Great Depression

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Great Depression

Overview

The Great Depression was the deepest and longest economic contraction in modern U.S. history. It began after the 1929 stock market crash and lasted through the 1930s, with recovery accelerating only after U.S. mobilization for World War II in 1941–42. The crisis combined a collapsing asset bubble, severe banking failures, policy mistakes, and a collapse in international trade. Its economic and social effects reshaped U.S. policy and institutions.

Key facts
* Duration: roughly 1929–1941 (U.S. economic mobilization in WWII marks a sharp break).
* Stock market: the Dow peaked in 1929 and ultimately fell nearly 90% from that high.
* Unemployment: about 3.2% in early 1929 → over 24% by 1933; remained very high through the decade.
* Trade: U.S. imports fell from roughly $1.3 billion (1929) to $390 million (1932); global trade collapsed.

What triggered the collapse

  1. Speculative boom and stock market crash
    During the 1920s, easy credit, heavy margin borrowing and exuberant speculation pushed asset prices far above fundamentals. The New York Stock Exchange collapsed in October 1929 (Black Thursday, Black Monday, Black Tuesday), triggering massive losses in nominal wealth and investor confidence.

  2. Banking panics and financial contagion
    Bank failures in 1930–1932 destroyed savings and curtailed credit. Without rapid, large-scale liquidity support, many solvent banks could not withstand runs; the resulting contraction of credit amplified the downturn.

  3. Policy mistakes by the Federal Reserve

  4. 1920s: the Fed permitted a large monetary expansion that helped inflate asset bubbles.

  5. After the crash: the Fed allowed the money supply to fall sharply (nearly one-third), failed to provide decisive liquidity to the banking system, and watched thousands of banks fail. This deflationary policy deepened and prolonged the slump.

  6. Protectionism and collapsing trade
    The Smoot–Hawley Tariff (1930) raised U.S. duties on hundreds of foreign goods. Many countries retaliated, global trade collapsed, and export-dependent industries suffered severe losses.

  7. Price and wage rigidities, and government interventions
    Early responses by policymakers—including efforts to prop up prices and wages—often kept markets from adjusting. Some measures (wage and price supports, trade barriers) impeded the economy’s natural reallocation and slowed recovery.

Government responses and the New Deal

Herbert Hoover (1929–1933) pursued public works and other interventions—federal spending rose and programs such as the Reconstruction Finance Corporation were created—but he also supported tariffs and encouraged wage rigidity. These measures mitigated some immediate hardship but did not restore broad recovery.

Franklin D. Roosevelt (from 1933) launched the New Deal, a wide-ranging set of reforms and relief programs aimed at stabilizing finance, creating jobs, and providing social safety nets. Key elements included:
* Emergency banking measures and a bank holiday to stop runs and restore confidence.
* Public-works programs building infrastructure and employing millions.
* Agricultural controls and payments to reduce crop surpluses.
* New regulatory frameworks to reform finance and curb monopolistic practices.
* Social programs such as Social Security and unemployment insurance.
* Removal from the domestic gold standard and restrictions on private gold hoarding.

Debate over the New Deal’s effects

The New Deal stabilized financial institutions and restored some public confidence, but historians and economists disagree on whether it shortened or lengthened the Depression. Criticisms include:
* Insufficient fiscal stimulus early on (from a Keynesian perspective) to restore full employment.
* Regulatory and tax changes that some argue discouraged private investment and hiring.
* Others credit the New Deal with preventing worse outcomes and building enduring social safety nets.

Role of World War II in recovery

Large-scale government spending for World War II created massive demand for labor and manufacturing, sharply reducing unemployment among civilians and mobilizing industrial capacity. While wartime conscription and rationing complicate measures of private-sector recovery, the fiscal stimulus and postwar economic expansion helped lead to a sustained recovery. That mobilization, rather than a simple market rebound, is widely seen as the main force that ended the Depression.

Social effects and survival strategies

Millions of families faced unemployment, homelessness, and hunger. People coped through:
* Public relief programs and charity.
* Community mutual aid and family networks.
* Self-sufficiency—gardening, bartering, and thrift.

Lessons and legacy

The Great Depression taught policymakers important lessons:
* Rapid, decisive monetary and fiscal intervention matters in a systemic crisis.
* Liquidity backstops and deposit insurance can prevent destructive banking runs.
* International cooperation and open trade help prevent worldwide economic collapse.
* A permanent social safety net (Social Security, unemployment insurance) can reduce human suffering during downturns.

The Depression also cemented the expectation that government has a central role in stabilizing the economy during major crises. Many institutions and policies established in the 1930s remain central to modern economic governance.