The Stock Market Crash of 1929 and the Beginning of the Great Depression

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Introduction

The usual reasons given for the Great Depression – the stock market crash of 1929 and the later collapse of the banking system – do not tell the whole story. Available economic data indicate (there were no national income accounts in 1929) that a recession had already begun before the stock market crash. The crash of October and November of 1929 was a catalyst that made the recession worse but the partial stock market recovery in early 1930 did not end the recession. Industrial production continued to fall quickly and unemployment rose rapidly in 1930. Continuing farm and businesses failures over the next two years wiped out thousands of small rural banks and threatened total financial collapse in early1933. 

For a fuller explanation, we have to go back to the 1920s to see additional reasons for the origins and the rapid decline in output at the beginning of the Great Depression. We have to look at the international financial situation and how it contributed to America’s depression, including the attempt after World War I to reestablish the pre-war gold standard.

The Stock Market Crash of 1929 

The stock market, and the financial sector in general, had become increasingly important to the American economy during the 60 years leading up to the crash of 1929. Its growth paralleled the financial requirements of the America's Industrial Revolution. New, capital-intensive, large, and growing corporations needed investment capital far in excess what company founders and rich backers could provide. The solution was the creation of the publicly financed, limited liability corporation. The railroads and canals starting in the 1820s and then the industrial corporations starting in the 1870s issued stocks and bonds to the public to finance their capital requirements. Corporate managers slowly realized that stocks gave managers more financial flexibility, less fixed financial obligations. Unlike bonds, stock never had to be redeemed; stockowners, however, could sell their shares through stock markets. In an expanding economy, they could expect to collect dividends and watch their stock appreciate in price.

After a deflationary recession following the end of World War I, the American economy experienced strong growth throughout the 1920s. Stock prices rose. The speculative bubble, when stock prices rose much faster than earnings and earnings per share, began in March 1928. As measured by the Dow Industrial Average, stock prices doubled and reached an all-time high the day after Labor Day, September 3, 1929. The total value of stocks had gone from $25 billion to $50 billion, in an economy of $100 billion.

By the end of November 1929, the stock market had fallen 50% and had wiped out all of the speculative gains since early 1928. In early 1930, it reversed direction and regained half of its 1929 losses. Volume was high. But in April commodity prices started to fall again. Industrial production continued to decline all through 1930. The market turned down again. By late 1930, the stock market had fallen below its November 1929 lows.

The entry of large pools of speculative capital and small investors into the stock market was one reason for the bubble. This was something new; until the 1920s, stock market participation was an insider’s game of professional speculators. There were no rules. But now insiders and investment pool managers of outside capital could manipulate stock prices at the expense of small investors. The small sheep were about to get shorn.

The stock market crash of October 1929 did not come as a surprise to everyone. Many of the biggest speculators (including John F. Kennedy’s father) and investment bankers sold their positions before the crash. Partners of the largest investment banks, market analysts, government officials, congressional committee hearings, and Fed officials had been warning of the dangers all during this period. But their warnings were ignored by speculators caught up in the investment frenzy. Instead, they listened to advisors like the foremost astrologer of the day, who predicted the market would go up forever. Presumably to the stars.

The Federal Reserve Banks and the Hoover Administration were very worried but did little to stop the bubble. The Fed did raise interest rates but this had little influence since expected gains from stock market speculation were far higher. 

The impression that “everyone” was playing the stock market is an exaggeration. By 1929, fewer than one out of ten families were speculating in the market. They were about half of all families with financial assets. Stocks, like consumer durables, were often bought on credit, or “margin,” by some of the speculators. Typically, the investors put up 25% of the value of the stock and borrowed the other 75% from the broker. Some speculators only put up 10%. The stock was collateral for the loan. The broker, in turn, borrowed the money from banks and other institutions with spare cash. Brokers’ loans (also known as “call money” because they were overnight loans and could be “called” in one day) increased from $4.4 billion in early 1928 to $8.5 billion in October 1929. About 80% of the money came from sources outside the banking system, including overseas, so Fed pressure on banks not to make call loans had little effect. The loans seemed safe as the stock collateral only increased in value and interest rates were high.

Small investors leveraged their bets even more by using margin to buy stock in investment trusts. Investment trusts were similar to mutual funds except they were also leveraged – selling both shares to investors and floating bonds. Then leveraged investment trusts bought shares in other leveraged investment trusts. Leverage worked on the downside; owners of shares in investment trusts were wiped out even when the shares of the underlying companies still had some value.

