The Great Depression on the Market: Then & Now (2024)

What Was the Great Depression & What Caused It?

At its core, the Great Depression was an economic event, though its scope, duration, and impact render it an event of such magnitude that it arguably compares in historic significance to the Civil War or World War II.

In the aftermath of World War I, the U.S. and other countries experienced a decade of great economic growth and prosperity, often referred to as the "Roaring Twenties". In the fall of 1929, however, a major crash in the U.S. stock market precipitated a global economic contraction that ushered in a ten-year economic decline of unprecedented magnitude and duration.

Market crashes can have consequential knock-on effects to consumers and the economy. Whether the 1929 crash actually caused the depression, however, is the subject of debate. In fact, a mild economic recession had already taken hold in the U.S. during the summer of 1929 while the stock market soared higher for months despite the downturn.

Some economists (monetists) will point to the recession as causing people to put off spending, thereby causing less consumer demand, which, in the absence of government or central bank intervention, spiraled the recession into a full-blown depression. Some (Keynesians) will point to the stock market crash as having put a significant dent in productivity, thus exacerbating the recession. Meanwhile, it may well have been a combination of these factors, coupled with job losses, a collapse in foreign trade, and other precipitating events that formed the 'perfect storm' that took place.

The Crash of 1929

The market's crash in 1929 was not the single-day event that history books often suggest. While the day most often cited for the crash was October 29, 1929, the signs of pending weakness began occurring months earlier in the year. Sharp selloffs in March and May of that year resulted from a mild recession that included declines in production from major industries like steel and automobiles. But the market recovered from those initial declines and lunged another 20% upward between June and September to a peak of 381.17 on September 3rd for the Dow Jones Industrial Average.

It is worth noting that by September 1929, the stock market had grown in value tenfold from a decade earlier. Spurred by 90% margin lending, the decade-long rise in equity values had permeated all facets of society with many people in the lower economic strata participating, and many using an exceptionally high degree of leverage.

While economist Irving Fisher was proclaiming that "Stock prices have reached what looks like a permanently high plateau", prominent entrepreneur Roger Babson sternly warned that "a crash is coming, and it may be terrific". Then, on September 20th, the London Stock Exchange, reacting to high-profile fraud and forgery disclosures, crashed as well. (Sources: CFO Magazine; archive.org)

Volatility increased in the U.S. markets as a result, with the first hard initial selloff occurring on October 24th ("Black Thursday") for about 11%. Financial leaders stepped in with a bid for 25,000 shares of US Steel, which stemmed most of that initial decline. But then on October 28th (Black Monday), margin calls began driving prices lower again, resulting in a 12.8% decline, followed by another 11.7% on October 29th (Black Tuesday).

A recovery bounce of 12.3% occurred on Wednesday of that fateful week but couldn't hold for long as the market continued to slide into November, whereupon a low on November 14th led to a strong bear market rally through April 17, 1930. The ensuing slide from that point took more than two years to complete and on July 8, 1932, finally hit bottom - down 89% from its 1929 peak.

The Decade-Long Depression

The duration and magnitude of the decline in stocks was unprecedented in U.S. history, leaving the country stunned by massive foreclosures, bankruptcies, repossessions, and bank failures.

• Unemployment reached 25% (and more than 30% in other countries).
• Economic activity severely contracted and the public's confidence in business was shattered.
• Many people who had purchased stocks during the prior decade (and especially those who purchased on credit), were completely wiped out.

The extent of the crash in stocks can certainly be seen as having exacerbated the damage from what began as a mild recession. But it wasn't the only factor, as several other issues contributed.

• Foreign trade was significantly curtailed. Many countries around the world (including the U.S.) were tied to the gold standard at the time, tying currencies in essence to each other and leaving all of them vulnerable to the weakness in the U.S.
• 1930 'Dust Bowl': Severe droughts hit the plains states of Nebraska and Texas, creating the famous "dust bowl" that forced farmers to abandon their crops and livestock in favor of job opportunities in other areas of the country.
• A series of bank runs occurred in the early 1930s caused by dwindling confidence and the need for cash, resulting in thousands of banks closing.
• The Smoot-Hawley Tariff Act of June 1930 instituted tariffs on foreign imports, making them more expensive.
• Little government intervention: The Hoover administration took only limited steps to address the problems in the economy. While Hoover offered loans to banks and passed the Emergency Relief and Construction Act, the basic approach of his administration was to let the economy run its course.

