what was the great depression 
the great depression was a devastating and prolonged economic recession that followed the crash of the united states stock market in 1929 it lasted through 1941 the same year that the u s entered world war ii the period was marked by several economic contractions including the stock market crash of 1929 banking panics in 1930 and 1931 and the smoot hawley tariff that crashed world trade other events and policies helped to prolong the depression during the 1930s economists and historians often cite the great depression as the most significant if not the most catastrophic economic event of the 20th century investopedia sabrina jiangit s hard to pinpoint exactly what caused the great depression but economists and historians generally agree that several factors led to this period of downturn they include the stock market crash of 1929 the gold standard a drop in lending tariffs banking panics and contracted monetary policies of the fed the 1929 stock market crashthe u s stock market fell by nearly 50 and corporate profits declined by over 90 during a short depression known as the forgotten depression that lasted from 1920 to 1921 the u s economy enjoyed robust growth during the rest of the decade the american public discovered the stock market and dove in headfirst during the roaring twenties period 1speculative frenzies affected both the real estate markets and the new york stock exchange nyse loose money supply and high levels of margin trading by investors helped fuel an unprecedented increase in asset prices 2the lead up to october 1929 saw equity prices rise to all time high multiples of more than 19 times after tax corporate earnings 3 coupled with the benchmark dow jones industrial index djia increasing 500 in just five years this ultimately caused the stock market crash 4the nyse bubble burst violently on oct 24 1929 a day that has come to be known as black thursday 5 a brief rally occurred on friday the 25th and during a half day session on saturday the 26th but the following week brought black monday oct 28 and black tuesday oct 29 the djia fell by more than 20 over those two days 6 the stock market would eventually fall almost 90 from its 1929 peak 4ripples from the crash spread across the atlantic ocean to europe triggering other financial crises such as the collapse of the boden kredit anstalt austria s most important bank the economic calamity hit both continents in full force in 1931 7the u s economy tailspinthe 1929 stock market crash wiped out nominal wealth both corporate and private and this sent the u s economy into a tailspin the u s unemployment rate was 3 2 in early 1929 it soared to over 25 by 1933 89the unemployment rate remained above 18 9 in 1938 despite unprecedented interventions and government spending by both the hoover and roosevelt administrations real per capita gross domestic product gdp was below 1929 levels by the time the japanese bombed pearl harbor in late 1941 the crash likely triggered the decade long economic downturn but most historians and economists agree that it didn t cause the great depression by itself nor does it explain why the slump s depth and persistence were so severe a variety of specific events and policies contributed to the great depression and helped to prolong it during the 1930s mistakes by the young federal reservethe relatively new federal reserve mismanaged the supply of money and credit before and after the crash in 1929 according to monetarists such as milton friedman and acknowledged by former federal reserve chair ben bernanke 10the fed was created in 1913 and it remained fairly inactive throughout the first eight years of its existence then it allowed significant monetary expansion after the economy recovered from the 1920 to 1921 depression 11the total money supply grew by 28 billion a 61 8 increase between 1921 and 1928 12 bank deposits increased by 51 1 savings and loan shares rose by 224 3 and net life insurance policy reserves jumped by 113 8 all this occurred after the federal reserve cut required reserves to 3 in 1917 gains in gold reserves via the treasury and fed were only 1 16 billion 13the fed instigated the rapid expansion that preceded the collapse by increasing the money supply and keeping the federal funds interest rate low during the decade much of the surplus money supply growth inflated the stock market and real estate bubbles the fed took the opposite course by cutting the money supply by nearly a third after the bubbles burst and the market crashed this reduction caused severe liquidity problems for many small banks and choked off hopes for a quick recovery world war ii created international trading channels and reversed burdensome price and wage controls which helped the country recover from the great depression the fed s tight fistas bernanke noted in a november 2002 address before the fed existed bank panics were typically resolved within weeks large private financial institutions would loan money to the strongest smaller institutions to maintain system integrity 10 that sort of scenario had occurred two decades earlier during the panic of 1907 at that time investment banker j p morgan stepped in to rally wall street denizens to move significant amounts of capital to banks that were lacking funds when frenzied selling sent the nyse spiraling downward and led to a bank run 14 ironically it was that panic that led the government to create the federal reserve to cut its reliance on individual financiers such as morgan the heads of several new york banks had tried to instill confidence after black thursday by prominently purchasing large blocks of blue chip stocks at above market prices 15 these actions caused a brief rally on friday but the panicked sell offs resumed on monday the stock market has grown beyond the ability of such individual efforts in the decades since 1907 only the fed was big enough to prop up the u s financial system the fed failed to do so providing no cash injection between 1929 and 1932 instead it watched the money supply collapse and let thousands of banks fail this and a collapsing financial sector led to deflation and spurred the following depression banking laws at the time made it very difficult for institutions to grow and diversify enough to survive a massive withdrawal of deposits otherwise known as a run on the bank the fed s harsh reaction may have been the result of its fear that bailing out careless banks would encourage fiscal irresponsibility in the future some