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The Great Depression is the period of history that followed "Black Thursday", the stock market crash of Thursday, October 24, 1929. The events in the United States triggered a world-wide depression, which led to deflation and a great increase in unemployment. On the global scale, the market crash in the USA was a final straw in an already shaky world economic situation. Germany was suffering from hyperinflation of currency, and many of the Allied victors of World War I were having serious problems paying off huge war debts. In the late 1920s the American economy at first seemed immune to the mounting troubles, but with the start of the 1930s it crashed with startling rapidity.

A fundamental misdistribution of purchasing power might have been the Depression’s main contributing factor. As industrial and agricultural production increased, the proportion of the profits going to farmers, factory workers, and other potential consumers was far too small to create a market for goods that they were producing. Even in 1929, after nearly a decade of economic growth, more than half the families in America lived on the edge or below the subsistence level—too poor to share in the great consumer boom of the 1920s, too poor to buy the cars and houses and other goods the industrial economy was producing, too poor in many cases to buy even the adequate food and shelter for themselves. As long as corporations had continue to expand their capital facilities (their factories, warehouses, heavy equipment, and other investments), the economy had flourished. By the end of the 1920s, however, capital investments had created more plant space than could be profitably used, and factories were pouring out more goods than consumers could purchase.

The nation’s economy had thus been showing some signs of distress for months before October 1929. Business inventories of all kinds were three times as large as they had been a year before (an indication that the public was not buying products as rapidly as in the past); and other signposts of economic health—freight carloads, industrial production, wholesale prices—were slipping downward.

There was also a serious lack of diversification in the American economy of the 1920s. Prosperity had been excessively dependent on a few basic industries, notably construction and automobiles; in the late 1920s, those industries began to decline. Between 1926 and 1929, expenditures on construction fell from $11 billion to under $9 billion. Automobile sales began to decline somewhat later, but in the first nine months of 1929 they declined by more than one third. Once these two crucial industries began to weaken, there was not enough strength in other sectors of the economy to take up the slack.

The first is the tight money policies of the Federal Reserve which restricted the money supply. The second was the recourse to protectionism with measures such as the Hawley-Smoot Tariff Act, which raised tariffs on imports in order to protect local producers who were being hurt by foreign competition. In response, many other countries also raised their tariffs, badly hurting US businesses that exported their goods. This led to a chain reaction of tariff increases which fragmented the world economy.

In the United States, Herbert Hoover was the president, and he tried to control the situation, however, he helped little. One of the major problems was that with deflation, the currency that you kept in your pocket could buy more goods as the prices went down. The other was that there had been no oversight in the stock market or other investments, and with the collapse, many of the stock and investment schemes were found to be either insolvent, or outright frauds. Unfortunately, many banks had invested in these schemes, and this precipitated a collapse of the banking system in 1932. With the banking system in shambles, and people holding on to whatever currency that they had, there was minimal cash available for any activities that would cause positive change.

In Germany unemployment increased drastically, fuelling widespread disillusionment and anger. Promising to fix the situation, Adolf Hitler took over the government there.

Likewise, many Americans were disillusioned with their system of government, believing that Hoover's policies had driven the country to ruin. (Shantytowns populated by unemployed people at the time were often dubbed "Hoovervilles" to highlight the President's fading popularity). During this period, several alternative and fringe political movements saw a considerable increase in membership. In particular, a number of high-profile figures embraced the ideals of Communism, though this would subsequently be used against them during the Red Scare of the 1950s. Radio speakers such as Father Charles Coughlin saw their listening audiences swell into the millions, as they sought for (and often found) easy scapegoats to blame the country's woes upon.

Roosevelt's "New Deal" in the USA

In 1933 the United States elected Franklin Delano Roosevelt to replace Hoover as president. With unemployment near twenty five percent of the workforce, he initiated a number of government programs to increase liquidity and provide jobs, which jointly are called the New Deal. Some believe that these actions helped bring the country out of the depression--though there is considerable controversy over the extent to which this is true--and provided some of the infrastructure, including roads that are still in use today.

Because the US was still in a state of depression when it entered World War II, it is hard to make a serious argument that the New Deal was a success. The reasons, however are open to debate. Some argue that the inherent instability of a market economy caused such a bad depression that even the well-chosen interventions of the New Deal could not correct it quickly. Others argue that because this longest depression in US history was also marked by the greatest degree of government intervention in US history, it is more reasonable to argue that government action worsened, rather than lessened, the severity of the depression.

It is known that Roosevelt's New Deal programs were initially struck down by the Supreme Court, so that his initial interventions in the economy were all halted. During this time the economy was on a slow improving trend. After the Court began to uphold his interventionist legislation, the economy took a sharp downward dip, which has been called a depression within a depression, from which it was only slowly recovering when the US entered WWII. Thus it is claimed that his intervention delayed the economic recovery that had been underway. This argument is supported by the fact that his programs significantly increased business costs and uncertainty about future government interventions, thus inhibiting business investment and hiring.

The Influence of the World War

Many believe that it was government-induced World War II spending that restarted world-wide economic expansion, but this is at best only partly true. Germany and Italy had "recovered" prior to WWII by making massive military and infrastructure investments. The US moved to full employment during WWII through massive military investments, but also by shifting a very large percentage of the potential work force into the military. While this was necessary, it meant the US economy had not returned to natural market conditions, and when the war ended a period of readjustment was necessary when millions of soldiers returned home. One of the purposes of the G.I. Bill was to ease this transition. In countries such as France, England and the Netherlands, of course, the war caused tremendous harm, rather than being a source of economic revival. While war is always profitable to particular businesses, it causes social and economic dislocations that outweigh any stimulus effects it might have. It is interesting to note that in a single generation popular opinion went from viewing war as the cause of the Depression to being the cure for the Depression, in both cases with arguably dubious causality.