GREAT DEPRESSION: CAUSES, CHARACTERISTICS AND CONSEQUENCES - HISTORY - 2025

The Great Depression or Crisis of 29 was a great economic crisis that began in the United States in 1929 and spread to the rest of the world during the following years. Its effects were devastating for a large number of citizens, who lost jobs, homes and all their savings.

The First World War brought a change in world geopolitics. The United States emerged as a superpower, displacing European countries and experienced great economic growth. However, this growth caused important imbalances that ended up being one of the causes of the Great Depression.

Unemployed waiting for the food distribution. Source: National Archives at College Park, via Wikimedia Commons

The crash of the New York Stock Exchange, which occurred on October 29, 1929 - known as Black Thursday - is considered the beginning of the Great Depression. Numerous banks failed and unemployment grew to reach one third of the population in some places.

The consequences of the crisis lasted for several years. On the political front, the Great Depression caused a major discredit of democracy. Many authors consider that its effects contributed to the rise of fascism and Nazism.

Background

The First World War made the industry modernize very quickly to meet the armament needs. At the end of the conflict, the factories were producing much more than before, causing the economy to begin to grow.

First World War

In addition to the millions of victims caused by the conflict, the First World War (1914-1918) also caused changes in the economic and political order of the planet. The public spending generated by the war was enormous, especially in Europe. That continent lost 10% of its population and 3.5% of its capital.

The public debt multiplied by six and the consequent money creation caused a sharp increase in inflation.

The United States, for its part, was favored by the conflict. Politically it became the great world superpower. Economically, it seized markets traditionally occupied by Europeans. Its factories were also modernized and production increased significantly.

The subsequent reconstruction of the European continent also brought profits for American companies. Europe was not in a position to carry all the burden and the United States government made loans and favored investments.

However, the situation of agriculture in the USA suffered. During the conflict, they had destined a good part to export, raising prices. At the end of the war, they found a surplus that caused price drops and large losses.

United States growth

The United States experienced a period of economic prosperity for much of the 1920s. His government promoted policies that favored private businesses and their industry. In addition, it legislated to protect its manufacturers against foreign competition.

Among its actions to favor private companies, the US government granted large construction loans, signed juicy transportation contracts and provided other indirect subsidies.

In the short term, these ways of acting made the economy grow enormously. Consumption skyrocketed and wealth began to flow. On the downside, those benefits were concentrated in a few hands, turning up a mass of disadvantaged workers.

Causes

The bonanza of the 1920s did not herald the troubles to come. By 1925, the economic effects of World War I seemed over. Production levels had recovered and the cost of raw materials had stabilized.

However, this recovery did not affect all countries equally. While in the United States or Japan the economy was doing very well, in England or France there were high unemployment rates and a prolonged crisis.

American policy did not help European countries overcome their difficulties. They demanded, for example, to pay the debt with gold or merchandise, stopped the importation of products through customs duties and, at the same time, imposed their products on the European continent.

Industrial overproduction

Historians point out that excess production in American industry favored the arrival of the crisis of 29.

The technical innovations caused a productive growth that could not be assumed by the demand. At first, this overproduction could be absorbed by the purchases of the workers, who saw their wages increased. This, in turn, caused prices to rise.

Over time, the increase in prices was much greater than that of wages, which reduced demand and industrialists saw that many of their products were not sold. The effect was the closure of companies, the growth of unemployment and the decrease in salaries.

Agriculture decline

At the same time, agriculture was going through very bad times. The first two decades of the twentieth century had been very prosperous for this sector and the prices of the products rose a lot.

With World War I, and the destruction of Europe's farmlands, the demand for American products had risen sharply. The end of the conflict caused the closure of the foreign market, causing many problems for farmers.

Bag reheating

As noted, the economic situation in the United States during the 1920s was excellent. They had known how to take advantage of the possibilities created by the war in Europe, becoming, practically, the absolute owner of the market. To this must be added the technological advance applied to the industry.

This bonanza situation was transferred to the New York Stock Exchange in the mid-1920s. The value of shares rose steadily and many citizens began to speculate to try to make a lot of money quickly. This affected all strata of the population, including many without stock market knowledge.

Continued demand for shares led to further increases until, according to experts, levels were reached well above the real value of the companies.

Soon, given the atmosphere of collective euphoria, many began to borrow money to continue trading on the stock market. Thus, the situation arose that for every 100 dollars invested, only 10 was in real money, while the rest was on credit. As long as it continued to rise, investors did not lose, but if it fell they were forced to sell at a loss.

The stock market crash

The so-called Black Thursday, October 24, 1929, was the first warning of what was coming. The total outbreak occurred 5 days later, during the so-called Black Tuesday. That day, the stock market and the entire financial system collapsed irretrievably.

