Great Depression

What It Means

The Great Depression, the most significant economic slowdown in U.S. history, lasted from 1929 until about 1939. A depression is an especially severe and long recession, and a recession is an economic downturn that can be defined in two ways. According to the most precise definition a recession is a decline in a country’s gross domestic product (GDP; the total value of all goods and services produced within a country) for two or more successive quarters (in the financial world, each year is commonly broken down into four three-month periods called quarters).

After the Great Depression began in 1929, it quickly spread to Europe and became an international financial crisis. Countries came out of the depression at different times, but for most nations the crisis lasted well into the 1930s. In the United States more than 9,000 banks closed during the 1930s, depositors lost their savings, and unemployment and homelessness sharply increased. Workers in agriculture, mining and logging, and other industries suffered the greatest losses because international trade sharply declined, and overseas markets for American raw materials and finished goods dried up. The United States began to come out of the Great Depression in 1938 and 1939 at the dawn of World War II.

When Did It Begin

While it is difficult to attribute the Great Depression to a single cause, economists generally point to several critical (and catastrophic) economic developments that occurred during the 1920s and early 1930s. The first major crisis came in the aftermath of World War I, when American farmers, hoping to fulfill global demand for food and other crops following the collapse of agriculture in war-ravaged Europe, began to increase production of major commodities (for example, grain, cotton, and corn). In order to accommodate this dramatic rise in production, many farmers took on large debts to finance additional farming machinery, increased shipping volumes, and other expenses. As production increased, however, farmers soon found themselves with an enormous surplus (a condition where a producer has more goods than can be sold). A rapid decline in agricultural prices resulted in a comparable decline in farming revenues, and many farmers defaulted on their loans (in other words, were unable to make loan payments) and were subsequently forced into bankruptcy. By 1929 farmers’ earnings amounted to only one-third of the national average. In the 1930s severe drought in key U.S. farming states (which became known, collectively, as the Dust Bowl) further devastated U.S. agriculture.

More Detailed Information

Arguably the most infamous event leading to the Great Depression came on October 29, 1929 (a day known in U.S. history as Black Tuesday), when the New York Stock Exchange (the largest organized stock market in the United States) crashed. On that day 16.4 million shares of stock were sold (a single-day record high that was not exceeded for nearly 40 years), and the stock market lost $14 billion. Largely forgotten, however, is the fact that there was a similar crash on the previous Thursday (October 24, 1929), when 12.9 million shares were traded. Heading into the weekend, many newspapers called that day Black Thursday. When trading resumed on Monday, October 28, investors continued to sell. Though most historians consider Black Tuesday the beginning of the Great Depression, it should be noted that the stock market began to recover in November and December of 1929, recouping almost a third of its losses before the end of the year. This gradual recovery continued until the autumn of 1930, when the market began a steady, long-lasting decline that lasted through most of the 1930s.

According to many economists, the government’s failure to act decisively following the stock market crash played a role in making the crisis worse. For one, the Federal Reserve (the central bank of the United States) failed to act when the nation’s leading banks began to fail in the early 1930s. Economists such as Milton Friedman (1912-2006) have argued that the Federal Reserve could have averted the disaster by lending money to the failing banks; instead, the collapse of the nation’s major banks resulted in the collapse of numerous smaller banks, notably those in rural areas, thereby worsening the crisis. At the same time, the nation’s money supply (the amount of money in circulation) dropped by over 30 percent between 1930 and 1931; according to Friedman, the Federal Reserve could have stimulated the economy by making more money available for loans, debt relief, and so on. At the same time, the decision of President Herbert Hoover (1874-1964) not to allow the federal government to take on debt further thwarted the economy’s prospects of a swift recovery.

Also thought to be a contributing factor was the Smoot-Hawley Tariff Act, passed by Congress in 1930. A tariff is a tax on foreign goods that is assessed when the goods are imported, or brought, into the country. Tariffs raise the price of imported items and thus encourage local consumers to buy domestically made goods. The Smoot-Hawley act taxed more than 20,000 imported goods at record levels. Some imports received as much as a 60 percent tax. Other countries retaliated, taxing American imports at the same rate. This cycle of events greatly reduced international trade; because the amount of goods imported into and exported from Europe and the United States greatly declined, the depression worsened. Before the tariff came into being, the unemployment rate in the United States was 9 percent. After the tariff was implemented, unemployment jumped to 16 percent within a year. By 1932 unemployment was at 25 percent.

Recent Trends

After the Great Depression the United States experienced a number of recessions, but all were shorter and less severe. There were also financial crises. For example, on Monday, October 19, 1987, the stock market fell by nearly 23 percent. Losses on this day were greater than those on Black Tuesday of 1929, but unlike in 1929, the market maintained a gradual recovery afterward. The stock market once again plummeted on September 17, 2001, six days after terrorist attacks in New York City and Washington, D.C. That day the stock market recorded its largest single-day loss in history. Common explanations for why the United States has avoided further depressions include the government’s willingness to spend money to stimulate the economy during economic downturns and better management by the Federal Reserve of the country’s money supply.