced similar or even higher levels of joblessness. As a result of economic hardship, homelessness and hunger became widespread.

Bank Failures and Financial Instability

The banking system was severely hit by waves of bank failures. This led to a contraction of credit, further deepening the economic downturn and impairing the ability of businesses and individuals to access funds.

Global Economic Contraction

The Great Depression was a global phenomenon, affecting countries around the world. International trade and investment plummeted as protectionist policies and economic nationalism rose, exacerbating the economic downturn and hindering recovery efforts.

Shifts in Economic Thinking

The Great Depression prompted a reassessment of economic theories and policies. The Keynesian economics emphasised the role of government intervention through fiscal policy and monetary policy in managing the economy for at least the next 40 years, which gained prominence as a response to the failures of laissez-faire policies during the Depression.

Legacy and Long-Term Effects

The Great Depression left a lasting impact on economic policies, institutions, and social safety nets in many countries. It also influenced international relations and contributed to the conditions that led to World War II, shaping the course of global history in the 20th century.

References

Federal Reserve History n.d., The Great Depression, Federal Reserve History, available at <https://www.federalreservehistory.org/essays/great-depression>.

Gene, S n.d., Great Depression, The Library of Economics and Liberty, available at <https://www.econlib.org/library/Enc/GreatDepression.html>.

History 2023, Dust Bowl, History, available at <https://www.history.com/topics/great-depression/dust-bowl>.

History 2009, Great Depression History, History, available at <https://www.history.com/topics/great-depression/great-depression-history#what-caused-the-great-depression>.