The combination of many new small investors, large investment “pools,” leveraged speculation, and buying on margin made the financial sector a much larger part of the economy. Before World War I, about a half a million shares were traded on a typical day. In 1928 and 1929, volume was rising rapidly, averaging about five million shares a day. On October 29, 1929, volume hit an all-time high of 16 million shares. Stock prices were higher than earlier in the 1920s, so that the combination of the two led to a huge increase in the dollar value of the stock market.

Investors’ and large speculators’ margin of 10%-25% was wiped out in just two days, October 28 and October 29. Margin calls for more cash went out; if not provided immediately, the broker tried to sell the underlying stock, increasing supply. Banks and other providers called their loans. All this led to a cascade of hitting stop-loss orders and more margin calls.  In the fall of 1929, about $2 billion of brokers’ loans was pulled out or wiped out.

Large investment pools, like the one controlled by Billy Durant (who put together General Motors), speculated on margin and lost heavily in the stock market crash. When stock prices fell, they doubled down – buying more stock – only to see their losses increase. Durant personally lost $18 million in October and November 1929. One of the richest men in America (on paper) in 1929, he never recovered and finally declared personal bankruptcy in 1936.  

The large, sharp decline in the stock market had an immediately negative impact on aggregate (total) demand, especially demand for consumer durables and luxury goods and services. Expectations of rising personal wealth from rising stock prices based were shattered.  

After the bubble burst, the New York Fed reacted quickly. In the six months after the crash, the New York Fed injected $500 million of liquidity into the banking system. It cut its rediscount (loan) rate to banks from 6.0% to 2.5%. New York banks, in response, took over $1 billion in brokers’ loans. No major New York bank failed. The market rallied in the first half of 1930. It appeared the crash had been contained. But it wasn’t.

It was not because:

• ·      The weaknesses in the American economy, especially the farm sector
• ·      The fragile international financial system, based on the gold standard, constructed after World War I
• ·      The fragmented American banking system watched over by passive regional Fed banks
• ·      The rising importance of the financial sector, and how it interacted with the real economy

The Farm Economy

The period from the mid-1890s to 1918 has been called the “Golden Age of American Agriculture.” Expansion into new areas, rising demand from American and European urban areas and industry, rising prices, and World War I all led to prosperity in the farming sector. Farmers brought more land under cultivation and bought new farm equipment. During this period, thousands of new banks were started in rural areas to finance this expansion. 

Agriculture was still a major part of the economy. In 1920, the farm population was 30% of the total U.S. population.  Almost 50% of Americans lived on the farm or in towns with fewer than 2.500 people, many of them in rural areas dependent on agriculture.

The farm economy went into recession during the price deflation after World War I and remained stagnant during the 1920s. Farm prices fell in half after World War I and then slowly declined as American farmers lost their European markets. In addition to the usual seasonal loans, farmers went deeper in debt to expand acreage (the average size farm increased) and buy large amounts of new equipment, including tractors, to increase productivity and lower unit cost.  They also bought new cars with borrowed money. 

Attempts by the Hoover Administration to stabilize farm prices through purchasing surpluses failed. In 1930, the market price of wheat fell in half.  Further large decreases after 1930 in farm prices and the “Dust Bowl” collapsed the agricultural sector, farmers defaulted on loans, resulting in the bankruptcy of thousands of small, rural banks. Depositors (savers) were ruined along with the banks.

Industrial Production and the Real Economy

The structure of the American economy changed in the 1920s. The economic expansion of 1921-1929 was rapid, based on the development of new technologies like radio and the expansion and sales of consumer durables like autos. The urban and suburban buildout of the electricity grid (and lower prices) led to demand for new electrical appliances and large productivity gains in mass production. Car ownership increased from about 7 million in 1919 to 27 million in 1929, on average about one car per household. This created demand for complementary products and services such as steel alloys, refined oil products, gas stations and mechanics, paved roads and motels. Radio went from selling hobby kits in 1919 to sales of $60 million in 1922 to sales of $426 million in 1929. (Figures on car and radio sales are from digital history.uh.edu, "The Consumer Economy and Mass Entertainment.") New industries were created in other forms of passive entertainment and mass consumption products like toiletries and cosmetics. Marketing and advertising encouraged consumption.

Large industrial corporations created and dominated markets. The raising of large amounts of financial capital fueled buying the more efficient capital equipment and industrial expansion. Combined with the stagnation of the rural sector, America became an urban, industrialized society.

