An outline, era by era

Great Depression (1929)

20th Century · 1914 – 2000

The Great Depression was the most severe worldwide economic downturn of the modern era. It is usually dated from the American stock market crash of October 1929, though the United States economy had begun to weaken a few months earlier. Output, prices, trade and employment fell sharply in most countries over the next three to four years. In the United States about a quarter of the workforce was unemployed at the worst point, in 1933, and many other industrial countries saw similarly high levels.

The slump spread through the gold standard, collapsing banks, falling prices and shrinking trade. Recovery came unevenly during the 1930s and varied by country. The crisis changed how governments saw their role in the economy, leading to new welfare systems, bank regulation and, later, Keynesian ideas of managing demand. It also fed political extremism in several countries, most notably Germany, and so forms part of the background to World War II.

Things happened, and the rest is history

  1. The First World War debts and reparations

    Event

    What happened

    The Treaty of Versailles of 1919 obliges Germany to pay reparations to the Allies. The Allies in turn owe large war debts to the United States. In 1923 France and Belgium occupy the Ruhr after Germany falls behind on payments, and Germany suffers hyperinflation. The Dawes Plan of 1924 and the Young Plan of 1929 restructure the payments.

    The rest is history

    The system came to depend on American loans flowing to Germany, which paid reparations to the Allies, who repaid their debts to the United States. When American lending dried up in 1928 and 1929, the arrangement became fragile. Historians still debate how large a burden reparations really were. Most agree that the web of international debts made the financial system more vulnerable to shocks. In 1931 President Hoover announced a one-year moratorium on these payments, and they were effectively ended at the Lausanne Conference in 1932.

    Sources

    1. PrimaryTreaty of Versailles, Part VIII (Reparations). Peace treaty signed 28 June 1919.
    2. BookEichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.
    3. BookTooze, Adam. The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931. London: Allen Lane, 2014.

  2. The restored gold standard

    Event

    What happened

    During World War I most major countries suspend the gold standard. Britain returns to gold in 1925 at the prewar rate of the pound, and France stabilises its franc in 1926. By the late 1920s most major economies are again tied to gold at fixed exchange rates. Countries must then protect their gold reserves, even when their economies are weak.

    The rest is history

    Many economists, including Barry Eichengreen and Ben Bernanke, argue that the gold standard spread and deepened the slump. Countries defended gold by raising interest rates and cutting spending, which pushed prices and output down. The countries that left gold earliest, such as Britain in September 1931, generally began to recover sooner. The United States left gold in 1933. Economists broadly agree on this pattern, though they differ on how much weight to give it among other causes.

    Sources

    1. BookEichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.
    2. ArticleBernanke, Ben S., and Harold James. "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison." In Financial Markets and Financial Crises, edited by R. Glenn Hubbard. Chicago: University of Chicago Press, 1991: 33-68.

  3. Farm distress and the credit boom of the 1920s

    Event

    What happened

    After World War I, farm prices fall as European agriculture recovers and demand shrinks, and many American farmers are left with heavy debts. Through the 1920s, instalment buying of cars and household goods grows rapidly, and the number of bank failures in rural areas is high even in the boom years. The share of national income going to the richest households rises.

    The rest is history

    These weaknesses did not alone cause the Depression. They meant that many households and banks were already fragile before 1929. When prices later fell sharply, debts became harder to repay, which Irving Fisher described in 1933 as debt deflation. Historians continue to debate how far an uneven distribution of income reduced spending in the late 1920s. Most accept that high debt made the later downturn worse.

    Sources

    1. ArticleFisher, Irving. "The Debt-Deflation Theory of Great Depressions." Econometrica 1, no. 4 (1933): 337-357.
    2. BookKindleberger, Charles P. The World in Depression, 1929-1939. Berkeley: University of California Press, 1973.

  4. The stock market boom and the Federal Reserve's tightening

    Event

    What happened

    From 1927 to the summer of 1929, share prices in New York rise steeply, helped by borrowing to buy stocks on margin. The Federal Reserve, worried about speculation, raises its discount rate in 1928 and 1929. Other central banks also tighten policy to protect their gold. The American economy begins to slow around mid-1929.

