The initial economic collapse which resulted in the Great Depression can be divided into two parts: 1929 to mid-1931, and then mid-1931 to 1933. The initial decline lasted from mid-1929 to mid-1931. During this time, most people believed that the decline was merely a bad recession, worse than the recessions that occurred in 1923 and 1927, but not as bad as the Depression of 1920-21. Economic forecasters throughout 1930 optimistically predicted an economic rebound come 1931, and felt vindicated by a stock market rally in the spring of 1930.
The stock market crash in the first few weeks had a limited direct effect on the broader economy, as only 16% of the U.S. population was invested in the market in any form. But thousands of investors and banks lost money when 10% of invested wealth was lost almost overnight, with prospect of further losses. The crash created uncertainty in people’s minds about the future of the economy. This distrust in future income reduced consumption expenditure. As demand for commodities decreased, so did their prices. However, many banks that had engaged in risky investments in the stock market, and/or had lent money to individuals engaged in trading, suffered balance sheet losses that reduced their capital ratios. Mounting losses from further stock market declines and a worsening macro-economy would further strain the banking system. Over $34 million in wealth would be lost from the collapses in leverage investment products in 1929 offered by Goldman Sachs alone.
An increasing number of bank failures in late-1930 interrupted the process of credit creation and reduced the money supply, harming consumption. After a second round of banking panics in mid-1931, there was a major change in people’s expectations about the future of the economy. This fear of reduced future income coupled with the Fed’s deflationary monetary policy resulted in a deflationary spiral that cratered consumer spending, business investment, and industrial production. This further depressed the economy until Roosevelt stepped into office in 1933 and ended the gold standard, thereby ending the deflationary policy.
A true understanding of the Great Depression requires not only knowledge of the U.S. monetary system but also the implications of the gold standard on its participatory nations. The gold standard made the involved nations interdependent on each other's policies. Due to a fixed exchange rate, the only way to affect the demand for gold was through interest rates. For example, if interest rates were high in one country, then investors would have no reason to exchange currency for gold and the gold reserves would remain stable. However, if interest rates were low in a different country then its investors would elect to move their funds abroad where interest rates were higher. In order to stop this from happening, each nation within the gold standard union had no choice but to raise its interest rates in correspondence with its fellow nation. This interconnectivity of deflationary policy amongst so many nations resulted in the prolongation of the greatest economic downturn.
This article focuses on the economic milestones, with some mention of the political and social impact of the depression on nations and classes in a global context.
1929
January - June: the Roaring Twenties
continue unabated. The combined net profits of 536 manufacturing and
trading companies showed a 36.6% increase over the same period in 1928,
with steel production leading the way. Retail sales, construction
starts, and railroad revenues set record after record. Stocks continue
to make record gains. An enormous surplus of wheat from 1928 drives down
wheat prices, straining commodity markets and farmers' incomes.
Unemployment hovers around a robust 4%. US nominal GDP is $105 billion
(it would not reach this level again until 1941).
March 25th: a mini-stock market crash occurs after the
Federal Reserve warns of excessive speculation. However, the mini-crash
was averted two days later when National City Bank pumped $25 million in
credit into the stock market.
Summer: consumer spending and industrial production begin
to stagnate. The Federal Reserve continues with its plan to raise
interest rates from 4% in mid-1928 to 6% by mid-1929 in an attempt to
combat speculative behavior.
June 15th: the Agricultural Marketing Act of 1929 is signed into law, providing some $100 million in emergency loans to struggling farmers
May-September: the stock market makes almost entirely uninterrupted gains, gaining 20% over this period.
August: a minor recession
begins, two months before the Stock Market Crash. Steel production and
automobile & house sales notably decline, construction stagnates,
and consumer debt was reaching dangerous levels on account of easy
credit. Over $8.5 billion of margin loans for stocks were outstanding,
worth more than all currency circulating in the United States at the
time.
September 3rd: The Dow Jones peaks at 381.17. The stock market would not regain this peak until November 23rd, 1954.