Investors in corporate stock did not understand why stock prices were rising. Mass production processors and assemblers had high fixed costs in capital equipment. Some of it was financed with debt, creating financial leverage. Companies had to run at a high percent of rated capacity to make a profit. A small increase in sales (output) resulted in a leveraged increase in profit. Stock prices rose with rising profits; expectations of future increases in profits led to higher stock price to earnings (P/E) ratios, also increasing stock prices. This worked in reverse, starting in late 1929. Decreases in sales led to leveraged decreases in profits. Stock prices fell. Expectations of further decreases in profits lowered P/E ratios causing even lower stock prices.

Real incomes rose in the 1920s. But, like today, income and especially wealth was concentrated.  One estimate is that about one-third of all income was going to the top 5%. Sales of luxury goods and services soared. In contrast, farm families experienced a fall in total income. 

Demand for consumer durables was partly paid for with a large increase in consumer debt. As an expanding urban middle class and working class financed their rising standards of living partly through increased borrowing; household debt rose faster than income. By 1929, about 60% of cars and 75% of all radios were bought on credit. (A top-of-the-line radio cost as much as the average cost of a car.) Total consumer debt doubled in just four years, going from $1.4 billion in 1925 to $3.0 billion in 1929. 

Home ownership financed by new forms of mortgage debt rose rapidly. Mortgage debt rose over eight times from 1920 to 1929. Household balance sheets were leveraged with debt backed by illiquid assets as collateral that quickly lost market value starting in the fall of 1929. 

By October 1929, the economy was already in recession. Railroad car loadings and steel production had been falling since summer. The Fed’s Index of Industrial Production was also declining. Auto inventories were rising. But a general recession wasn’t recognized and declared until late in 1929. It doesn’t appear that these numbers had much influence on analysts or investors. 

The recession was sudden and severe. Industrial production fell about 5% in October and another 5% in November. The contraction continued into 1930; industrial production fell another 30%. Unemployment doubled, from about 1.5 million (3% of the workforce) in the summer of 1929 to about 3 million (6%) in the spring of 1930, and then rose to about 5 million (10%) at the end of 1930. At least 25% of American families – a higher percent of non-farm families – were hit by unemployment before the end of 1930. About half of the Great Depression’s total decrease in industrial production and half of the increase in unemployment had already occurred by late 1930.

Demand for consumer durables was especially hard hit. Car sales were 5.4 million in 1929, falling about one-third to 3.4 million in 1930. At the bottom of the depression, auto production would fall by 90%. Sales went from $3.5 billion in 1929 to $0.8 billion in 1932.

When the worse was over, real GDP fell by about 25% and nominal GDP went from about $100 billion in 1929 to about $55 billion in 1932. In 1929, corporations made total profits of about $10 billion; in 1932, they lost about $3 billion. Business investment disappeared.

The depression and consequent disappearance of corporate profits (earnings) had consequences for stock prices. Using valuation metrics like price/earnings (P/E) ratios, there was no support level, no bottom, for stock prices. The other support for stock prices – dividends – also fell drastically as profits disappeared. Trading volume fell, from an average around 10 million shares per day in October 1929 to around a half a million shares per day in 1932.  Market indexes fell 80-90%.

The negative reinforcing feedback effects between the real economy and the financial sector created the Great Depression. Remember that the size of the total economy was about $100 billion in 1929. Between 1929 and 1932, stocks (and stockholders) lost $40 billion in value. Total bank credit fell $20 billion.

Wages and Prices

Wages and prices acted differently at the beginning of the Great Depression compared to earlier recessions. The Consumer Price Index (CPI) went down only 2.6% in 1930. Nominal (current dollar or money) wages in the large industrial corporations, and other large companies, stayed virtually constant in 1930. Industrial prices also did not decline. Instead, large manufacturing firms laid off employees and cut production, watching sales and profits plummet. Investment stopped, hurting the capital goods sector. The question all this raises is:  Why didn’t large companies quickly cut wage and prices, as in prior recessions?

In a series of conferences in November and December 1929, President Herbert Hoover urged the leaders of the largest companies not to cut wages. Many corporate presidents agreed, including the presidents of General Motors, Ford, General Electric, Westinghouse, Standard Oil, U.S. Steel, Du Pont, Firestone, and Goodrich. The idea was that by not cutting the wages, and therefore income, of their workers, they were helping to limit the fall in overall (aggregate) demand. 

Keeping wages and thus prices high probably contributed to the large decreases in demand for consumer durables. As demand and output fell, these companies laid off workers, contributing to the rapid increase in unemployment. It was only in late 1930 and 1931, two years after the start of the depression, that large companies began cutting wages.

In 1933, President Franklin Roosevelt had Congress pass the National Recovery Act (NRA), an economy-wide, mandatory version of President Hoover’s voluntary program.

