The Great Depression

Context/Description: The "Roaring Twenties" saw extraordinary U.S. prosperity driven by electrification, automobile manufacturing, consumer appliances, and rising productivity. The stock market became a national obsession. Buying stocks "on margin" (with only 10% down payment) was common practice, allowing massive leverage. Radio and newspapers hyped stock tips. Meanwhile, overproduction in agriculture (post-WWI demand collapse) and industry created mounting inventories.

Warning Signs:

• The Dow Jones rose 500% from 1922-1929—unsustainable growth
• Price-to-earnings ratios reached historic highs (30-40x)
• Margin debt exploded—credit extended for stock purchases
• Construction and automobile sales peaked in 1928, declining into 1929
• Market volatility increased in March 1929 with a sharp but brief crash
• Insider selling: smart money (including Joseph Kennedy) exited
• Wealth concentration: top 1% owned 40% of wealth, limiting consumption capacity
• Agricultural distress persisted throughout the decade
• Protective tariff debates (precursors to Smoot-Hawley) worried international traders

The Problem: Speculation had inflated stock prices far beyond underlying business values. The economy had structural weaknesses: agricultural depression, wealth inequality limiting consumer demand, overproduction, and international war debt issues. Easy credit created an unstable pyramid. Banks made speculative investments with depositors' money.

The Trigger: The market peaked September 3, 1929. Small declines triggered margin calls—investors had to pay debts or sell holdings. On Black Thursday (October 24, 1929), panic selling began with 12.9 million shares traded. Bankers temporarily stabilized markets, but Black Tuesday (October 29) saw 16.4 million shares dumped in complete panic.

The Cascade: The crash destroyed wealth, but the Depression came from cascading failures:

• Banks failed as stock-backed loans defaulted (9,000 banks ultimately failed)
• Bank failures destroyed savings and froze credit
• Businesses couldn't get loans, leading to layoffs and failures
• Unemployment reduced consumption, causing more business failures
• Smoot-Hawley Tariff (1930) triggered global trade wars
• International gold standard transmitted deflation globally
• Agricultural prices collapsed further, causing farm foreclosures
• Feedback loops spiraled downward for years

Results/Impacts: The worst economic catastrophe in modern history:

• Dow fell 89% from peak (1929) to trough (1932)
• Global GDP declined approximately 15%
• U.S. unemployment peaked at 25% (1933); underemployment much higher
• Industrial production halved
• 9,000 U.S. banks failed
• Homelessness, bread lines, and "Hoovervilles" became widespread
• International impacts: German economic collapse contributed to Hitler's rise; global political extremism; famines in colonized regions

Total economic losses estimated at $1 trillion in 1930s dollars (equivalent to roughly $17 trillion today). The Depression lasted through the 1930s; full recovery came only with World War II mobilization.

Policy Responses:

• New Deal programs: Social Security, unemployment insurance, banking reforms, public works
• Glass-Steagall Act (1933) separated commercial and investment banking
• Securities Exchange Act (1934) regulated stock markets
• FDIC created to insure bank deposits
• Abandonment of gold standard enabled monetary flexibility

The Lesson: Leverage magnifies both gains and catastrophic losses. Banking system fragility can transform a stock crash into economic depression. Policy responses matter enormously—the Federal Reserve's passive stance worsened the crisis. International economic coordination is essential in a globalized world.