The crash

The Great Depression began with the United States stock market collapse of late October 1929. The Dow Jones Industrial Average had reached a then-record peak of 381.17 on 3 September 1929. It began to decline through early October and crashed catastrophically over four trading days: Black Thursday (24 October, ~11% intraday loss recovered partially), Black Monday (28 October, –13%), and Black Tuesday (29 October, –12%). By mid-November the Dow had lost approximately 40% from its September peak. It would lose a further 60% over the next two and a half years, eventually bottoming at 41.22 on 8 July 1932 — approximately 89% below its 1929 peak.

The stock-market crash was the trigger rather than the cause. The deeper causes — overcapacity in industrial production, structural weakness in agricultural prices throughout the 1920s, the destabilizing effects of the post-WWI gold standard, the rigid international debt-and-reparations structure inherited from the Versailles settlement, and substantial speculative excess in stock-market lending — produced the conditions that turned a sharp market correction into a sustained economic collapse.

The depression

The depression’s full economic effects developed over the following three years. By 1933:

  • U.S. industrial output had fallen approximately 50% from 1929 levels.
  • U.S. unemployment had risen from approximately 3% in 1929 to approximately 25% — roughly 13 million unemployed in a labour force of 52 million.
  • U.S. price levels had fallen approximately 25% (a deflationary collapse that substantially aggravated debt burdens).
  • Approximately 9,000 U.S. banks had failed, with approximately $7 billion in lost deposits (in 1933 dollars).
  • International trade had collapsed by approximately 50%, partly as a consequence of the Smoot-Hawley Tariff Act of 1930 and the retaliatory tariff responses by U.S. trading partners.

The collapse was not confined to the United States. Germany — already economically destabilized by the Versailles reparations and the 1923 hyperinflation — was hit particularly severely; unemployment reached approximately 30% by 1932. Canada, Australia, Argentina, and most of central Europe suffered comparable economic contractions. The United Kingdom, France, and the Scandinavian economies were less severely affected but still experienced substantial downturns.

The political consequences of the depression in Germany were directly consequential for the rise of the Nazi Party (which had received approximately 2.6% of the vote in 1928 and 37.4% in July 1932), the appointment of Adolf Hitler as German Chancellor on 30 January 1933, and the subsequent Nazi consolidation of power that would produce the Second World War and the Holocaust.

The New Deal

The U.S. political response was the New Deal of President Franklin D. Roosevelt, inaugurated on 4 March 1933 (the worst single week of the U.S. banking crisis). The New Deal’s first hundred days produced a substantial body of emergency legislation: the Emergency Banking Act (closing all U.S. banks for a four-day audit and reopening only solvent ones); the abandonment of the gold standard (April 1933); the Civilian Conservation Corps, the Tennessee Valley Authority, the Public Works Administration, the Agricultural Adjustment Act, the National Industrial Recovery Act, and the Federal Emergency Relief Administration.

The “Second New Deal” of 1935–1936 added the Social Security Act (the federal old-age pension system, still operating), the Wagner Act (federal collective-bargaining law), the Works Progress Administration, and the Wealth Tax Act. The Federal Reserve was substantially reorganized; bank deposits were federally insured via the new FDIC (created in 1933).

The New Deal did not by itself end the depression — U.S. unemployment was still approximately 14% in 1937 and 19% in 1938 (the year of the “Roosevelt recession”). It did substantially reduce the worst of the immediate human cost and laid the institutional foundation of the post-WWII U.S. welfare state.

End

The Great Depression ended in the United States with the massive industrial mobilization that began in 1940–1941 under the pre-war rearmament and the post-Pearl Harbor war economy. U.S. unemployment fell from 14.6% in 1940 to 1.2% in 1944. The European depression similarly ended with the mass mobilization for the war.

The Bretton Woods Conference of July 1944 — held at Bretton Woods, New Hampshire, with delegates from 44 Allied nations — established the post-war international monetary system explicitly designed to prevent a repetition of the 1930s depression: fixed exchange rates pegged to the U.S. dollar (which was in turn convertible to gold at $35/ounce), the International Monetary Fund, and the International Bank for Reconstruction and Development (later the World Bank). The Bretton Woods system would govern international economic relations until the suspension of gold convertibility in 1971.

Legacy

The Great Depression produced the institutional foundations of the modern industrialized welfare state, the macroeconomic-policy assumption that governments are responsible for managing aggregate economic demand and unemployment levels (the “Keynesian consensus” that dominated economic policy from approximately 1945 to 1973), the international financial-economic regulatory institutions of the post-WWII period, and the political-economic case-study against which subsequent recessions and financial crises have been continuously evaluated (the 1973–1975 recession, the 1980–1982 recession, the 2008 Global Financial Crisis).

The depression’s political legacy — the relationship between sustained economic distress and the rise of authoritarian-fascist political movements — has continued to inform analysis of subsequent democratic political-economic crises. The interwar pattern (depression → fascism → world war) was the dominant analytical template through which the second half of the 20th century interpreted the relationship between economic policy and political stability.