In the United States, the Great Depression is commonly (though not universally) dated to the Wall Street crash of October 1929. The nadir came in 1931–1933, and recovery came in 1940. The stock market crash marked the beginning of a decade of high unemployment, famine, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth as well as for personal advancement. Altogether, this period represented a traumatic loss of confidence in the economic future.
The usual explanations include numerous factors, especially high consumer debt, ill-regulated markets that permitted overoptimistic loans by banks and investors, and the lack of high-growth new industries. These all interacted to create a downward economic spiral of reduced spending, falling confidence and lowered production. Industries that suffered the most included construction, shipping, mining, logging, and agriculture. Also hard hit was the manufacturing of durable goods like automobiles and appliances, whose purchase consumers could postpone. The economy hit bottom in the winter of 1932–1933; then came four years of growth until the recession of 1937–1938 brought back high levels of unemployment.Chandler (1970); Jensen (1989); Mitchell (1964)
The Depression caused major political changes in America. Three years into the depression, President Herbert Hoover, widely blamed for not doing enough to combat the crisis, lost the election of 1932 to Franklin D. Roosevelt by a landslide. Roosevelt's economic recovery plan, the New Deal, instituted unprecedented programs for relief, recovery and reform, and caused a major alignment of politics with social liberalism and a retreat of laissez-faire economics until the rise of neoliberalism in the late 20th century. There were mass migrations of people from badly hit areas in the Great Plains (the Okies) and the South to places such as California and the cities of the North (the Great Migration).The Migrant Experience . Memory.loc.gov (April 6, 1998). Retrieved on 2013-07-14.American Exodus The Dust Bowl Mi . Faculty.washington.edu. Retrieved on July 14, 2013. Racial tensions also increased during this time.
Causes Monetary interpretations Examining the causes of the Great Depression raises multiple issues: what factor set off the first downturn in 1929; what structural weaknesses and specific events turned it into a major depression; how the downturn spread from country to country; and why the economic recovery was so prolonged.
Many rural banks began to fail in October 1930 when farmers defaulted on loans. There was no federal deposit insurance during that time as bank failures were considered a normal part of economic life. Worried depositors started to withdraw savings, so the money multiplier worked in reverse. Banks were forced to liquidate assets (such as calling in loans rather than creating new loans).Robert Fuller (2012), Phantom of Fear: The Banking Panic of 1933, pp. 241–242 fn. 45 This caused the money supply to shrink and the economy to contract (the Great Contraction), resulting in a significant decline in aggregate investment. The decreased money supply further aggravated price deflation, putting more pressure on already struggling businesses.
The U.S. Government's commitment to the gold standard prevented it from engaging in expansionary monetary policy. High interest rates needed to be maintained in order to attract international investors who bought foreign assets with gold. However, the high interest also inhibited domestic business borrowing. The U.S. interest rates were also affected by France's decision to raise their interest rates to attract gold to their vaults. In theory, the U.S. would have two potential responses to that: allow the exchange rate to adjust, or increase their own interest rates to maintain the gold standard. At the time, the U.S. was pegged to the gold standard. Therefore, Americans converted their dollars into francs to buy more French assets, the demand for the U.S. dollar fell, and the exchange rate increased. One of the only things the U.S. could do to get back into equilibrium was increase interest rates.
In the late 20th century, Winner of the Swedish Central Bank Nobel Memorial Prize in Economic Sciences economist Milton Friedman and his fellow monetarist Anna Schwartz argued that the Federal Reserve could have stemmed the severity of the Depression, but failed to exercise its role of managing the monetary system and ameliorating banking panics, resulting in a Great Contraction of the economy from 1929 until the New Deal began in 1933. This view was endorsed by Fed Governor Ben Bernanke who in 2002 said in a speech honoring Friedman and Schwartz: Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.Ben S. Bernanke (Nov. 8, 2002), FederalReserve.gov: "Remarks by Governor Ben S. Bernanke" Conference to Honor Milton Friedman, University of Chicago — Ben S. Bernanke
Stock market crash The Wall Street Crash of 1929 is often cited as the beginning of the Great Depression. It began on October 24, 1929, and kept going down until March 1933. It was the longest and most devastating stock market crash in the history of the United States. Much of the stock market crash can be attributed to exuberance and false expectations. In the years leading up to 1929, the rising stock market prices had created vast sums of wealth in relation to amounts invested, in turn encouraging borrowing to buy more stock. However, on October 24 (Black Thursday), share prices began to fall and panic selling caused prices to fall sharply. On October 29 (Black Tuesday), share prices fell by $14 billion in a single day, more than $30 billion in the week. The value that evaporated that week was ten times more than the entire federal budget and more than all of what the U.S. had spent on World War I. By 1930 the value of shares had fallen by 90%.