September 20th: The London Stock Exchange crashes after
the collapse of Hatry Group on charges of fraud and forgery. £24 million
in value is wiped out. The collapse shakes the confidence of American
investors in the security of overseas investments.
October 24th: Wall Street Crash of 1929 begins. Stocks lose over 11% of their value upon the opening bell.
October 25th - 27th: Brief recovery on the market.
October 29th: 'Black Tuesday'. U.S. Stock market collapse, the Dow Jones closing down over 12%.
October 30th: one day recovery
November 1st: The Federal Reserve begins lowering the discount rate from its 6% level.
November 13th: stock market bottoms out at 198.60, followed by a bear market that would last until April 1930. Commodity prices, however, continue to decline steeply.
1930
Year:
recession deepens. US GDP contracts by 8.5% and nominal GDP falls to $92
billion. Prices decline slightly but wages hold relatively steady. US
annual inflation rate is -6.4%. Unemployment reaches 9%. 1,350 banks
fail.
April 17th: Dow reaches a secondary closing peak (i.e.,
bear market rally) of 294.07, followed by a long stagnation until a
severe decline began in April 1931. This peak matches early-1929 levels,
but is 30% below the September 1929 peak.
May: Automobile sales fall below 1928 levels.
June 17th: Smoot-Hawley Tariff Act
passed, placing more stress on the weakening global economy, primarily
through the collapse in trade of agricultural products, which strained
banks that had lent heavily to farmers. Further decreases in trade of
manufactured products led to layoffs and reduced corporate profits,
weakening the economy. General consensus among economists is that the
Smoot-Hawley Act did not cause the Depression, but did worsen it and
stunted recovery efforts after 1933. Exports declined from $5.2 billion
in 1929 to just $1.7 billion in 1933.
September - December: First major round of U.S. bank failures. Some $550 million in deposits are lost. Over 300 banks failed in December alone.
November: Caldwell & Company, a major conglomerate
offering banking, insurance, and brokerage services in the Southern
United States, collapses and triggered a cascading effect of bank runs
on smaller banks in Tennessee and Kentucky. The collapse generates
national headlines, contributing to the contagion of fear regarding the
banking system.
December: The Federal Reserve's federal funds rate reaches 2%, a then-record low.
December: Bank of United States
(a private bank in New York City) collapses. The bank had over $160
million in deposits and was the fourth largest bank in the United States
at the time, and its failure is widely considered to be the moment when
the banking collapse in the United States hit a critical mass, sparking
a nationwide run on the banking system that was a major contributor to
the deflationary spiral of 1931-1933.
1931
Year: 2,294 banks went down with nearly $1.7 billion in
deposits. 28,285 businesses failed for a daily rate of 133 failures in
1931. Unemployment rises to 16%. US nominal GDP falls to $77 billion,
and growth is -8.5%. Annual inflation is -9.3%.
May 11th: Creditanstalt,
Austria's premier bank with major stakes across a variety of
industries, becomes insolvent after being forced to assume liabilities
from three other insolvent banks, triggering a cascading effect of bank
failures across Central Europe. Creditanstalt represented 16% of
Austria's GDP, and could not find another institution to guarantee
liquidity. 140 million Austrian Schillings were lost. The collapse of
Creditanstalt caused the Bank of France, the National Bank of Belgium,
the Netherlands Bank, and the Swiss National Bank to begin a run on the
U.S. Dollar for their gold reserves, and forced the Federal Reserve to
raise interest rates from 1.5% to 3.5% to maintain the gold standards,
which in turn contributed to the deepening of the Depression and the
second round of banking failures in the U.S. during the summer of 1931.
May: The Federal Reserve's federal funds rate bottoms out at 1.5%.
May–June: Second major round of U.S. bank failures and
worsening economic situation contributes to permanent change in people's
expectation of the economy. This run was centered on bank in Chicago,
which suffered from real estate loan defaults. Of the 193
state-chartered banks in the Chicago area in 1929, only 35 would survive
to the end of 1933.
