Library of Congress. New York World-Telegram & Sun Collection. Source
Facts on Great Depression
The Great Depression was the most severe economic recession in American history.
It started in 1929 and continued until the end of the 1930s. The Great Depression is said to be started when the stock market crashed in October 1929.
By 1933, unemployment had reached 25 percent, and almost 5,000 banks had failed.
Although President Herbert Hoover attempted to improve the economy with initiatives such as the Reconstruction Finance Corporation, these initiatives accomplished little to solve the crisis.
Franklin Roosevelt was elected president in November 1932.
Inaugurated in March 1933, Roosevelt's New Deal provided a new approach to the Great Depression.
After the 1929 Wall Street Crash, during which the Dow Jones Industrial Average collapsed from 381 to 198 in two months, hope continued for some time.
The stock market recovered in early 1930, with the Dow recovering its pre-recession high of 294 in April 1930, before dropping slowly for several years to a level of 41 in 1932.
Governments and corporations spent more in the first half of 1930 than in 1929. Investors, many of whom lost big in the stock market last year, reduced spending by 10%.
A severe drought hit the U.S. agricultural heartland in the mid-1930s.
By mid-1930, interest rates declined, but consumer consumption and investment remained low due to predicted deflation and reluctance to borrow.
Automobile sales dropped below 1928 levels by May 1930. Salaries remained stable in 1930, but prices dropped. In 1931, deflation began.
A Great Plains drought and falling crop prices impact farmers.
Despite government grants, approximately 10% of Great Plains farms were sold during the Great Depression.
The U.S. economy's fall first dragged down most other countries, although each country's individual deficiencies or strengths deteriorated or improved situations.
The 1930 U.S. Smoot–Hawley Tariff Act and retaliatory tariffs in other countries intensified the global trade collapse, contributing to the depression.
The economic downturn reduced world trade by one-third by 1933.
Origins of Great Depression
The Great Depression started in the US and spread worldwide, therefore its beginnings are analyzed in the context of the US economy.
The Roaring Twenties brought wealth to the US and Europe following World War I 1929 saw American economic growth.
On March 25, 1929, a mild stock crash stabilized. Despite financial concerns, the market improved through September. September stock prices fell and were turbulent.
Mid-October saw a massive stock sell-off. Finally, on October 24, Black Thursday, the US stock market fell 11% at the opening bell.
On Black Monday, October 28, the market fell 12% despite stabilization efforts.
On Black Tuesday, the market fell 11%. Thousands of investors lost billions, and many equities could not be sold at any price.
Wednesday's 12% recovery was too late. After recovering from November 14 to April 17, 1930, the market collapsed.
The market dropped 89% from April 17, 1930, to July 8, 1932.
After the 1929 crash, a crowd gathered at the intersection of Wall Street and Broad Street. Source
After 1929, the worst of the crisis hit the world.
A Bank of United States bank run in December 1930 sparked fear (privately run, with no relation to the government).
The bank failed to pay all its customers.
The Bank of United States lost a third of the $550 million deposits lost by 608 American institutions in November and December 1930, reaching a minimum threshold.
Smoot - Hawley and International Trade Collapse
Smoot–Hawley Tariff Act
In April 1929, Willis C. Hawley (left) and Reed Smoot before the House of Representatives passed the Smoot–Hawley Tariff Act.
The US Smoot–Hawley Tariff Act was passed on June 17, 1930, after being proposed the year before.
It failed and may have caused the Depression. The Smoot-Hawley Tariff exacerbated the Great Depression, according to Keynesians, Monetarists, and Austrian economists.
The Smoot-Hawley Tariff was widely blamed for the depression.
Two-thirds of American economic historians said the Smoot–Hawley Tariff Act worsened the Great Depression in 1995.
The Senate website calls the Smoot–Hawley Tariff Act one of the worst congressional acts.
Many economists believe that the dramatic drop in international trade after 1930 worsened the depression, especially for trade-dependent nations.
Most historians and economists blame the Act for worsening the crisis by severely restricting foreign trade and triggering retaliatory tariffs in other countries.
Foreign trade was a modest component of the U.S. economy and focused on farming, but it was considerably greater in many other countries.
