What Happened During the Great Depression? (2024)

The Great Depression was a worldwide economic depression that lasted 10 years. It began in the United States on October 24, 1929, otherwise known as “Black Thursday," when panicked investors sold a record 13 million shares. Over the next four trading days, the Dow Jones Industrial Average, a popular proxy for the U.S. stock market, fell nearly 25%. It continued to decline for the next three years, losing nearly 90% between October 1929 and July 1932.

The stock market crash significantly reduced consumer spending and business investment. Consequently, U.S. GDP decreased dramatically in the first years of the Great Depression, dropping from $104.6 billion in 1929 to $57.2 billion in 1933. In comparison, GDP declined just 2% at the height of the Great Recession between 2008 and 2009.

Unemployment Reached 25%

The Great Depression affected all aspects of society. By its height in 1933, unemployment had risen from about 3% to nearly 25% of the nation’s workforce. Some workers who kept their jobs saw their wages fall, many others had to work lower-paying jobs that they were often overqualified for. From 1929 to 1932 the U.S. gross domestic product was nearly cut in half, dramatically decreasing from $104.6 billion to $57.2 billion, partly due to deflation. The Consumer Price Index fell 27% between November 1929 to March 1933, according to the Bureau of Labor Statistics.

Panicked government leaders passed the Smoot-Hawley tariff in 1930 to protect domestic industries and jobs, but it actually worsened the issue. World trade plummeted 66% as measured in U.S. dollars between 1929 and 1934.

The Depression’s pain was felt worldwide, leading to World War II. Germans were already burdened with financial reparations from World War I. That caused hyperinflation. This added to the pressures that ultimately led the German people to elect Adolf Hitler’s Nazi party to a majority in 1933.

Life During the Depression

The Depression caused many farmers to lose their farms. At the same time, years of over-cultivation and drought created the “Dust Bowl” in the Midwest, destroying agricultural production in a previously fertile region. Thousands of these farmers and other unemployed workers migrated to California in search of work.

What Caused It?

According to Ben Bernanke, a former chairman of the Federal Reserve, the central bank helped create the Depression. It used tight monetary policies when it should have done the opposite. According to Bernanke in 2004, these were the Fed's five critical mistakes:

1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing rates through a recession that started in August 1929.
2. When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government. Speculators began trading in their dollars for gold in September 1931. That created a run on the dollar.
3. The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for businesses. More bankruptcies followed.
4. The Fed did not increase the supply of money to combat deflation.
5. Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew their cash and put it under their mattresses. That further decreased the money supply.

The Fed did not put enough money in circulation to get the economy going again. Instead, the Fed allowed the total supply of U.S. dollars to fall by a third. Later research has supported parts of Bernanke's assessment.

How Did the Great Depression End?

In 1932, the country elected Franklin D. Roosevelt as president. He promised to create federal government programs to end the Great Depression. Within 100 days, he signed the New Deal into law, creating 42 new agencies throughout its lifetime. They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist. They aim to help safeguard the economy and prevent another depression.

Many argue that World War II, not the New Deal, ended the Depression.Still, others contend that if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression. In the nine years between the launch of the New Deal and the attack on Pearl Harbor, FDR increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it added another $64 billion.

Can a Great Depression Happen Again?

While anything is possible, it's unlikely to happen again. Central banks around the world, including the Federal Reserve, have learned from the past. There are better safeguards in place to protect against catastrophe, and developments in monetary policy help manage the economy. The Great Recession, for instance, had a significantly smaller impact.

Some argue that the size of the U.S. national debt and the current account deficit could trigger an economic crisis. Experts also predict that climate change could cause profound losses.

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