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What Caused The Great Depression?

When a friend of mine was young, his grandparents came for a lengthy visit. As his grandmother unpacked, my buddy noticed an odd piece of clothing. When he asked about the roughly-made item with faded words printed on it, his granny told him it was a pair of boxer shorts made out of cloth chicken feed bags.

During the Great Depression, she explained, the family had to watch every penny – both coming and going. She and grandpa started raising chickens to supplement their income and prepare against the real threat of grandpa losing his job. Wasting the perfecting good (if rough) chicken feed bag fabric was out of the question. But what about when the Depression was over, my friend asked? Well, by then thrifty living, including chickens and DIY underwear, was an ingrained habit.

As that story illustrates, the Great Depression had a tremendous life-long impact on those who endured that cataclysmic downturn, which tormented the country for a dozen years – from 1929 until after the US entered World War II in December 1941.

The Depression is also very much alive in America’s collective imagination and fears. All of us, regardless of age, are familiar with the broad outlines of the Depression – stock market crash, massive unemployment, bread lines, widespread suffering. All of those images can flood into our brains when we see turmoil in the stock market or a downturn in the overall economy. Comparisons to the Great Depression were certainly top of mind for many people during the housing collapse and subsequent “Great Recession.”

Given the Great Depression’s continued looming presence in our money minds, I think it’s important that we all strive to better understand the tragic event. Knowing more about the Great Depression might give us a better perspective on future economic turmoil, and perhaps ease our minds as we contemplate whether such dark history could repeat itself.

Here are four aspects of the Great Depression that are key to understanding what happened, and why.

The role of the 1929 stock market crash. On October 29, 1929, the white-hot stock market dropped dramatically, kicking off a month-long tumble that saw the Dow fall to 41.22. Millions of Americans who had invested their life savings (and borrowed money) in the “sure thing” of stocks were wiped out in the crash.

This blow to the economy was heavily compounded by the market losses suffered by banks and major corporations. Banks that had lost their customers savings deposits in the market and were unable to meet the panicked public’s demand for their cash were forced to close. Manufacturers who lost capital in the crash were sometimes forced to reduce their payrolls.

Those layoffs helped trigger a downward spiral as a growing number of unemployed Americans – which would crest at 25% of the workforce – and those afraid of layoffs spent less and less money.

While the stock market crash is often cited as the cause of the Great Depression, there were signs earlier in 1929 that economic trouble was brewing after a decade of unbridled growth. These flashing red lights included notable dips in steel prices, fewer home starts, and lower automobile sales.

Compounding factors. While the fall-out from the stock market crash was probably enough to tank the economy, the pain of the Great Depression was made much worse by the twin plagues of drought and wind storms that struck the Midwest in the 1930s. The resulting “Dust Bowl” forced millions of once self-sufficient farm people off their land and onto the road in search of short-term sustenance and new livelihoods.

The suffering of industrial workers was aggravated by ill-advised tariffs early in the Depression. These levies on foreign imports were designed to bolster domestic manufacturing. Instead, they reduced the demand for US goods overseas as other countries countered with their own tariffs.

The New Deal. President Franklin Delano Roosevelt’s New Deal was designed to kick-start the economy by pouring federal money into infrastructure and other projects that would create jobs and get money circulating again. Economists today agree that the New Deal failed in that mission. Roosevelt’s many employment initiatives, including the Works Progress Administration and Civilian Conservation Corp, certainly alleviated a great deal of suffering by providing Americans with a paycheck and the dignity of work. But at the dawn of the 1940s, America was still mired in economic malaise.

The Great Depression was so powerful that only another epic event could bring it to an end. The American economy didn’t truly escape the Depression until the US entered World War II and began to flex its industrial might as the Arsenal of Freedom.

Lessons Learned. While the New Deal’s employment initiatives had limited impact on the Great Depression, some of Roosevelt’s regulatory policies continue to serve Americans well through the ups and downs of a market economy. These include regulation of the securities industry as overseen by the Securities and Exchange Commission and the federal government’s insurance of savings deposits.

We will never be free from economic turbulence and market downturns. And every rough patch will come with different causes and results. Nevertheless, studying the past is always a good way to develop context, which allows us to make smart decisions based on fact, not fear when the ride gets bumpy.

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