Since many banks had also invested their clients' savings in the stock market, these banks were forced to close when the stock market crashed. After the stock market crash and the bank closures, people were afraid of losing more money. Because of their fears of further economic challenge, individuals from all classes stopped purchasing and consuming. Thousands of individual investors who believed they could get rich by investing on margin lost everything they had. The stock market crash severely impacted the American economy.
Banking failures
A large contribution was the closure and suspension of thousands of banks across the country. Financial institutions failed for several reasons, including unregulated lending procedures, confidence in the gold standard, consumer confidence in future economics, and agricultural defaults on outstanding loans. With these compounding issues the banking system struggled to keep up with the public's increasing demand for cash withdrawals. This overall decreased the money supply and forced the banks to resort to short or liquidate existing loans. In the race to liquidate assets the banking system began to fail on a wide scale. In November 1930 the first major banking crisis began with over 800 banks closing their doors by January 1931. By October 1931 over 2100 banks were suspended with the highest suspension rate recorded in the St. Louis Federal Reserve District, with 2 out of every 5 banks suspended."Banking Panics (1930–1933)." Encyclopedia of the Great Depression. Encyclopedia.com. June 13, 2017<http://www.encyclopedia.com >. The economy as a whole experienced a massive reduction in banking footholds across the country amounting to more than nine thousand closed banks by 1933.
The closures resulted in a massive withdrawal of deposits by millions of Americans estimated at near $6.8 billion ($ in dollars). During this time the Federal Deposit Insurance Corporation (FDIC) was not in place resulting in a loss of roughly $1.36 billion (or 20%) of the total $6.8 billion accounted for within the failed banks. These losses came directly from everyday individuals' savings, investments and bank accounts. As a result, GDP fell from the high seven-hundreds in 1929 to the low to mid six-hundreds in 1933 before seeing any recovery for the first time in nearly 4 years.USA annual GDP from 1910–60, in billions of constant 2005 dollars, with the years of the Great Depression (1929–1939) highlighted. Based on data from: Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" MeasuringWorth, 2008 Federal leadership intervention is highly debated on its effectiveness and overall participation. The Federal Reserve Act could not effectively tackle the banking crisis as state bank and trust companies were not compelled to be a member, paper eligible discount member banks heavily restricted access to the Federal Reserve, power between the twelve Federal Reserve banks was decentralized and federal level leadership was ineffective, inexperienced, and weak.
Banking growth
Throughout the early 1900s banking regulations were extremely lax if not non-existent. The Currency Act of 1900 lowered the required capital of investors from $50,000 to $25,000 to create a national bank. As a result of this change nearly two thirds of the banks formed over the next ten years were quite small, averaging just above the $25,000 in required capital.Walter, John R. "Failures: The Great Contagion or the Great Shakeout?" Federal Reserve Bank of Richmond Economic Quarterly Volume 91/1 Winter 2005 91.1 (2005): 39–41. Web. 2005 The number of banks would nearly double (number of banks divided by Real GDP) from 1890 to 1920 due to the lack of oversight and qualification when banking charters were being issued in the first two decades of the 1900s.(Federal Reserve Board 1933, 63–65).
The unregulated growth of small rural banking institutions can be partially attributed to the rising cost of agriculture especially in the Corn Belt and Cotton Belt. Throughout the corn and cotton belts real estate increases drove the demand for more local funding to continue to supply rising agricultural economics. The rural banking structures would supply the needed capital to meet the farm commodity market, however, this came with a price of reliability and low risk lending. Economic growth was promising from 1887 to 1920 with an average of 6 percent growth in GDP. In particular, the participation in World War I drove a booming agricultural market that drove optimism at the consumer and lending level which, in turn, resulted in a more lax approach in the lending process. Over banked conditions existed which pressured struggling banks to increase their services (specifically to the agricultural customers) without any additional regulatory oversight or qualifications. This dilemma introduced several high-risk and marginal business returns to the banking market.Federal Reserve Board 1933, 67. Banking growth would continue through the first two decades well outside of previous trends disregarding the current economic and population standards. Banking profitability and loan standards begin to deteriorate as early as 1900 as a result.