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The Great Depression: What Caused It, and Will It Happen Again?

Is another Great Depression on the way?

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The Great Depression is perhaps the most studied and talked about economic event in the nation’s history. The decade-long downturn triggered widespread misery and destruction, from double-digit unemployment to bank failures to homelessness. It was a terrible time for the country. But the question is: Will the United States ever emulate this depression ever again? America has come close to falling into a depression, from the 2008-2009 financial crisis to the 2020 coronavirus-induced collapse. Perhaps understanding how the Great Depression came about and how terrible conditions were could offer some insight into what needs to unfold before the U.S. mirrors the 1930s – and how it responds.

The Great Depression: A Primer

The 1930s were a culmination of various economic and political events that exacerbated the depression, lasting from 1929 until 1939. In addition to a transition from President Herbert Hoover to President Franklin Delano Roosevelt, there were plenty of notable developments in American society that left millions of Americans impoverished.

  • The economy contracted 50%.
  • The unemployment rate skyrocketed to 25%.
  • One-third of the nation’s banks failed, and depositors lost $140 billion.
  • International trade crashed 66%.
  • The Dow Jones Industrial Average cratered 85%.

While economic data improved following President Roosevelt’s election in 1932, the economy was still in the doldrums. Joblessness was still as high as 19%, the agricultural sector languished throughout the 1930s, and excessive deflation decimated many households.

The federal government’s finances were devastated, too. The national debt as a proportion to the gross national product (GNP) was above 40% and climbed to 120% when the U.S. joined the Second World War. Washington’s expenditures tripled, adding to the national debt that soared to nearly half of the gross domestic product by 1939, which conservative economists contend today prolonged the depression. Indeed, the New Deal and the Second New Deal weighed enormously on America’s finances, causing Republican critics to worry about the country turning into a socialist state.

Conservatives formed a coalition to abandon the so-called alphabet soup of federal agencies, including the Reconstruction Finance Corporation (RFC), the Works Progress Administration (WPA), and the Civilian Conservation Corps (CCC). But they were unsuccessful in dismantling Social Security. Following the depression and the war, the public debt was finally on a steady decline until the 1980s.

The national economy also started to normalize in the 1940s, although many Americans continued to struggle. Consumer spending, personal income, price inflation, and agricultural production were on the rise again.

What Caused the Great Depression?

The Wall Street Crash of 1929, also known as Black Tuesday, was the start of the Great Depression.

After years of excessive speculation and the debt expansion that artificially elevated stock valuations, the New York Stock Exchange witnessed a monumental collapse, with more than 16.4 million shares being traded in a single day and billions of dollars being wiped out. This led to the many other economic calamities that were prevalent throughout the United States at the time.

Following the First World War, the Federal Reserve slowed down money-supply growth and raised interest rates to fight inflation that had swelled to as much as 20%. However, in the following years, the U.S. central bank expanded the money supply rapidly and cut rates, flooding the market with freshly created dollars. The institution then ended this easy money policy in 1929 and allowed the total supply of U.S. dollars to decline by one-third, resulting in the downturn. Contrary to the monetary expansionists, the Fed returned to inflationary practices during this period. For example, it purchased $1.1 billion in government debt in 1932.

In addition to Fed policy, other factors contributed to the historic economic downturn:

  • A housing bubble in the major metropolitan areas.
  • A decline in foreign lending and international trade (protectionism).
  • Credit expansion, loose credit, and over-indebtedness.
  • Rampant deflation that impacted rural America.

Put simply, it was a perfect storm of events that sparked a decade of destitution and despair for much of the country. Even for Americans who kept their jobs and earned a decent living, life was still tough as the motto of the time was: “Use it up, wear it out, make do or do without.” With the New Deal prolonging the depression, the nation went through these times longer than needed.

Can It Happen Again?

Legendary economist Hans F. Sennholz wrote in The Freeman in October 1962: “Can it happen again? Inexorable economic law ascertains that it must happen again whenever we repeat the dreadful errors that generated the Great Depression.”

Indeed, the economy and the political fallout of the 1930s have been intensely studied by academia for decades. While opposing schools of thought have presented different ideas to the causes of the Great Depression, these concepts bring many prescriptions to the table to better understand the next recession – and the warning signs of an economic depression.

Andrew Moran

Economics Correspondent at LibertyNation.com and LNGenZ.com. Andrew has written extensively on economics, business, and political subjects for the last decade. He also writes about economics at Economic Collapse News and commodities at EarnForex.com. He is the author of “The War on Cash.” You can learn more at AndrewMoran.net.

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