The new tariff raised the average ad valorem (value-based) tax on dutiable imports from 25.9% to 50% from 1931 to 1935.
In dollar terms, American exports decreased from $5.2 billion in 1929 to $1.7 billion in 1933, a 33% drop in volume and price. Wheat, cotton, tobacco, and timber suffered the most. (ref)
"Imposing tariffs, import limits, and exchange controls" helped governments worldwide reduce foreign goods consumption.
During the depression, these restrictions caused tension between countries with considerable bilateral trade, declining exports, and imports.
Protectionism varied by government. Some countries raised tariffs sharply and restricted foreign exchange transactions, while others decreased "trade and exchange restrictions only marginally":
"Gold-standard nations were more prone to restrict international trade." In these nations, "protectionist measures enhanced the balance of payments and minimized gold losses" They thought these limits and depletions would slow economic collapse.
Abandoning the gold standard allowed currencies to devalue, strengthening the balance of payments.
It deregulated monetary policy so central banks could cut interest rates and act as lenders of the last option.
They had the best tools to battle the Depression without protectionism.
"The period of time a country uses the gold standard impacts how severe its recessions are and how quickly it recovers from them."
Early gold standard abandoners had modest recessions and quick recoveries. Countries on the gold standard continued to fall longer."
Vegetable gardens fed rural and small-town women.
American agricultural groups taught housewives how to get the most out of their gardens and how to raise chickens for meat and eggs.
Rural women made grain bag clothes and other items. African American city quilters collaborated, extended, and taught beginners.
Cheap quilts improved women's friendships and pleasures.
Gold Standard and Worldwide Depression
The gold standard triggered the Great Depression.
Since higher interest rates in deflationary countries caused gold outflows in countries with lower interest rates, even countries that did not face bank failures and monetary deflation had to join.
The gold standard's price–specie flow mechanism required countries that lost gold to deflate their money supply and price level.
There is also agreement that protectionist policies, particularly the Smoot–Hawley Tariff Act, worsened or caused the Great Depression.
International Depression
Some economic studies suggest that suspending the gold rate of exchange (or weakening the currency in gold terms) helped recover from the global depression.
During the Great Depression, all major currencies abandoned gold.
The United Kingdom was first. In September 1931, the Bank of England stopped exchanging pound notes for gold and floated the pound.
In 1931, Japan, Scandinavia, and the UK left the gold standard.
Italy and the US kept on the gold standard until 1932 or 1933, while France and the "gold bloc" (Poland, Belgium, and Switzerland) stayed on until 1935–36.
Later analysis showed that leaving the gold standard early indicated economic recovery.
UK and Scandinavia, who left the gold standard in 1931, recovered faster than France and Belgium, which stayed on gold. China, with a silver standard, almost escaped the depression.
For dozens of nations, including emerging ones, quitting the gold standard is a powerful predictor of depression severity and recovery time.
This partly explains why depression varies by location and country.
German Banking Crisis (1931) and British Crisis
The financial crisis got out of hand around the middle of 1931, when the Credit Anstalt in Vienna went bankrupt.
Germany was already facing political crisis before this happened.
Germany received emergency funding from private banks, the Bank of International Settlements, and the British Bank of England.
Germany's crisis worsened, causing political chaos that ultimately to Hitler's Nazi regime taking power in January 1933.
Investors began withdrawing £2.5 million of gold from London each day as the global financial crisis gripped Britain.
Credits of £25 million from the Bank of France and the Federal Reserve Bank of New York and a £15 million fiduciary note delayed but did not end the British crisis.
In August 1931, Britain's financial crisis sparked a political crisis.
The divided cabinet of Prime Minister Ramsay MacDonald's Labour government agreed to raise taxes, reduce spending, and reduce unemployment payments by 20% to balance the budget.
Labour opposed welfare cuts. MacDonald wanted to resign, but King George V insisted he establish a "National Government" of all parties.
Conservative, Liberal, and a few Labour leaders joined, but most Labour leaders called MacDonald a traitor for leading the new government.
Britain left the gold standard and survived longer in the Great Depression.
