The Great Depression-1929:Causes, Consequences and important lessons

By Arun Dahal Khatri

The Great Depression 1929:The Great Depression, often called the worst economic downturn in world history, was a cataclysmic event that shook the global economy from 1929 to 1939. Characterized by a significant crash in the stock market in October 1929, this unprecedented economic bubble had far-reaching consequences that profoundly impacted nations and individuals alike. The repercussions of the Great Depression were multifaceted, extending beyond mere financial hardships to reshape the very fabric of society.The origins of the Great Depression can be traced back to the roaring 1920s, a period of rapid economic growth and speculative exuberance in the United States. The nation was basking in prosperity because of soaring stock prices and a credit-fueled consumer boom. However, the unsustainable euphoria came to a screeching halt on Black Tuesday, October 29, 1929, when the New York Stock Exchange experienced a devastating crash. As panic spread among investors, countless fortunes evaporated, triggering a chain reaction that unraveled the country's financial stability.

During the stock market collapse, consumer spending and investment plummeted drastically. People's confidence in the economy waned, leading them to curtail their spending, further aggravating the downturn. The once-thriving industries were crippled by reduced demand for goods and services, resulting in massive unemployment and a deflationary spiral. The intricate web of interconnectedness in the global economy meant that the repercussions of the crash were not confined to the United States; the effects were felt worldwide. As the economic woes persisted, businesses closed their doors, factories shut down, and millions of workers became unemployed. When the economy hit rock bottom in 1933, an astounding 15 million Americans were out of work, leading to widespread poverty and despair. The financial system was equally shattered, with one-third of the country's banking institutions collapsing under the weight of bad loans and bank runs. Confidence in the banking sector was severely shaken, further exacerbating the economic turmoil.

Under President Franklin D. Roosevelt, the U.S. government embarked on an ambitious plan to resuscitate the economy through a series of unprecedented measures known as the New Deal. This comprehensive set of economic and social reforms aimed to relieve the suffering population, stimulate growth, and regulate the financial sector. While the New Deal initiatives did alleviate some of the immediate hardships, it was not until the outbreak of World War II that the Great Depression finally saw its end. The war effort infused the economy with massive government spending and created millions of jobs, pulling the nation out of its decade-long slump. Nevertheless, the scars of the Great Depression left an enduring impact on the American psyche and the global economy. It was a painful reminder of the dangers of unchecked speculation, unbridled capitalism, and the importance of prudent economic policies.

The Great Depression serves as a stark lesson in economic history, cautioning against the complacency that often accompanies periods of prosperity. It highlighted the need for sound fiscal and monetary policies, effective regulation, and social safety nets to protect citizens during economic hardship. Moreover, the lessons from the Great Depression laid the groundwork for developing modern financial theories and institutions, shaping future economic policies and practices.The Great Depression was a momentous and unparalleled event in economic history, marking a period of extreme turmoil and suffering for people worldwide. Its causes were deeply rooted in speculative excesses, overreliance on credit, and flawed economic policies. The consequences of the crash were dire, leading to widespread unemployment, deflation, and social upheaval. The legacy of the Great Depression continues to resonate, reminding us of the importance of responsible economic governance and the need for vigilance to avoid similar catastrophes in the future.

Cause of The Great Depression -1929:

