At the end of the 1920s, the United States boasted the largest economy in the world. With the destruction wrought by World War I, Europeans struggled while Americans flourished. Upon succeeding to the Presidency, Herbert Hoover predicted that the United States would soon see the day when poverty was eliminated. Then, in a moment of triumph, the stock market crash of 1929 touched off a chain of events that plunged the United States into the longest, deepest economic crisis of its history.
The Great Depression (1929-39) was the deepest and longest-lasting economic downturn in the history of the USA and the western industrialized world. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed.
The depression is best understood as the final chapter of the breakdown of the worldwide economic order. As the depression deepened, governments tried to protect their reserves of gold by keeping interest rates high and credit tight for too long. This had a devastating impact on credit, spending, and prices, and an ordinary business slump became a calamity. What ultimately ended the depression was World War II. Military spending and mobilization reduced the U.S. unemployment rate to 1.9 percent by 1943.
It is too simplistic to view the stock market crash as the single cause of the Great Depression:
- The gold standard. Most money was paper, but governments were obligated, if requested, to redeem that paper for gold. This "convertibility" put an upper limit on the volume of paper currency governments could print. A loss of gold (or convertible currencies) forced governments to raise interest rates.
- The best-known economists Milton Friedman and Anna Schwartz, blame the Federal Reserve for permitting two-fifths of the nation's banks to fail between 1929 and 1933. Since deposits were not insured then, the bank failures wiped out savings and shrank the money supply. From 1929 to 1933 the money supply dropped by one-third, choking off credit and making it impossible for many individuals and businesses to spend or invest.
- Economist Charles Kindleberger sees depression as a global event caused by a lack of world economic leadership. According to Kindleberger, Britain provided leadership before World War I. It fostered global trade by keeping its markets open, promoted expansion by making overseas investments, and prevented financial crises with emergency loans. Between WWI and WWII wars no country did enough to halt banking crises, and the entire industrial world adopted protectionist measures in attempts to curtail imports. In 1930, President Herbert Hoover signed the Smoot-Hawley tariff, raising tariffs on dutiable items by 52 percent. The protectionism put an extra brake on world trade just when countries should have been promoting it.