Impact of the Great Depression on America & the World

The impact of the Great Depression was felt across a wide swath of the population and reverberated around the world. The low point was in 1933 when 15 million Americans were out of work and half the nation's banks had failed. In March 1933, the FDR administration began taking a number of steps to halt the economic decline and begin the long road to recovery. While it would take 25 years for the stock market to surpass its 1929 peak, many of the steps taken as a result of the depression had a lasting impact on American society and became permanent programs that still exist today.

1. Unemployment & the Impact on Workers

Many companies either went bankrupt or laid off workers, depriving millions of workers of their jobs and driving the unemployment rate up to as much as 25%. To make matters worse, in the early 1930s the U.S. was the only industrialized nation that did not have unemployment insurance or some kind of government pension program. As a result, two of FDR's early priorities were to create new jobs and initiate social security.

The government response was to pass the Social Security Act in 1935, providing American workers with unemployment and disability compensation, as well as a government-sponsored pension system. In addition, the government initiated programs such as the Tennessee Valley Authority (TVA) to construct hydroelectric facilities and the Works Progress Administration (WPA), which created permanent jobs for 8.5 million people in the late 1930s and early 1940s.

2. Impact on Banking and Corporations

The pressures of a rapidly sinking stock market and massive job losses caused banks to call in loans, which a large number of consumers and businesses were unable to pay. This became a vicious spiral downward, resulting in a cascade of bank failures.

Corporations suffered from a severe contraction in demand, both domestically and from overseas, resulting in closings and layoffs, which put people out of work and reduced demand even further.

3. Political Impact

The substantial victory for Franklin Roosevelt in 1933 was a resounding statement by the American public in support of the government assuming a stronger role in managing economic affairs. While some of this may have been a consequence of the desperation of the day, we often take for granted today the notion that the government and the central bank should be active participants in helping to manage the economy and to prevent an economic calamity from reoccurring.

It is also commonly accepted that the economic hardships in Europe during the 1930s provided fertile ground for the rise in power of Adolf Hitler in Nazi Germany.

4. Socio-Economic Impact

Psychologists and sociologists have noted that the effects of depression-era hardships can shape the behavior of people for the rest of their lives, impacting activities ranging from saving money to job preferences, food conservation, and even birth rates. Some of these behaviors were also passed down to children who grew up during the depression and psychologists even claim to have seen depression-era trauma reflected in the behavior of subsequent generations as well.

One sociological setback that resulted from depression-era legislation was the preference to providing men with jobs over women. By 1940, over half the states had placed "marriage bars", giving preference to men over married women in many jobs.

How The Great Depression Still Impacts Us Today

While the psychological impact of the Great Depression may still weigh on investors, particularly the older ones, the more visible effects of the Great Depression and the market crash of 1929 today are the many laws and regulations put into place during that period to either address the consequences of such events or prevent them from occurring in the first place.

Impact on American Society

Many older people today are only 2-3 generations removed from ancestors who lived through the Great Depression and are still apt to regard the event as a reference point as to how bad things can get economically when they begin to spiral out of control. This tends to heighten sensitivity to economic factors such as inflation, interest rates, unemployment, and market selloffs, causing investors to perhaps exhibit more anxiety and become overly cautious.

On the other hand, younger investors may be more apt to exhibit complacency as a result of recent actions by the Fed and the government, such as those taken in 2008 to ward off the mortgage crisis or in 2020 to combat the effects of the COVID-19 pandemic. It may further explain the younger generation's embrace of alternative financial instruments such as cryptocurrencies, which are seen as operating outside the influence of the government altogether.

Impact on the World

The Great Depression was not limited to the United States and was particularly acute in Europe as well. Whether a particular country was impacted or not, the effects of the Great Depression are well documented and no doubt serve as a reference point for any country with an economy similar to that of the U.S. or reliant upon the U.S. for their own prosperity.

Impact on the Economy & Stock Market

Most of the securities regulations in place today, including the creation of the Securities and Exchange Commission and various securities acts that define and regulate the investment industry, the firms, the agents, and the products therein, all originated during the decade of the Great Depression. In addition, guiding principles of securities analysis and financial valuation used today also originated during that era.

Bottom Line

The Great Depression was the most dramatic economic event that the United States and the industrialized world experienced in modern times. It serves as a stark reminder, nearly 100 years later, of how deep and broad an economic event can be and how strongly it can impact people's lives.