The Great Depression

The third development that shaped the 1930s and contemporary ideas of the economy, society and policy was the Great Depression, the deepest of the 47 economic downturns the United States has experienced since 1785. It began with the Wall Street Crash of 1929, which ushered in a 12-year period of mass unemployment and pauperization that affected all western industrial nations.

The stock crash began on October 24, 1929, since then known as “Black Thursday,” when the market lost 11 percent of its value, it intensified on on October 28 (“Black Monday”) when the losses added an extra 13 percent decline and peaked on Black Tuesday, October 29, when the market declined further, another 12 percent and a volume of trading that went unmatched for 40 years, as panic took hold.

Much has been written about the event, perhaps the most dispassionate and succinct presentation for the nonspecialist is The Great Crash, 1929 by John Kenneth Galbraith, published long after the smoke cleared, in 1954.

Among the factors that played into the panic, Galbraith explains, was the unrestricted ability to speculate on stocks by borrowing money (known as trading on margin) and a speculative bubble in which investors failed to notice that consumption was beginning to lag behind production. Joseph Kennedy, father of the president, famously recounted that he got out of the market before the crash, when a shoeshine boy offered him a stock tip, his clue that speculation was running amok.

A group of wealthy investors and banks tried to remedy matters and the market briefly regained its value, but another, much longer, steady decline ran from April 1931 to July 8, 1932, when the market closed at the lowest level of the 20th century, with a net 89 percent loss of value for stocks overall. Events in Wall Street caused a panicked run on banks and internationally on the dollar, which was then backed by gold, and business uncertainty led to layoffs.

Between 1929 and 1932, worldwide gross domestic product fell by an estimated 15 percent (worldwide GDP fell by less than 1 percent from 2008 to 2009 during the Great Recession). U.S. unemployment rose to 25 percent (by comparison, the Great Recession peaked briefly at 10 percent) and in other countries it rose as high as 33 percent.

The Depression was actually two downturns. The first was the slump brought on by the crash, from which the U.S. was beginning to recover toward 1935 thanks to President Franklin D. Roosevelt’s New Deal. Then there was a second slump beginning in 1936, brought on entirely by Washington policy when Republicans attempted to cut spending on the programs that were lifting up the economy.

What ended the Depression definitively was the massive government investment in World War II. By 1943 unemployment was at 3 percent. The explanation is simple. Government-financed capital spending rose from 5 percent of all such investment in 1940 to 67 percent by 1943. The United States had found its investor of last resort.