Great Depression of 1929: Causes and Economic Effects

The Great Depression was a period of global economic crisis of massive scale. It was unprecedented in modern world’s economic history. Severity of the global economic crisis was such that till today it is seen as the worst tragedy of the global economy. Such was the Great Depression of 1930s. But how did the Great Depression start? What were the factors responsible? How did the world recover from it? What were the effects of the Great Depression? We will learn all of it in this article.

Causes of the Great Depression

The Great Depression saw its dawn in America at a time when the American wealth had doubled within a span of one decade. It was the second decade of the 20^th century and this period of growth was termed famously as the roaring twenties. New and innovative consumer products were entering the American markets. Large scale domestic consumption was witnessed. But most of the consumption was credit or installment based; which eventually led to economic unsustainability.

This was coupled with the downfall of the agriculture sector. Expansion in American farm industry during World War-I along with large scale farm mechanization could not sustain the pace of growth it required. This pushed the farmers into huge debts. Manufacturing industry also showed the signs of economic slowdown and, as a result, production decreased; leading to the rise in unemployment.

However, the biggest factor was reckless speculations at the Wall Street. From workers who could barely survive on their income to the business tycoons who inherited fortunes; everybody invested their savings in the stock market. The increased economic pressure led to higher stock price value in comparison to its real value. And the final showdown occurred in October 1929. The American stock market suddenly started falling in September 1929 and it finally crashed on 29 October 1929. The date of 29 October 1929 is now known as the Great Crash or Black Tuesday. It was this event which made the world aware of America’s economic plight and the entire slowdown cycle so triggered was termed as the Great Depression.

QUICK FACTS (See more interesting facts about Great Depression)

The Great Depression lasted from August 1929 to March 1933
The Great Depression lasted for 43 months
Overall global GDP decline: -26.7%
Peak global unemploy­ment: 24.9% (in 1933)

Global Impact of the Great Depression

What followed next was an era of massive unemployment, slowdown in production and complete stock market crash. The level of economic disturbance was too severe to spare the world economy. As most countries adhered to the gold standard in a fixed currency exchange regime, America’s economic tragedy swiftly paved its way into the world economy and the ripple effect was experienced everywhere. European countries were amongst the hardest hit.

American Administration During Crisis

Herbert Hoover, Dust Bowl & the Banking Crisis

President Herbert Hoover was leading America when the unprecedented economic crisis of Great Depression hit the country. His regime witnessed the rise in unemployment by over 10 million within two years. Industrial production dropped-off significantly and the farmers were in no position to harvest the crops. Meanwhile, natural calamity also took a toll. State of Nebraska experienced severe drought in 1930. People belonging to the Southern Plain region started moving towards cities in search of work and avenues of survival. Severe dust storms caused huge damage to the ecology and agriculture in America and Canada in 1930s. This period was termed as the “Dust Bowl”.

Migrant Mother is an iconic photograph taken by Dorothea Lange in Feb/March 1936. The photograph shows Florence Owen Thompson with her children during the Great Depression in California. This photograph became face of the hardship endured by people in the US. More information on this photograph.

President Hoover’s administration also witnessed panic waves which started in the banking sector. Investors lost all confidence in the sustainability of banks and started demanding their deposits in cash. Bank were compelled to liquidate as they had insufficient cash reserves to fulfill the demand. Eventually thousands of banks succumbed to the crisis. It is estimated that 11,000 out of 25,000 US banks had failed during Great Depression.

With the intention to serve with base support, Hoover’s administration provided government loans. The logic behind the support was that if money was infused in the banking system, it would be able provide loans to the businesses. Then businesses would in turn revive and provide jobs to people. This indirect approach was followed because Hoover was reluctant about making any direct intervention in the economy. He believed it was not the government’s job. Hard to believe it today, isn’t It? Nonetheless, it was what it was!

Franklin Roosevelt, New Deal & the Social Security Act

On 04 March 1933, democrat Franklin D. Roosevelt succeeded the republican government of Herbert Hoover. President Roosevelt inherited an economically devastated America with over 15 millions unemployed people. Roosevelt wasted no time in taking decisions. Within the first 100 days of his regime, US government passed several legislation to stabilize the economic scenario of the country. The legislation so passed included crucial banking sector related reforms. In order to restore people’s confidence, he started a series of 30 radio chats famously known as “fireside-chats”.

Franklin Roosevelt created the Federal Deposit Insurance Corporation (FDIC) which protected depositor’s accounts. He also created the Securities & Exchange Commission (SEC) to regulate the stock market and prevent any kind of abuses leading to a meltdown like what happened in 1929. In order to recover from the Great Depression, Roosevelt also introduced the New Deal. Under the New Deal, between 1933 and 1939, President Roosevelt’s regime took many new initiatives; including a permanent jobs program and infrastructural development.

One of the most prominent features of Roosevelt’s regime was the introduction of the Social Security Act in 1935. The Social Security Act provided pensions to the unemployed, disabled and persons in old age. This Act gained widespread popularity.

Signs of Recovery

The American economy started showing signs of recovery from the very initial days of Roosevelt’s regime. Economy positively responded to reforms and GDP growth began to look promising. However, recession again hit America in 1937. It was an outcome of the Federal Reserve’s decision to increase its money reserve. By 1938, the economy once again started overcoming the economic downfall. The second recession was certainly a setback because it adversely affected the growth economy had achieved till 1937 after the great crash. It also prolonged the depression period but eventually America overcame all economic hurdles.

End of the Great Depression

What begins always has an end. Holds true even for the greatest economic depression our world has seen. World War-II followed the era of economic turmoil. Pearl Harbour attack of 1941 led to America’s entry in the World War-II. Participation in the World War increased the military manufacturing, industrial production and employment. This, along with other economic reforms, brought back the nation to its full production capacity. Eventually, America recovered and the episode of greatest economic tragedy of modern times ended.