Great Depression - AlwaysWealthy

Great Depression

The Great Depression was a prolonged economic crisis that started with the stock market crash of 1929 and lasted almost a decade. The Great Depression was a deflationary depression during which prices of consumer products such as food and clothes decreased considerably. Asset prices of stocks, real estate and commodities dropped sharply as well.

During the Great Depression there were many bank runs and bank failures. This led to the rise of several institutions and policy changes, most notably the FDIC insurance and abandonment of the gold standard.

Table of Contents

What Led to the Great Depression?

The origins of the Great Depression are debated and there are various economic theories that aim to explain it, including the Austrian Business Cycle theory.

After World War I, many countries experienced a post-war boom known as the Roaring Twenties. Businesses and industries experienced rapid growth during this period. Stocks were generating impressive gains for investors.

But this growth wasn’t sustainable. Banks had overextended their loans, and arguably, a lot of the growth experienced during the Roaring Twenties was based on easy money and credit. This led to an artificial boom which ended in a bust when the economy began deleveraging.[1] Rothbard, Murray N.: America’s Great Depression (2008)

What Caused the Stock Market Crash of 1929?

While only around 2.5% of Americans owned stocks at the time, the idea that regular, hard working men could get rich on the stock market had spread after World War I.

The post-war boom led many Americans to believe that the good times would never end. Many stocks were selling at 40x earnings.[2] Roth, Benjamin: The Great Depression. A Diary (2010), pp. 7. Despite this, newspapers were full of recommendations to buy stocks.

Americans began buying stocks on margin based on tips or on a “hunch” without looking at or understanding fundamentals.[3] Roth, Benjamin: The Great Depression. A Diary (2010), pp. xv.

The Dow Jones between 1920-1933 by St. Louis Fed

In late October 1929, the stock market started selling off aggressively. While newspapers were still recommending to buy stocks at bargains and viewed the crash as an opportunity, the stock market lost a majority of its value in the subsequent years.

Many stocks dropped 90% or more, wiping out the life savings of many Americans.[4] Federal Reserve History: “Stock Market Crash of 1929” Accessed Feb. 24, 2022.

While some people name the market crash of 1929 as the cause of the Great Depression, the economy had been suffering from structural problems long before that, including banks overextending their lending.

Why Did Banks Fail During the Great Depression?

As the Great Depression started taking hold of the United States, many Americans went broke because they had put their life savings into stocks, real estate or lost their jobs.

Wiping out both savings and income of Americans lead to many defaults.

Banks had overextended their lending, and as people stopped paying their mortgages and loans, banks faced serious liquidity issues.

Many banks began suspending payments and demanding notices for withdrawals. This led to bank runs where large numbers of depositors attempted to withdraw their money from banks at the same time.[5] Roth, Benjamin: The Great Depression. A Diary (2010), pp. 11ff. Bank runs further drained the cash reserves of overextended banks, leading to many more bank failures.

Bank run on the American Union Bank

As one bank failure after another was announced, on a daily basis, bank runs intensified. Depositors panicked and silently lined up in large ques at bank tellers to get their money out of the bank as long as they still could.

Gold Hoarding

The little money that Americans still had, they held onto and hoarded.

Given that the general public didn’t trust their money was safe in banks, and the stock market and real estate market crash led to panic, applying a “wait and hold” approach became common.

The last thing people wanted was to lose their last bit of life savings in a bank failure, or by betting on a stock or real estate property that seemed anything but a safe investment.

As a result, Americans withdrew money, demanded gold, or held onto their gold certificates, in the hopes of preserving their wealth or what little was left of it. This later on became president Roosevelt’s rationale for outlawing gold ownership.[6] The American Presidency Project. “Executive Order 6102—Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government” Accessed Feb. 24, 2022.

President Hoover’s Failed Attempts at Ending the Great Depression

During the early years of the Great Depression, president Hoover was still in office. While he attempted to combat the depression through several policy changes, they either came to late or weren’t effective enough at preventing bank failures.

The Federal Reserve, which had been founded in 1913, was still a very young organization. Throughout Hoover’s presidency, the Federal Reserve was given more flexibility and a new national banking corporation called Reconstruction Finance Corp (RFC) was set up to support banks.[7] Federal Reserve History: “Reconstruction Finance Corporation Act” Accessed Feb. 24, 2022.

Despite these efforts, the Great Depression continued worsening. In 1931, England, Denmark and Sweden went off the gold standard.

The United States still held onto the gold standard under Hoover’s presidency, but as times got more desperate, sentiment changed. During the next election period end of 1932, Franklin D. Roosevelt was elected.

Did the New Deal End the Great Depression?

Unlike Hoover, Roosevelt was willing to act more decisively and take unprecedented and controversial action.

Shortly after taking office, Roosevelt declared a national bank holiday.[8] National Park Service: “Timeline of Franklin D. Roosevelt’s Life” Accessed Feb. 24, 2022. This prevented depositors from withdrawing their savings and further draining the cash reserves of banks. Some banks never opened their doors again. And those that did implemented strict withdrawal limits.