In a few hours, the stock lost almost all of its value, ruining millions of Americans. At first everyone tried to sell, even if it was losing a little, but the decline in values ​​was unstoppable. Soon, they were worth absolutely nothing.

Financial collapse

On October 23, before Black Thursday, the prices suffered a loss of 10 points. The next day, they dropped from another 20 to even 40 points.

The main banks in the country tried to save businesses. They managed to inject 240 million dollars into the system through massive purchases of shares. However, it was a momentary relief. On October 28, the drop was almost 50 points. The next day, Black Tuesday, Wall Street crashed. The panic spread quickly.

In November, with the situation somewhat calmer, the shares were worth half than before the crisis. Losses are estimated to have reached $ 50 billion.

Many historians consider that the collapse of the stock market was more a symptom of economic imbalances than the cause of the crisis. The effect, in any case, reached the whole of society.

Demand fell sharply given the large number of people who had gone bankrupt. The few investors who remained liquid were unwilling to risk and invest again. Credit stalled, hitting hard European countries that depended on loans from the United States.

characteristics

International effect

The Great Depression, although it originated in the United States, ended up having worldwide repercussions. It affected, in a short time, many nations, whether developed or not. Only the Soviet Union, closed commercially to the West, was saved from the effects of the crisis.

The GDP (Gross Domestic Product) of the United States fell by 10% between the beginning of the crisis in 1933. In France and Germany the fall was 15%. England got off a bit and only lost 5% of its national wealth.

As for prices, the drop in demand caused them to fall by up to 40% in France, while in the US they did so by 25%.

It also affected several Latin American nations, which saw their product exports significantly reduced. This caused economic problems in many sectors of the population.

Long duration

Although there were variations depending on the country, in many parts of the world the effects of the crisis were felt up to ten years after it began.

Bank bankruptcies

Banks were one of the sectors most affected by the Great Depression. Up to 40% of countries saw their banks go bankrupt in 1931.

The reason for these bankruptcies was, in the first place, the impossibility of banking entities to face requests for cash withdrawals from their clients. Many banks had, because of that, big cash problems. In no time, they became insolvent and had to close.

Consequences

Economical

Apart from the effects on the financial economy, that of the stock market, the Crisis of 29 greatly affected the real economy. A feeling of pessimism and fear spread throughout American society that held back consumption and investment.

At the same time, many families lost all their savings, sometimes leading to the loss of their homes.

Businesses, for their part, were hurt by the drop in demand. The closures were frequent, compounding the problem for the masses of workers.

Three years after the stock market crash, industrial production in the world did not reach two-thirds of what it was before the crisis. In Europe it fell somewhat below 75% and, in the United States, it only reached 50%.

By 1934, world trade was only generating a third of the profits it had in 1929. In 1937, its value was only 50% than before the crisis.

Social

For the vast majority of the population, the most dire consequence of the Great Depression was rising unemployment. It is estimated that, in 1932, up to 40 million workers were unemployed.

In the United States, the rate reached 25% and caravans of workers traveled the country in search of a job. Germany, for its part, had 30% unemployed. The situation of poverty led to an increase in crime and begging.

As a direct effect, many were unable to meet their mortgages and loans. Evictions became common.

As a consequence of this situation, there was an increase in the followers of the unions and workers' parties. The communists grew in number, something that was more reflected in European countries such as Germany or France. Even in the United States, organizations of this ideology appeared.

Demographic decline

Growing poverty caused the birth rate to decline in the United States, causing a demographic decline. On the contrary, in the European countries where fascism prevailed, the birth rate increased.

For the first time in history, the United States began to deny the entry of migrants, a policy change that would continue after the crisis.

Social inequality

The Great Depression also generated an increase in social inequalities. Despite the closure of many industries, the wealthiest were better able to save their personal assets. Instead, the middle and lower classes lost almost everything they had.

Among the most affected were those belonging to the so-called middle and lower bourgeoisie. Liberal professionals and small merchants, among others, were greatly impoverished. Some historians consider that these classes sought the solution to their ills in the promises of the fascist parties.

Finally, those who suffered the most were the workers. It was them who were most affected by unemployment and, having no economic cushion, they ended up starving and homeless.

Policies

The Great Depression led many citizens to distrust economic liberalism. Others expanded this lack of trust directly towards the democratic system.

This pessimistic and discrediting climate of the system was used by the fascist parties to grow electorally. In Belgium, France or Great Britain, the supporters of fascism grew in number, although without reaching power.

Different was the case of Italy and Germany. In those countries, there was also an exaltation of nationalism. Although it was not the only cause, the Crisis of 29 is part of the factors that led Benito Mussolini and Hitler to power and, in a few years, to World War II.

References

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