Few areas of historical research have provoked such intensive study as the causes of America’s Great Depression—and for good reason. Tens of millions of humans suffered intense misery and despair.
How bad was the Great Depression? The dimensions of the economic catastrophe in America and the rest of the world cannot be captured fully by quantitative data alone, but here are some figures that might help put this economic nightmare into perspective:
From 1929–1933, production at the nation’s factories, mines, and utilities fell by more than half.
People’s real disposable incomes dropped 28%.
Stock prices collapsed to one-tenth of their pre-crash height.
The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933.
At the height of the Depression, one of every four workers was out of a job.
Because of these unspeakable traumas, the Great Depression and its causes have remained at the forefront of economic study and debate. The Great Depression was a complex event, and understanding what happened is no small challenge. In this guide, we aim to give you a clear picture of the key historical figures, policies, and events that caused and extended America’s Great Depression.
We’ll start by breaking down the timeline of how exactly the Depression unfolded, which we’ll break up into into four distinct phases.
The Four Phases of the Great Depression
When you think of the Great Depression, probably the first thing that comes to mind is the massive stock market crash of 1929, when stock prices plummeted spectacularly and investors dumped their stocks as fast as they could. The ensuing panic was memorable indeed, but it was only one aspect of the Depression. In fact, the Depression had four distinct phases:
The government’s “easy money” policies caused an artificial economic boom and a subsequent crash.
President Herbert Hoover’s interventionist policies after the crash suppressed the self-adjusting aspect of the market, thus preventing recovery and prolonging the recession.
After Hoover left office, Franklin Delano Roosevelt’s “New Deal” expanded Hoover’s interventionism into nearly every aspect of the American economy, thus deepening the Depression and extending it ever longer.
Labor laws such as the Wagner Act struck the final blow to the remaining healthy sectors of the economy, dragging the last remaining bulwarks of productivity to their knees.
Each of these phases are marked by distinct events, and each had their own specific causes. Together they produced one common result: business stagnation and unemployment on a scale never before seen in the United States. Let’s examine each phase and its causes in turn.
1. Easy Money: A Series of False Signals
The first phase of the Great Depression was a massive boom during the “Roaring 20’s,” which inevitably burst in 1929. In order to understand this crash, we first have to understand the boom and how it happened.
For various reasons, the government in the 1920’s created monetary policies that ballooned the quantity of money and credit in the economy. A great boom resulted, followed soon after by a painful day of reckoning. None of America’s depressions prior to 1929, however, lasted more than four years and most of them were over in two. The Great Depression lasted for a dozen years because the government compounded its monetary errors with a series of harmful interventions. But how exactly did the government inflate the economy, and how did that cause the boom and inevitable bust?
Monetary Policy, Interest Rates, and the Business Cycle
The key to understanding how the government’s policies caused the initial boom and bust of the Great Depression lies in understanding how businessmen and investors use interest rates to decide how and when to spend their money.
Investors rely on interest rates to gauge the level of risk for various investments. In simplistic terms, a relatively low interest rate for a given loan signals to potential investors that taking out the loan is probably a safe bet; a high interest rate, on the other hand, signals to investors that money can bet better invested elsewhere. The government’s expansion of the money supply artificially reduces and thus falsifies the interest rates, and thereby misguides businessmen in their investment decisions.
In the belief that declining rates indicate growing supplies of capital savings, investors embark upon new production projects. The creation of money gives rise to an economic boom. It causes prices to rise, especially prices of capital goods used for business expansion.