Financing Economic Growth and Development in the 1920s

The financial sector as a whole was a growing part of the economy in the 1920s. Finance doubled as a share of GDP with most of the growth coming in the second half.

The raising of large amounts of financial capital fueled the economic expansion, not just on the supply side but also on the demand side.

An expanding urban middle class financed its rising standard of living partly through increased borrowing; household debt rose faster than income. In addition, mortgage debt rose rapidly. Household balance sheets were leveraged with debt backed by illiquid assets that quickly lost market value starting in the fall of 1929.

The purchase of consumer durables such as autos, radios (some cost as much as cars), and some electrical appliances was usually financed with debt, often with money borrowed at the new consumer finance companies. Miss one payment and the product was repossessed. One of the largest banks that specialized in car loans, controlled by Henry Ford’s son Edsel, went under. 

The American Banking System and the Fed

At the beginning of 1929, the United States had 25,000 banks. Half were outside the Federal Reserve System (the Fed). States and the federal government had passed laws to protect local banks from competition from larger banks by limiting the geographical reach of banks. Between 1929 and 1933, the U.S. banking system – unregulated, fragmented, mostly without deposit insurance – went through waves of bankruptcies as farmers, businesses, and consumers defaulted. About half of all banks would disappear during the Great Depression. Depositors lost their savings. Farmers and processors could not repay loans and small, local banks went under. Solvent farmers could not get credit to produce. Urban and suburban banks started to go bankrupt as consumers, local businesses, and homeowners defaulted on loans. At the depth of the depression, half of all mortgages were in default.

Why did not the Fed save the banking system from collapse?  One of the Fed's powers was to be the "lender of last resort" to member banks. Banks in a liquidity squeeze could borrow at the rediscount window at the Fed banks. But this was limited. Over half of the banks in the U.S. were not members of the Federal Reserve System, including most of the small banks.

Through all this, the eleven regional Fed banks outside of New York and the governing board in Washington did virtually nothing. Controlled by local bankers and manufacturers, they did not believe it was their responsibility to save the banking system. Their governing boards limited the types of collateral they were willing to accept from borrowing banks. They did not actively encourage local banks to apply for funds. This attitude was shared by Andrew Mellon, Hoover’s Secretary of the Treasury. (He was too busy adding to his fabulous art collection by secretly and illegally buying art from the Soviet Union, which needed hard currency to finance it spying operations. These paintings, taken from the Hermitage, are now in the National Gallery collection in Washington.)

By the spring of 1933, the American banking system was near total collapse. Over half the states had declared a “bank holiday,” closing all the banks in their states to see which ones could be saved. This meant that depositors could not withdraw their savings. The new Roosevelt Administration’s first act in March 1933 was to declare a national bank holiday. His second act was to take the United States off the gold standard. 

International Aspects  

In the 1920s, New York had become the center of the global financial system. This was a consequence of World War I and its aftermath. During the war, England and France partly financed their war effort with substantial borrowing from New York banks. During the 1920s, Germany borrowed large sums in the United States to restart its economy and pay war reparations to England and France.

Central bankers and large investment banks spent the 1920s trying to rebuild the global financial system shattered by World War I. They saw the pre-war gold standard as a control mechanism to overcome the economic dislocation and instability caused by the war. The key, as they saw it, was to fix the value of national currencies in gold and thus, to each other. By 1929, almost all currencies, including the dollar, were on the gold standard. (In a bit of bad timing, Japan went on the gold standard in January 1930.)

The gold standard depended critically on the pound sterling and London before the war, and the dollar and New York after the war. The New York Fed chairman (Benjamin Strong) worked closely with the chair of the Bank of England (Montagu Norman) and other central bankers to coordinate policy, primarily changes in interest rates to influence currency and gold flows. Central banks and investment banks, mostly American, would also loan money to foreign governments to ease pressure on their currency. 

But America’s commitment to reforming the global financial system was limited. There were three major problems:

1) Allied war debts and German reparations. The Allies, mostly England and France, had borrowed over $10 billion in America to help finance the war. After the war, the Allies imposed reparations on Germany, payable mostly to England and France. These two countries relied on payments from Germany to meet the interest and principal payments on their debt to the United States. But the German economy had a hard time recovering from the war and taxing its people to raise reparation funds. Instead, Germany depended on borrowing from private banks in New York. Some of the funds would then go to London and Paris, to be cycled back to New York. Towards the end of the 1920s, more of the loans were short-term (“hot money”) rather than the usual long-term credits. The system functioned as long as American bankers were willing to lend to Germany, that is, to roll over rather than call short-term loans.