Chicago area banks engaged heavily in real estate lending between 1923
and 1929, and banks that had greater exposure to the real estate bust
were very likely to fail. The deflationary spiral that began earlier in
the year rapidly and severely intensifies.
June-July: German banking crisis. The Reichsbank loses 840
million marks in less than 3 weeks as investors pull out short-term
deposits. Germany's second largest bank, Danatbank, becomes insolvent on
July 13th. Two day bank holiday is declared. Industry suffers a
catastrophic collapse. The Hoover Moratorium
is issued June 20th, suspending reparation payments from Germany to
stabilize the country. Although private banks in New York City and the
Bank of England begin emergency lending to Germany, the banking crisis
spills over into Hungary and Romania, and the collapse of the economy
paves the way for Adolf Hitler's rise in the July 1932 and March 1933
elections. The contagion also puts increasing pressure on the United
Kingdom.
August - deepening deficits and demands for a balanced
budget lead to Ramsay MacDonald's Labour government raising taxes by £24
million and cutting spending by £96 million, most controversial was the
20% cut to unemployment benefits (a sum of £64 million). The U.K.'s
public debt at the time was 180% of GDP, mostly left over from the
expenses of World War One. Public outrage would lead to the Labour Party
being virtually destroyed in the October 1931 election.
September 21st: Britain leaves the gold standard,
and the Pound Sterling depreciates by 25%. Despite warning of disaster,
the departure proves beneficial to the British economy, as exports
become more competitive. Additionally, the Bank of England was now free
to engage in money creation, and reduced interest rates from 6.00% to
2.00%.
October 27th: the United Kingdom General election, 1931 takes place, destroying the Labour Party and delivering a landslide victory to the Conservatives.
September - October: Substantial amount of dollar assets
(primarily Federal Reserve Notes) are converted to gold in the US by
European central banks seeking to cover losses from the panic that had
been sweeping Europe since the collapse of CreditAnstalt. In response,
the Federal Reserve increases the federal funds rate from 1.50% to 3.50%
to stabilize the dollar, but this only worsens the Depression as banks
are further strained. The New York Fed had loan $150 million in gold
(some 240 tons) to European central banks, and the wisdom of this was
questioned as European countries rapidly abandoned the gold standard.
As deflation intensified, real interest rates were magnified and
rewarded those who held onto money, thus contributing to the
deflationary spiral.
1932
Year:
Unemployment rises to 23%, GDP growth is -13%, annual inflation rate is
-11%, 1,700 banks fail. US nominal GDP falls to $60 billion. Over 13
million in the U.S. are unemployed and 3.5 million in the U.K.
January 22nd - the Reconstruction Finance Corporation
is created to lend $2 billion to troubled financial institutions that
were not part of the Federal Reserve System that were solvent in the
long-run. By 1941, the RFC would lend out some $9.5 billion to banks,
railroads, and mortgage associations, as well as state and local
governments.
April - June: Federal Reserve conducts open market transactions, increasing the money supply by $1 billion.
Summer 1932: Majority of foreign trade restrictions take effect, from Smoot-Hawley in the U.S. and Imperial Preference in the British Empire
June 6th - the Revenue Act of 1932 is signed into law, raising taxes on personal income, corporate income, and sales taxes on various goods.
July: U.S. government discontinues open market operations.
July 8th: the Dow Jones Industrial Index bottoms out at
41.22, the lowest level recorded in the 20th Century and representing an
89% loss from its peak in September 1929.
July 31st: the German federal election, July 1932 is held, and the Nazi Party, led by Adolf Hitler, becomes the largest party in parliament (but lacks a majority)
November 6th: the German federal election, November 1932,
the last free and fair all-German election until 1990, is held. A minor
setback for the Nazi Party, a campaign of mass violence and
intimidation would begin in the run up to the next election in March
1933.
November 8th: Franklin D. Roosevelt elected 32nd President in a landslide, Democrats win massive majorities in both chambers of Congress.
