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Lifecycle

The Great Depression

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The Great Depression

The Great Depression was not a single event but a sequence of interlocking catastrophes that reinforced each other over more than a decade. It began with the 1929 crash, deepened through waves of bank failures, was prolonged by trade protectionism and gold-standard rigidity, and reached bottom in 1932–1933 with unemployment above 25 percent and industrial production roughly half its 1929 level. Understanding why the Depression lasted as long as it did is as important as understanding how it started.

The banking system collapses​

Between 1930 and 1933, roughly 9,000 American banks failed—about one-third of all banks in the country. When a bank failed, its depositors lost their savings. Those losses reduced consumption, which reduced business revenues, which reduced employment, which reduced deposits further. The Federal Reserve, misunderstanding its mandate, allowed the money supply to contract by about one-third between 1929 and 1933—precisely the opposite of what a lender of last resort should do during a banking crisis. The gold standard prevented the monetary expansion that might have broken the deflationary spiral.

Protectionism compounds the damage​

The Smoot-Hawley Tariff Act of 1930, which raised import duties to record levels, invited retaliation from trading partners and caused U.S. exports to fall by more than half. International trade collapsed globally. Countries that might have recovered faster found their export markets closed. The episode stands as perhaps the clearest historical example of how protectionism, far from protecting domestic industry, amplifies economic downturns through the destruction of trade.

FDR and the New Deal​

Franklin Roosevelt's inauguration in March 1933 marked the first coherent attempt to address the Depression through active government intervention. The bank holiday, which closed all banks for four days and allowed only solvent institutions to reopen, restored enough confidence to stop the immediate banking panic. The New Deal programs that followed—the CCC, WPA, Social Security, agricultural price supports, securities regulation—represented a fundamental expansion of the federal government's role in the economy. Not all worked as intended, and the recovery was uneven, but the New Deal changed what Americans expected of their government during economic crises.

The long recovery​

The economy grew strongly from 1933 to 1937, then relapsed into the 1937–1938 recession when FDR prematurely tightened fiscal policy. Full recovery came only with the rearmament spending that preceded World War II. The Dow Jones Industrial Average did not recover to its 1929 level until 1954—twenty-five years after the peak. The Depression's shadow extended even longer: the generation that lived through it remained notably risk-averse in their financial behavior for the rest of their lives, a behavioral legacy that shaped American savings patterns for decades.

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