The Great Depression: Causes, Impacts, and Recovery

Introduction: The Onset of the Great Depression

The Great Depression started in 1929 and lasted until the end of the Second World War. It was the most severe economic depression experienced in the Western world, and its far-reaching economic, social, and political consequences continue to shape scholarly debate. To understand the depression fully, it is necessary to examine the event itself, its underlying causes, its impacts, and the process by which recovery eventually took place.

The Great Depression may be argued to have begun in August 1929, when the country's GDP started to decline; however, it is the crash of October 1929 that marks the official beginning of the crisis (Robbins & Weidenbaum, 2009). The stock market crash of 1929 was a shock to many, as the previous decade had been one of growth and prosperity. On Black Tuesday, 29 October, the bottom dropped out of the stock market, resulting in panic selling that wiped out 40% of the paper value of stocks (Robbins & Weidenbaum, 2009). The initial response from politicians and major business leaders was one of optimism, with predictions of a rapid recovery. However, the depression was to continue for more than a decade, with the stock market crash being only the first of many serious problems.

By 1933, unemployment had risen to 25%, up from just 3.2% in 1929, and the stock market continued to fall, with total market value dropping to less than 20% of its pre-crash level (Robbins & Weidenbaum, 2009). Farm incomes fell by 50%, industrial output had decreased by 45% by 1932, and many banks suffered and ultimately failed (Robbins & Weidenbaum, 2009). Numerous banks had invested their depositors' money in the stock market, generating losses that prompted customers to withdraw their savings in fear, further increasing pressure on banks and accelerating their closures (Cecchetti, 1992).

Economic and Social Impacts

The impacts across the country were severe. With more than 13 million people unemployed by 1933, approximately 34 million Americans lived in families with no full-time wage earner. In past recessions, farms had suffered only minimal effects compared to city dwellers, as rural families had the means to feed themselves. However, the Great Depression changed this dynamic. Not only were there deeply adverse economic conditions, but poor weather compounded the crisis, creating the conditions for a widespread Dust Bowl (Bernanke, 1983). A prolonged drought, combined with severe dust storms that were partly the result of decades of overgrazing and the consequent loss of grass cover, devastated agricultural land.

With many small farmers already in debt, the environmental catastrophe made their situation far worse. The failure of farmers to meet their debt obligations saw a large number lose their homes and businesses, displacing entire communities and adding to the wave of internal migration that came to define the era.

Underlying Causes

The causes of the depression may be traced to a fundamental disparity between gains in production capacity and the economy's ability to consume the goods being made in the years leading up to the crisis (Cecchetti, 1992). Rapid technological development had allowed productivity to increase dramatically, but there was insufficient demand in the economy to absorb the output. The initial gains from productivity growth served mainly to widen the gap between the rich and the poor (Cecchetti, 1992).

The wealthy and middle classes saw their savings grow, but the level of increase was often based on irrational expectations of continued growth, meaning that the value of investments — particularly stocks — was not sustainable (Cecchetti, 1992). The industrial expansion of the preceding years had not been built on a solid foundation. The failures of the banks and the problems afflicting agriculture only deepened an already fragile structural situation.

Conclusion

It was not until the U.S. entered the Second World War, following the bombing of Pearl Harbor, that recovery was truly achieved. Fighting the war required the full mobilization of all available labor and all production facilities, and output increased significantly to meet the demand for machinery, war equipment, and food — including supplies sent to allied nations. The definitive end of the Great Depression was therefore driven by the surge in demand generated by wartime mobilization, which provided the economic stimulus that peacetime policies alone had been unable to sustain.

References

Bernanke, B. S. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. The American Economic Review, 73(3), 257–276.

Cecchetti, G. (1992). Sources of output fluctuations during the interwar period: Further evidence on the causes of the Great Depression (Working Paper No. 4049). National Bureau of Economic Research.

Robbins, L., & Weidenbaum, M. (2009). The Great Depression. Transaction Publishers.