    The rest is history

    Share prices peaked in early September 1929 and fell sharply in October, with the worst days on 24 and 29 October. The Dow Jones index lost nearly 90 percent of its value by July 1932. Most economists today see the crash as a signal and an accelerator rather than the sole cause of the Depression. Milton Friedman and Anna Schwartz argued that tight monetary policy turned a recession into a catastrophe. Others stress the gold standard and the failure of banks.

    Sources

    1. BookFriedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.
    2. BookGalbraith, John Kenneth. The Great Crash, 1929. Boston: Houghton Mifflin, 1955.

  5. The Smoot-Hawley Tariff and the collapse of trade

    Event

    What happened

    In June 1930 President Hoover signs the Smoot-Hawley Tariff Act, which raises American duties on many imports. More than a thousand economists had signed a petition urging him to veto it. Other countries raise their own tariffs and set quotas. World trade shrinks sharply between 1929 and 1933.

    The rest is history

    Most economists think the tariff was a damaging policy but not the main cause of the Depression, since imports were a small share of American output. Much of the fall in trade came from falling incomes and prices. Still, rising protection made recovery harder and soured international relations. In 1934 the United States passed the Reciprocal Trade Agreements Act, which allowed tariffs to be lowered by agreement with other countries.

    Sources

    1. ArticleIrwin, Douglas A. "The Smoot-Hawley Tariff: A Quantitative Assessment." Review of Economics and Statistics 80, no. 2 (1998): 326-334.
    2. BookIrwin, Douglas A. Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton: Princeton University Press, 2011.

  6. The banking panics of 1930 to 1933

    Event

    What happened

    Beginning in late 1930, waves of bank failures hit the United States. The failure of the Bank of United States in New York in December 1930 is followed by further panics in 1931 and 1932. In early 1933 states declare bank holidays, and President Roosevelt closes all banks nationwide on taking office in March. In Europe, the failure of the Austrian Creditanstalt in May 1931 spreads panic to Germany and then Britain.

    The rest is history

    Thousands of American banks failed, and depositors lost savings, which cut spending and lending. The Emergency Banking Act of March 1933 reopened sound banks under government supervision. The Glass-Steagall Act of June 1933 created federal deposit insurance through the FDIC. Bank failures dropped sharply afterwards. Bernanke has argued that the collapse of credit channels made the Depression longer and deeper.

    Sources

    1. ArticleBernanke, Ben S. "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression." American Economic Review 73, no. 3 (1983): 257-276.
    2. BookFriedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

  7. Unemployment and political upheaval in Germany

    Event

    What happened

    Germany depends on short-term foreign loans, and these are withdrawn after 1929. Unemployment rises to around six million by early 1932. Heinrich Brüning's government responds with spending cuts and deflation. In the Reichstag elections of September 1930 the Nazi Party rises from 12 seats to 107, and in July 1932 it wins 230 seats.

    The rest is history

    Historians agree the economic crisis helped the Nazis win mass support, but not that it made their rise inevitable. Conservative politicians also played a part. President Hindenburg appointed Adolf Hitler chancellor on 30 January 1933. The Nazi regime then ended democracy in Germany within months. This chain of events leads directly into the origins of World War II.

    Sources

    1. BookEvans, Richard J. The Coming of the Third Reich. London: Allen Lane, 2003.
    2. BookKindleberger, Charles P. The World in Depression, 1929-1939. Berkeley: University of California Press, 1973.

  8. The Dust Bowl and the New Deal

    Event

    What happened

    In the early 1930s drought and wind erosion strike the Great Plains, where years of ploughing had removed native grass. Great dust storms, including the one on 14 April 1935, strip topsoil from farms in states such as Oklahoma, Kansas and Texas. Meanwhile Franklin Roosevelt takes office in March 1933 and launches the New Deal, including relief, public works and the Social Security Act of 1935.