Around the same time, Roosevelt took another controversial step and issued Executive Order 6102 which outlawed gold ownership.[9] The American Presidency Project. “Executive Order 6102—Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government” Accessed Feb. 24, 2022.

Roosevelt did this in order to prevent Americans from hoarding gold. All citizens were asked to turn over their gold bullion, coins and gold certificates. Those who didn’t follow the order were threatened with large fines and up to 10 years in prison, although most of it turned out to be a bluff.

End of the Gold Standard

In 1933, when Roosevelt outlawed gold ownership for American citizens, most countries had already gone off the gold standard. The United States was one of the last countries to remain on the gold standard.

With Executive Order 6102, America was now officially off the gold standard as well. This meant, the government could expand the paper money supply beyond its gold reserves. Outlawing gold meant ending convertibility of bank notes into gold.

In the following years of Roosevelt’s presidency, government spending increased dramatically and many people feared inflation.[10] Roth, Benjamin: The Great Depression. A Diary (2010), pp. 222.

Despite this, the Great Depression continued. Deflation and not inflation was prevalent.

Unemployment During the Great Depression

Unemployment rates skyrocketed, business was at standstill and many industries operated at minimal capacity. Stocks remained low and real estate foreclosures were common because people stopped paying mortgages and rents. Soup lines increased and unemployed workers were desperate to get work.

Soup lines during the Great Depression

Mobs of farmers, suffering from low food prices and facing foreclosure and default, showed up at auctions, threatening to lynch foreclosure judges.

Those who had invested in real estate prior to the Great Depression didn’t generate any income. Selling properties, even at a loss, was difficult because there were no buyers despite the low prices.

Many real estate owners destroyed their own properties in order to prevent having to pay taxes.[11] Roth, Benjamin: The Great Depression. A Diary (2010), pp. 63.

Agricultural Adjustment Act

As part of Roosevelt’s “New Deal”, the Agricultural Adjustment Act was passed in 1933. The goal of the Agricultural Adjustment Act was to help farmers return to the income and prosperity they enjoyed before the Great Depression.[12] Rasmussen, Wayne D., et. al: A Short History of Agricultural Adjustment, 1933-75, in: Agriculture Information Bulletin No.391 (1976)

Food prices had been consistently dropping due to deflation. Despite the lower prices, poverty, starvation and hunger were widespread across the United States. Those who hadn’t lost their jobs certainly got paid less.

In an attempt to combat dropping food prices, the Agricultural Adjustment Act paid farmers who agreed to cut their production output by one third.[13] Roth, Benjamin: The Great Depression. A Diary (2010), pp. 148.

In order to reduce supply and drive up food prices, the Agricultural Adjustment Act also destroyed overproduction and ordered the slaughter of eight and a half million piglets.

Roosevelt Recession

Many people believed the Great Depression had ended in 1937 as the stock market and economy started picking up.

But between May 1937 and June 1938, the stock market and economy experienced another downturn.

This 13-month economic downturn, after signs of steady recovery, was dubbed the “Roosevelt Recession”. During this time, and even beyond, the hardships experienced during the Great Depression returned.

At this point, the United States had been in a deflationary depression for almost a decade. Americans were desperate for better times.

When Was the Great Depression in the United States Over?

In 1939, tensions in Europe grew and escalated in World War II. The German hyperinflation and subsequent depression paved the path for Hitler’s power grab. After the beginning of the conflict, the focus of the United States shifted from economic recovery to preparing for war.

Once the United States got involved, most of the industrial production shifted from a peace-time economy to that of a nation at war.

From mass food production to building out an unprecedented war machine, the United States would never be the same again.

In the following decade, the United States became the strongest military power in the world. And by the end of World War II, the United States owned more than two thirds of global gold reserves.

Bretton Woods Agreement

In 1944, shortly before World War II ended, global leaders met in Bretton Woods, New Hampshire.

A new monetary system, known as the Bretton Woods system, was drafted.

At its center was the United States and the US dollar, now declared world-reserve currency. The problems of the Great Depression seemed far away, yet new institutions such as the International Monetary Fund (IMF) and World Bank were founded during the Bretton Woods conference.

The goal of these institutions was to prevent issues experienced during the inter-war period, such as competitive currency debasement and economic downturns.

After Roosevelt’s presidency, free market capitalism in the United States shifted to a mixed economy.

Keynesianism became the new economic doctrine after the Great Depression.[14] Federal Reserve History: “The Great Depression” Accessed Feb. 24, 2022. Keynes, who himself played a major role during the Bretton Woods conference, was a strong believer in counter-cyclical government spending.

He believed the gold standard was an outdated system and that economic crises like the Great Depression could be prevented or significantly shortened.

In subsequent economic crises, the Federal Reserve became more decisive and engaged in monetary policy faster and more aggressively.


February 24, 2022