The Causes of the Great Depresssion
The Great Depression lasted from 1929 until 1941 when the US entered World War Two. 1 While there were several contributing factors, the turning point that ushered in this twelve-year period was the Stock Market Crash on October 24th, 1929. So severe was the drop in stock prices that the day has come to be called “Black Thursday”. The result was widespread unemployment in the United States.2 Unemployment rates during this time averaged at 1 out of every 4 men or 25% of the workforce. In Black communities like Harlem, the rates were as high as 50%.3
While this economic calamity affected both the United States and the major countries of the world, for Americans, the Great Depression was the “worst economic disaster in American history”.4
The Stock Market Crash of 1929 was not the cause of the Great Depression, merely the notification that this economic downturn had arrived. Only a few Americans personally owned stock and therefore directly affected by the Stock Market Crash of 1929. In 1930 and 1931 a series of bank failures "turned what had been a typical recession into the beginning of the Great Depression.”5 Of the 24,000 commercial banks in the United States at that time, 2/3 of those banks were not part of the Federal Reserve System.6 The Federal Reserve System had been created in 1913 to combat such economic issues as “banking panics.”7 The absence of “a fractional-reserve banking system in the absence of deposit insurance”8 caused depositors to withdraw their savings and that created a fear that the entire banking system could collapse.
Milton Freidman refers to this time period from 1929 until FDR took office in 1933 as “The Great Contraction”9 Irving Fisher coined the term “Debt Deflation”10 to explain why banks were failing. Rising debt leads to asset sell offs, which leads to shrinking of the money supply. With less cash, businesses begin to fail. With an “Increase Bankruptcies“11 unemployment rises and ”pessimism”12 follows.
Herbert Hoover had been the President of the United States when the Stock Market crashed in 1929 and in 1933 Franklin D. Roosevelt replaced Hoover. To stop the bank runs, FDR instituted a “Bank Holiday”13 on March 5th, 1933. All banks in the US were closed and Federal inspectors were sent in to determine the liquidity of the bank. Then FDR went on the radio to speak to the American people in “his first Fireside Chat” 14 The result was a return of confidence in the banking system by Americans. Those who had withdrawn their savings in panic stood in line to redeposit their money in the bank. This success was due in part to the Emergency Banking Act of 1933, which Congress passed on March 9.
At the same time one ‘of the new president’s first actions was to take the United States off gold.”15 FDR decided to abandon the Gold Standard so the Federal Government could “reflate their money supplies and price levels.”16
In addition to abandoning gold for silver, FDR embarked on a three-prong approach to the economy: relief recovery, and reform. Americans and American businesses needed relief from the collapse of the economy.
The economy needed to recover, and the system needed to be reformed to prevent this type of economic disaster from ever happening again.17 FDR and a mostly Democratic US Congress embarked on the President’s New Deal. The New Deal created a series of programs that created jobs such as the Federal Emergency Relief Administration, CCC, the PWA, the WPA, and the TVA. There were programs to reform the economic system, such as FDIC and the Securities and Exchange Commission. Social Security was instituted to ensure that the elderly never needed to worry about money in their retirement, but “Roughly half went to relief grants, about 20 percent went to public works, about 20 percent went to payments to veterans, and 10 percent was distributed to farmers.”18
The 1930s saw an explosion of over 30 New Deal programs, but none of these truly ended the Great Depression. If we use GDP as an indicator, the Great Depression was ended by World War Two.19 Programs like Lend Lease turned America into the Arsenal of Democracy. By building the weapons for war, FDR put America back to work.
While the New Deal didn’t end the Depression, it gave Americans the feeling that their government had not abandoned them and that as Americans, we would get through this together.
BIBLIOGRAPHY:
Bernanke, Ben S. “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1. 1995. https://doi.org/10.2307/2077848.
Bernanke, Ben. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” American Economic Review 73, no. 3, June 1983.
Carol Berkin; et al. Making America, Volume 2: A History of the United States: Since 1865. Victoria: AbeBooks. 2001.
Duhigg, Charles (23 March 2008). "Depression, You Say? Check Those Safety Nets". The New York Times. ISSN 0362-4331. Archived from the original on 1 March 2021.
Eichengreen, Barry. “Interwar Instability.” In Globalizing Capital: A History of the International Monetary System - Third Edition, NED-New edition., 46. Princeton University Press, 2019. https://doi.org/10.2307/j.ctvd58rxg.6.
Fisher, Irving. “The Debt-Deflation Theory of Great Depressions.” Econometrica 1, no. 4, 1933. https://doi.org/10.2307/1907327.
Mercer, Deborah. “Unit 11 1930s: The Great Depression” New Jersey State Library. https://www.njstatelib.org/research_library/new_jersey_resources/highlights/african_american_history_curriculum/unit_11_great_depression/
Richardson, Gary “The Great Depression”. Federal Reserve History.
Taylor, Jason E. “The Newest on the New Deal” The Journal of Economic & Business History Society. Vol. 36 (2018): Essays in Economic & Business History)
William Silber “Why Did FDR’s Bank Holiday Succeed?” ECONOMIC POLICY REVIEW. (FRBNY Economic Policy Review / July 2009)
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