The economy seems beautiful when it has stable and sustainable growth. But, when the economy starts to take the high speed without taking precautions and without using protection then obviously it will get into an accident and harm the nation. Through 1920 the economy of the USA expanded rapidly and the growth rate was increasing yearly. Interestingly, the national wealth of the USA grew more than doubled between 1920 to 1929. The period is also called The Roaring Twenties. The speculation in the stock market was seemingly high and the performance and the index of the Dow Jones Industrial Average were getting excessively higher by overtaking all the soaring points. People were involved in the stock market blindly and most of the undervalued stocks got an unbelievable skyrocket price in the market. Everyone became millionaires. As a result, the Stock market reached a very high point in August 1929. By that time the production sectors were not getting enough attention, Therefore, production had already declined. All the amounts which are needed for production are in the stock market. The unemployment rate was slowly but steadily increasing. The wages of employees were cut off and it has declined manufacturing and agriculture production. These sectors were facing huge problems and were struggling due to the falling price of food. People take the margin loan from the bank and the liquidation of the bank is poor. People got loans from the bank and invested in the stock market which caused great problems for the manufacturing and agriculture sector. After reaching its highest point American economics start to divert in the downturn. On October 24, 1929,  investors began selling overpriced shares. The day was also called “Black Thursday” when 12.9 million shares were traded. In the mid of 1929 certainly, consumer spending declined and factory production also started to slow down. 

Gross Domestic Production (GDP) of the USA between 1929 to 1939:

Consequences of The Great Depression-1929:

The devastating impact of the Great Depression was not limited to economic consequences; it caused widespread suffering for people in the USA and across the globe. Approximately one-third of banks in the USA collapsed, leading to severe financial instability. Housing prices in the country plummeted, and international trade ended as economies struggled to cope with the crisis. The unemployment rate soared to an alarming 25%, leaving millions of Americans jobless and in dire straits.

Before the onset of the Great Depression, the USA boasted a thriving economy with a reported size of $105 billion. However, the persistent economic decline during the Depression led to a staggering 50% reduction in Gross Domestic Production (GDP), which plummeted to $57.2 billion by the end of 1933. This sharp contraction in economic activity left many businesses struggling to survive, as falling prices and deflation caused widespread bankruptcies.

The Great Depression also had significant political ramifications, eroding people's faith in unfettered Capitalism. The failed approach of President Herbert Hoover in handling the crisis fueled disillusionment among the populace. Consequently, in the 1932 presidential election, the American people voted for Franklin D. Roosevelt, who proposed a new economic model known as Keynesian economics. Roosevelt's approach sought to use government intervention and spending to stimulate the economy and combat the effects of the Depression.The Great Depression inflicted substantial economic hardships and social upheaval domestically and internationally. The collapse of banks, plummeting housing prices, and the cessation of international trade worsened the crisis. The unemployment rate skyrocketed, leading to widespread joblessness. The Depression also prompted a reevaluation of economic and political ideologies, with many turning to the Keynesian economic model proposed by President Roosevelt as a potential solution.

Consumer Price Index (CPI) of the USA between 1929 to 1939:

The important lessons every economy needs to learn from The Great Depression 1929:

The great depression of 1929 is not only an economic accident but also one of the greatest lessons for most of economics. It did not only bear the negative consequences but also give key economic lessons. The most predominant lessons are mentioned below:

1- Government policies are the most important indicators for economic development. Therefore, regulatory bodies like the government and central banks need to make stable policies. Failure of policies can cause the result like the great depression of 1929.

2-The problems of liquidation can lead the economic failure. Therefore, solving the liquidation problems is most important to keep the economy alive.

3-The unprecedented growth of the asset market can bring the overconfidence of the people which can district the overall economy of the nation.

4- Government spending and industrial development are important for the country's sustainable economic development and also play the important role in solving the problems of unemployment.

5- The manufacturing and agriculture sector is the backbone of the economy. Collapsing this sector is like collapsing the spinal cord of the human body.

 Important notes;

1-The Roaring Twenties: 1920 the first decade having full of prosperity and dissipation. Changes in the traditional cultures and started to live the liberal life.

2-Black Thursday: On October 24, 1929, anxious investors began to sell the overpriced shares which caused the crash of the stock market in 1929.

3-Deflation: Continuously decreasing the price of goods and services in the market.

4-Kyenensian economics module: The macroeconomics module was brought by John Maynard Keynes who stated that fluctuations of components of aggregate demand (sending, Consumption, Investment, and Government expenditures) can cause output change.