historians argue that the fed created the conditions that caused the economy to overheat and then exacerbated an already dire economic situation hoover s propped up pricesherbert hoover has often been characterized as a do nothing president but he took action after the crash occurred he implemented three major changes between 1930 and 1932 hoover was mainly concerned that wages would be cut following the economic downturn he reasoned that prices had to stay high to ensure high paychecks in all industries consumers would have to pay more to keep prices high but the public was burned badly in the crash leaving many people without the resources to spend lavishly on goods and services nor could companies count on overseas trade because foreign nations weren t willing to buy overpriced american goods any more than americans were many of hoover s other post crash interventions and actions by congress such as wage labor trade and price controls damaged the economy s ability to adjust and reallocate resources 17u s protectionismthe bleak reality forced hoover to use legislation to prop up prices and wages by choking out cheaper foreign competition he signed the smoot hawley tariff act of 1930 into law following the tradition of protectionists and in the face of the protests from more than a thousand of the nation s economists the act was initially intended to protect agriculture but it swelled into a multi industry tariff imposing huge duties on more than 880 foreign products nearly three dozen countries retaliated and imports fell from 7 billion in 1929 to just 2 5 billion in 1932 international trade declined by 66 by 1934 not surprisingly economic conditions worsened worldwide 18hoover s desire to maintain jobs as well as individual and corporate income levels was understandable but he encouraged businesses to raise wages avoid layoffs and keep prices high at a time when they naturally should have fallen the u s suffered one to three years of low wages and unemployment plus cycles of recession depression before dropping prices led to a recovery the u s economy deteriorated from a recession to a depression when it was unable to sustain these artificial levels with global trade effectively cut off the new dealpresident franklin roosevelt promised massive change when he was elected in 1933 the new deal program that he initiated was an innovative unprecedented series of domestic programs and acts that were designed to bolster american businesses reduce unemployment and protect the public 19the new deal was loosely based on keynesian economics and the idea that the government could and should stimulate the economy it set lofty goals to create and maintain the national infrastructure full employment and healthy wages the government set about achieving these through price wage and even production controls 20some economists claim that roosevelt continued many of hoover s interventions just on a larger scale he kept a rigid focus on price supports and minimum wages and removed the country from the gold standard forbidding individuals to hoard gold coins and bullion 21 he banned monopolistic business practices and instituted dozens of new public works programs and other job creation agencies the roosevelt administration also paid farmers and ranchers to stop or cut back on production one of the most heartbreaking conundrums of the period was the destruction of excess crops despite the need of thousands of americans for affordable food 20federal taxes tripled between 1933 and 1940 to pay for these initiatives as well as new programs such as social security these increases included hikes in excise taxes personal income taxes inheritance taxes corporate income taxes and an excess profits tax 19new deal success and failurethe new deal led to measurable results including financial system reform and stabilization it also boosted public confidence roosevelt declared a bank holiday for an entire week in march 1933 to prevent institutional collapse due to panicked withdrawals this was followed by a construction program for a network of dams bridges tunnels and roads these projects opened up federal work programs employing thousands of people the economy showed some recovery but the rebound was far too weak for the new deal s policies to be deemed successful in pulling america out of the great depression historians and economists disagree on the reason a study by two economists at the university of california los angeles estimated that the new deal extended the great depression by at least seven years 22but it s possible that the relatively quick recovery that was characteristic of other post depression recoveries may not have occurred as rapidly after 1929 because it was the first time the general public and not just the wall street elite lost large amounts in the stock market american economic historian robert higgs argued that roosevelt s new rules and regulations came so fast and were so revolutionary that businesses became afraid to hire or invest 23philip harvey a professor of law and economics at rutgers university suggested that roosevelt was more interested in addressing social welfare concerns than in creating a keynesian style macroeconomic stimulus package social security policies enacted by the new deal created programs for unemployment disability insurance old age and widows benefits the impact of world war iilooking at employment and gdp figures the great depression appeared to end suddenly around 1941 to 1942 this was the time when the u s entered world war ii the unemployment rate fell from eight million in 1940 to just over one million in 1943 24 however more than 16 million americans were conscripted to fight in the armed services 25 the real unemployment rate in the private sector grew during the war the standard of living declined due to wartime shortages caused by rationing taxes rose dramatically to fund the war effort private investment dropped from 17 9 billion in 1940 to 5 7 billion in 1943 and total private sector production fell by nearly 50 26the notion that the war ended the great depression is a broken window fallacy but the conflict did put the u s on the road to recovery the war opened international trading channels and reversed price and wage controls government demand opened up for inexpensive products and that demand created a massive fiscal stimulus private investments rose from 10 6 billion to 30 6 billion in the first 12 months after the war ended the stock market broke into a bull run after a few short years 