1933
Year:
inflation rate turns positive, at 1% annually. Quarterly GDP growth
turns positive by summer, but overall annual rate is -1.3% growth.
Unemployment peaks at 25%. 2 million are homeless. Industrial production
is half of what it was in 1929. US nominal GDP bottoms out at $57
billion (down from $105 billion in 1929)
February 14th: Michigan becomes the first state in the
U.S. to declare an indefinite bank holiday, in an attempt to stem the
impending collapse of First National Bank of Detroit and the Guardian
National Bank of Commerce, the two largest banks in Detroit. First
National and Guardian National were threatened with failure if the Ford
Motor Company made good on its desire to withdraw all of its deposits in
the two banks; Ford needed the cash to cover its $75 million loss in
1932. At this time, over 80% of Detroit's manufacturing capacity laid
idle, and over 400,000 people were unemployed. Michigan's bank holiday
set off a contagion of fear across the country, and by March 6th an
additional 37 states would declare indefinite bank holidays.
March 4th: Franklin D. Roosevelt is inaugurated as President.
March 5th - the German federal election, March 1933
is held. The Nazi Party would win a narrow majority of seats, but only
in coalition with the German National People's Party (DNVP). Though this
would be the last free election before World War II, it is not
considered to be a fair election, as the Nazi Party's paramilitary
organizations waged a campaign of violence, censorship, intimidation,
and harassment against all parties that opposed them, as well as
surveillance of voting on election day itself.
March 6th - Executive Order 2009
suspends all banking activity for one week, in response to renewed
stress on major New York City banks that threatened another round of
bank failures and further deepening of the Depression. By this time, 38 states had declared bank holidays.
March 9th- The Emergency Banking Act
was enacted, which enabled a restructuring of the banking system. Over
4,000 banks with $3.6 billion in deposits that were deemed irreparably
insolvent were closed forever, but by March 15th, banks controlling some
90% of the nation's banking activities were back in business. By the
end of March, over $1.1 billion in hoarded cash was deposited into the
banking system.
These new deposits saved cash-starved banks and helped restart the
money creation process after years of credit contraction. The Act also
created the Federal Deposit Insurance Corporation (FDIC), which insured
deposits up to $2,500 and helped restore confidence in the banking
system.
March 20th - the controversial Economy Act of 1933
is signed into law, slashing $243 million in government salaries and
pensions, and veterans' benefits. Despite the economic crisis,
supermajorities of American economists, policymakers, and the general
public believed that the federal government needed to balance the budget
and avoid deficit spending, to avoid putting further strain on the bond
market which would negatively affect government borrowing costs, banks,
corporations, and foreign investors. From 1929 to 1933, the total debt
owed by the U.S. government rose from $16.9 billion to over $23 billion.
This "Economy" Act was designed to reduce government outlays and
assuage fears about government debt and deficits.
March 31st - The Civilian Conservation Corps, a public works relief program, is created. It would last until 1942 and is an icon of the New Deal programs.
April 5th - Executive Order 6102 of President Franklin D. Roosevelt issued, forbidding hoarding of gold coin, bullion, and certificates, effective from May 1, 1933
May 12th - the Agricultural Adjustment Act is enacted, designed to boost agricultural prices by reducing surpluses.
May 27th - the Securities Act of 1933
is enacted, requiring the registration of all sales and purchases of
financial securities, as well as the disclosure of critical financial
information about the firms involved. The U.S. Securities and Exchange Commission was established the following year, which helped combat insider trading and reducing transaction risk.
July - Federal Reserve industrial production index rebounds to 85.5, a 57% increase over the 54.3 recorded in March 1933
November 8th - the Civil Works Administration
is created, which would employ over 4 million people and distribute
over $400 million in funds for work programs through its end on March
31, 1934, when it would be replaced by the more permanent Works Progress Administration
December 5th - Prohibition
is repealed at the national level. 18 states continue with state-level
prohibition. The end of Prohibition hurts organized crime, allows legal
employment in alcoholic drink production, and increases state tax
revenues.