    The rest is history

    Many farm families left the Plains, and some moved to California. The New Deal created agencies such as the Civilian Conservation Corps and the Works Progress Administration, and the Soil Conservation Service was set up in 1935. Historians disagree about how much the New Deal ended the Depression. Unemployment fell through the mid-1930s but remained high, and a sharp recession followed in 1937 to 1938. Full recovery came with the rearmament and war production of the early 1940s.

    Sources

    1. BookWorster, Donald. Dust Bowl: The Southern Plains in the 1930s. New York: Oxford University Press, 1979.
    2. BookKennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, 1999.

  9. Stockbrokers leaping from windows

    Popular belief

    The legend

    After the crash of October 1929, ruined investors are said to have jumped from Wall Street skyscrapers in large numbers. Stories describe brokers falling past the windows as crowds gathered below. The image has become a shorthand for the crash.

    The rest is history

    Contemporary records do not support a wave of suicides. Galbraith noted in The Great Crash that the stories were widely told but that suicide rates in the weeks after the crash did not rise sharply, and the New York figures for October and November 1929 were not unusual. Suicide rates did rise over the early 1930s as the economy worsened. Wall Street stories of the time were often exaggerated, and some were jokes, such as the tale of hotel clerks asking guests if they wanted a room for sleeping or for jumping.

    Sources

    1. BookGalbraith, John Kenneth. The Great Crash, 1929. Boston: Houghton Mifflin, 1955.
    2. BookKlein, Maury. Rainbow's End: The Crash of 1929. New York: Oxford University Press, 2001.

  10. The crash caused the Great Depression

    Popular belief

    The legend

    It is often said that the stock market crash of October 1929 alone brought on the Depression. In this telling, prosperity ended overnight on Black Tuesday and the whole world fell into ruin straight away. The date 1929 becomes the start of the whole story.

    The rest is history

    The crash was dramatic, but the economy had begun to slow in mid-1929, and the market recovered a good deal in early 1930. The worst years came from 1930 to 1933, as bank failures, monetary tightening, the gold standard and falling prices combined. Economists still debate the relative weight of each factor. The crash probably hurt confidence and spending, but it is generally seen as one part of a larger chain. Industrial production in the United States fell by about half between 1929 and 1933.

    Sources

    1. BookTemin, Peter. Did Monetary Forces Cause the Great Depression? New York: W. W. Norton, 1976.
    2. BookEichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.

  11. Hoover did nothing

    Popular belief

    The legend

    Herbert Hoover is often remembered as a president who stood by and did nothing while the country sank. His name was attached to shantytowns called Hoovervilles and to Hoover blankets, meaning newspapers. The story goes that Roosevelt then rescued the country by acting where Hoover would not.

    The rest is history

    Hoover did act, though many historians judge his actions inadequate. He urged businesses to keep wages up, increased public works, and in 1932 signed the Reconstruction Finance Corporation into law to lend to banks and firms. He also signed the Smoot-Hawley Tariff and a large tax increase in 1932, both widely criticised. Several New Deal ideas had precedents in his administration. Roosevelt won the 1932 election with about 57 percent of the vote.

    Sources

    1. BookKennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, 1999.
    2. BookLeuchtenburg, William E. Franklin D. Roosevelt and the New Deal, 1932-1940. New York: Harper & Row, 1963.

  12. The New Deal ended the Depression

    Popular belief

    The legend

    A common version says that Roosevelt's New Deal brought the Depression to an end within a few years. In this telling, relief programmes and public works restored prosperity by the middle of the 1930s. The war is treated as a footnote to a recovery already achieved.

    The rest is history

    The economy grew strongly from 1933 to 1937, and the banking system was stabilised. Unemployment, however, was still around 14 percent in 1937 and rose again in the 1937 to 1938 recession. Economists disagree about how much was due to the New Deal, leaving gold, and monetary expansion. Christina Romer has argued that monetary expansion, helped by gold inflows after 1933, drove much of the recovery. Unemployment fell to low levels only with wartime mobilisation in the early 1940s.

    Sources

    1. ArticleRomer, Christina D. "What Ended the Great Depression?" Journal of Economic History 52, no. 4 (1992): 757-784.
    2. BookKennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, 1999.

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