The Great Depression: What Caused It and How it Ended

An excessively bullish, overvalued, and overbought stock market, coupled with an imbalance of supply and demand, led to Black Tuesday, the day the market crashed. Falling nearly 25% in just two days, the stock market eventually bottomed out in 1932, when the Dow sat at a paltry 41.22. It would take FDR's New Deal programs and America's involvement in WWII to bring the U.S. out of the Great Depression, a chain of events that took more than a decade.

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Rapid economic growth in the 1920s created a climate where speculating on the stock market was a hobby for many upper-class individuals. Consequently, buying stocks on margin (paying a mere percentage of the price but borrowing the remainder from a broker or bank) became standard practice. An excess of products hit the market in the late '20s. Forced to sell or dump products for big losses, share values decreased rapidly. With millions of shares purchased on margin and no ready cash available, liquidation of portfolios compelled the downward spiral of the stock market.

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On October 29, 1929 (Black Tuesday), the stock market crashed. Within just three years, stocks were valued at only 20 percent of their going prices in 1929. Nearly 50 percent of all U.S. banks were closed by 1933, and over 15 million people could not find jobs. No legislation for unemployment benefits existed. Flophouses, soup kitchens, and breadlines emerged as people relied on churches, the Salvation Army, and other private organizations to provide temporary food and shelter.

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Many historians point to the Great Depression and the dramatic impact it had on Germany's economy as paving the way for Adolph Hitler to take power by the mid-1930s. Already a polarizing figure in German politics, Hitler decried the 30 percent unemployment rate in Germany and blamed it on the existing Social Democratic Party. Although Hitler lost the presidential election in 1932, he developed a Reichstag majority of followers quickly following the election. He officially became dictator of Germany in 1935.

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Inaugurated in January 1933, Franklin Delano Roosevelt initiated New Deal programs meant to stimulate product demand, offer work for the unemployed, and increase government spending, all with the goal of spurring the economy and establishing financial reforms. The Emergency Banking Act allowed the reopening of stable banks supervised by the Treasury Department. FDR made available federal loans where needed, as well. The Securities Act of 1933 and the Securities Exchange Act of 1934 (which ultimately morphed into the U.S. Securities and Exchange Commission) were designed to help prevent another stock market crash.

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Many years of wind erosion and over-farming (deep plowing of topsoil), followed by a severe drought, caused large areas of the Great Plains to turn into veritable dust deserts. Prevailing gusty winds blew over the region, creating immense black clouds of dust that sometimes reached Washington D.C. and New York City. Soil erosion and drought affected over 100 million acres of farmland where wheat and corn once grew plentifully. The hardest-hit areas were the Oklahoma and Texas panhandles.

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To help stimulate the economy, FDR eliminated the 21st Amendment or Prohibition in 1933, making alcohol legal again. Enacted in 1920 by President Warren Harding, the 21st Amendment was directly responsible for the rise of gang activity and crime, especially in Chicago and New York City. In fact, "mobsters" in the bootlegging industry controlled much of Chicago's city government until the early 1930s. Liquor manufacturers re-opened in 1934 to a society eager to drown their sorrows in a legal bottle of alcohol.

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Roosevelt restored public trust and confidence in the government by speaking directly to U.S. citizens on the radio. These "Fireside Chats" grew immensely popular with a Depression-era audience gripped by uncertainty, financial instability, and fear of the future. Re-elected in 1936, 1940 and 1944, FDR is the first and only President to serve four terms as POTUS. He also led the U.S. out of a policy of isolationism to a resounding victory over Germany, Italy, and other allies during WWII and established a peace organization that later became the United Nations. Roosevelt died while in office, in April 1945.

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President Roosevelt is probably best known for his creation of New Deal programs, such as the Social Security Administration, the Civil Works Administration, and the Civilian Conservation Corps, all programs to provide jobs and money to people too old to work. Congress passed some New Deal programs while others passed through executive order. History experts suggest that without Roosevelt's New Deal package, unemployment may have reached as high as 30% between 1932 and 1935.

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Understanding how entering World War II helped the U.S. dig itself out of the Great Depression involves learning principles of Keynesian economics. Economist John Maynard Keynes claimed that depressed economies recover when demand for services and goods increase. Since you need people to make products or provide services, employment rates naturally rise, and workers once again have money to spend. With the onset of U.S. involvement in World War II, between 1941 and 1943 government purchases from manufacturers quadrupled. This added substantial demand to the American economy.

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