In 1931, the Labour Party was nearly wiped out, leaving MacDonald as Prime Minister of a Conservative coalition.
Revival of Great Depression
Per-capita GDP (average income per person) in constant 2000 dollars and important events of the Depression in the US. Long-term trend, 1920–1970: dotted red line.
Most nations recovered from the Great Depression in 1933.
In early 1933, the U.S. recovered, but it took over a decade to reach 1929 GNP and had an unemployment rate of 15% in 1940, down from 25% in 1933.
Economists disagree on what caused the Roosevelt-era economic expansion (and the 1937 recession that interrupted it).
Most economists believe Roosevelt's New Deal policies either caused or helped the recovery, though they never fully ended the recession.
Roosevelt's rhetoric and actions predicted higher nominal interest rates and reflation, which economists say had favorable impacts.
Reversing those reflationary efforts ended the 1937 recession.
The Banking Act of 1935 tightened reserve requirements, which caused monetary contraction and slowed recovery.
GDP rose again in 1938. Revisionist economists believe the New Deal prolonged the Great Depression.
John Maynard Keynes believed the New Deal under Roosevelt did not cure the Great Depression: "It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to perform the vast experiments that would establish my case—except in war conditions."
Christina Romer believed that significant international gold inflows boosted the US economy's money supply and prevented self-correction.
Devaluation of the U.S. dollar and European political instability contributed to gold inflows.
Milton Friedman and Anna J. Schwartz's book, A Monetary History of the United States, similarly linked the recovery to monetary reasons and argued that the Federal Reserve System's bad money management impeded it.
Former Federal Reserve Chairman Ben Bernanke believed that monetary considerations contributed to the global economic collapse and recovery.
Bernanke also stressed the importance of institutional considerations, particularly the reconstruction and reorganization of the financial system, and said that the Depression should be evaluated internationally.
Role of Women in Home Economics
Without continuous income, housewives struggled to provide food, clothing, and healthcare.
Delaying births till families could afford them decreased birthrates everywhere.
The birthrate for 14 major countries declined 12%, from 19.3 per thousand in 1930 to 17.0 in 1935.
Half of Canadian Roman Catholic women use contraception to delay pregnancy.
Women workers in light manufacturing experienced layoffs.
Working husbands could cost women their jobs. British spouses wanted part-time work.
France's 1930s population growth lagged behind Germany's. Family ladies received depression aid.
The Conseil Supérieur de la Natalité approved Code de la Famille (1939) provisions that boosted state aid to families with children and compelled employers to protect dads' jobs, even foreigners.
Vegetable gardens fed rural and small-town women.
American agricultural organizations trained housewives to maximize gardens and raise fowl for meat and eggs.
Rural women manufactured grain bag clothes and other goods.
African American city quilters collaborated, extended, and taught beginners. Cheap quilts improved women's friendships and pleasure.
Oral history shows industrial city housewives' financial management. They updated their mothers' poor-family strategies.
Soups, beans, and noodles were cheap. They used cheap meat—sometimes horse meat—to make sandwiches and soups from Sunday roasts.
They patched clothes, swapped outgrown stuff with neighbors, and lived in cooler dwellings. Furniture and appliances waited.
Women boarded, laundered, and stitched for neighbors. Cousins, in-laws, and extended relatives received food, accommodation, repairs, and money.
Japan fell. To minimize national household consumption, the government targeted housewives.
For German economic self-sufficiency, the 1936 Four-Year Plan changed family spending.
Nazi women's organizations, propaganda agencies, and the state influenced consumption to achieve economic self-sufficiency for the war.
Authorities, propaganda, and organizations promoted thrift and health. These efforts changed housewives.
WWII and recovery from the Great Depression
Fort Worth, Texas 1942 female manufacturing worker. Women worked while men were drafted.
Economic historians believe World War II ended the Great Depression.
Many economists believe that government expenditure on the war caused or accelerated recovery from the Great Depression, whereas some feel it only reduced unemployment.
European economies were boosted in 1937–1939 by pre-World War II rearmament.
British unemployment dropped to 1.5 million by 1937. Wartime mobilization abolished unemployment in 1939.
In 1941, the US entered the war, ending the Great Depression and lowering unemployment to below 10%.
War spending in the U.S. doubled economic growth, disguising or ending the Depression.
To take advantage of favorable government contracts, businesses ignored the rising national debt and additional levies.
Great Depression Causes
Between Black Tuesday and the 1933 Bank Holiday, the money supply dropped significantly.
M2 money supply rises annually. US industrial production 1928–1939
Keynesian (demand-driven) and Monetarist economic theories of the Great Depression compete.
Heterodox theories also reject Keynesian and monetarist interpretations.
Demand-driven theories agree that a widespread lack of confidence slashed consumption and investment.
After panic and deflation, many thought staying out of the markets would prevent future losses.
Demand fell as prices fell and the money bought more items, making holding money lucrative.
Monetarists argue that the Great Depression began as a recession, but the declining money supply worsened it.
Economists and economic historians are roughly evenly split between the classic monetary explanation that monetary factors caused the Great Depression and the standard Keynesian argument that a collapse in autonomous expenditure, particularly investment, caused the Great Depression.
Today, academics embrace the debt deflation theory and the expectations hypothesis, which add non-monetary reasons to Milton Friedman and Anna Schwartz's monetary explanation.
There is consensus that the Federal Reserve System should have expanded the money supply and acted as a lender of last resort to stop monetary deflation and banking collapse.
This would have mitigated and shortened the economic crisis.
Standard explanations
Modern mainstream economics identifies the causes in
A decrease in the money supply (Monetarists) and consequently a financial crisis, credit contraction, and bankruptcies.
Insufficient private sector demand and inadequate government spending (Keynesians).
The Smoot–Hawley Tariff Act exacerbated what would have otherwise been a "normal" recession (Both Monetarists and Keynesians).
Insufficient expenditure, the decline of the money supply, and debt on the margin caused decreasing prices and additional bankruptcies (Irving Fisher's debt deflation).
Monetarist View on Great Depression
US monetary Great Depression. Real GDP in 1996-Dollar (blue), price index (red), money supply M2 (green), and a number of banks (grey). All adjusted to 1929=100%.
New York's American Union Bank bank was run during the Great Depression.
Friedman and Schwartz explained monetarism.
They blamed "The Great Contraction"—a 35% monetary contraction, one-third of banks failing, and bank shareholder value loss—for the Great Depression. 33% drop (deflation).
The Federal Reserve did not lower interest rates, increase the monetary base, or inject liquidity into the banking sector to prevent the Great Depression.
If the Federal Reserve had moved strongly, Friedman and Schwartz maintained, the stock market fall and economic crisis would have been normal.
Bernanke stated in 2002:
I'll end my speech by misusing my Federal Reserve representative status. Milton and Anna, the Great Depression was right. Finished. Sorry. You prevented it.
The Federal Reserve allowed major public bank failures like the New York Bank of United States, which created panic and widespread runs on local banks, and watched as banks collapsed.
Friedman and Schwartz argued that if the Federal Reserve had provided emergency lending to these key banks or bought government bonds on the open market to provide liquidity and increase the money supply after the key banks fell, all the other banks would not have fallen and the money supply would not have fallen as far and as fast.
Lack of capital prevented businesses from investing. The New York Bank is accused of inaction.
The gold standard prohibited the Fed from stopping the money supply decline. Federal Reserve Notes required 40% gold backing, limiting credit issuance.
The Federal Reserve virtually exhausted its gold-backed credit by the late 1920s.
Federal Reserve demand notes financed this. "Gold in hand" beats "promise of gold" when they only had enough gold to cover 40% of Federal Reserve Notes.
Bank panics returned demand notes for Federal Reserve gold.
Since the Federal Reserve had hit its credit limit, reducing gold in its vaults needed a bigger credit reduction.
On April 5, 1933, President Roosevelt issued Executive Order 6102, prohibiting the individual holding of gold certificates, coins, and bullion, lowering Federal Reserve gold pressure.
An individual who worked as a social worker in Chicago once penned the following in an article:
"We observed Want and Despair walking the streets, and our friends, sensible, careful families, reduced to poverty."