2) England went back on the gold standard in 1925 at the pre-war parity. It overvalued the pound compared to other currencies. English exports were priced out of global markets; imports were relatively cheap. As a consequence, the English economy had a hard time recovering from the war, experiencing deflationary stagnation. England ran a trade surplus before the war but a trade deficit after the war. Defending sterling’s price in gold meant high interest rates to attract foreign funds, low economic growth, deflation (with pressure on wages), and high unemployment rates. The New York Fed often changed American interest rates to accommodate the Bank of England’s attempts to deal with England’s economic and financial problems.

3) Central bankers would change interest rates to influence cross-country capital and gold movements. But changes in interest rates also affected domestic economies. Interest rates in New York were actually lowered at the beginning of the stock market boom to encourage money flows to England. But lowered rates also reduced the cost of call money and brokers’ loans to speculators, fueling the stock market bubble.

Gold was also “high-powered” money. An influx of gold allowed a country’s banking system to created money by creating new loans. Throughout the 1920s there was a net inflow of gold into the United States. American banks could increase the amount of loans to American consumers, stock market speculators, farmers, and corporations.

Just when it seemed the global financial system was stabilizing, it started to unwind. Germany went into recession in 1928. The head of Germany’s central bank threatened to stop paying reparations. Money flowed out of Germany. American bankers stopped expanding short-term loans to Germany. The American government refused to reduce Allied war debts; England and France could not reduce reparations. By 1929, Germany had stopped paying war reparations and the crucial cycle of American loans to Germany, German reparation payments to England and France, and their war debt payments to American banks began to unravel. American banks were now sitting on billions of dollars of bad loans.

A slowdown in economic growth in the industrialized countries led to a large decrease in global commodity prices (inelastic demand). Countries that depended on commodity exports went into recession and were the first countries to leave the gold standard.

The U.S. economy went into recession and the stock market crashed. One consequence was that American banks started calling in German loans, deepening the German recession. There was a large and sudden increase in German unemployment. This contributed to the rise of Hitler and the Nazi Party, which received only 2.6% of the vote in 1928 but over 35% in 1930. The Nazi Party was the largest right-wing party, making it almost inevitable that Hitler would become Chancellor as conservatives tried to form an effective government to counter rising left-wing support. In office, Hitler renounced all reparations payments.

By 1931, the English government realized that England would not get out of long-term stagnation without eliminating the deflationary effects of the gold standard. England and 20 trading partners left the gold standard. The English pound sterling depreciated (went down in value) against the dollar, making America’s recovery more difficult.

The Gold Standard and Domestic Policy

The Hoover Administration's and the Fed's commitment to the gold standard limited domestic policy options. Budget deficits, lower interest rates, or increasing the money supply through Fed lending to banks would have tempted foreign central banks and depositors to withdraw gold. 

The worsening recession and the gold standard led to deflation. Deflation led to the higher real cost of debt to borrowers, and then defaults as incomes and asset prices fell. The banking system weakened. Banks failures rose dramatically in 1931 and 1932. Seeing the deep recession and the weak financial sector, foreigners began pulling gold out in 1932. The Fed raised interest rates to keep the gold in the U.S. The Hoover Administration raised taxes to reduce deficits and signal fiscal responsibility. Again, by early 1933, the entire U.S. banking system was approaching total collapse.

Summary

It is a mistake to see the stock market as separate from the rest of the economy. It was part of the financial sector, which greatly expanded in the 1920s and became a more important part of the economy.

The financial sector helped finance the economic growth and new products of the 1920s, especially demand for the new consumer durables. Gains from the stock market helped to finance the flamboyant life-style of a small percentage of consumers, symbolized when wealthy Americans on luxury trans-Atlantic steamers could radio their brokers in New York with stock orders. The boom in buying consumer durables and housing was made possible by the huge expansion of consumer loans and home mortgages. Increases in consumption and consumer loans were tied together. In contrast, small local banks were tied to a stagnant, leveraged agricultural sector.

Although the Great Depression lasted for 3½ years, over half the fall in output and real income occurred in the first year, by the end of 1930. This was a large and rapid decline. The stock market crash was a catalyst; it accelerated the decline in income, wealth and the demand for goods and services through feedback effects between the financial sector and the real economy.

The stock market crash of 1929 was not the only reason for the depression. Many of the systemic risks were due to global and domestic problems caused by the First World War and its aftermath. There were continuous feedback effects between the real sector and the financial sector. What changed was the size and importance of the American financial sector – as an international lender, as a raiser of capital, as a provider of household credit, as a seller of financial instruments.

The continuous feedback effects also help explain why the depression lasted so long and was so deep. Waves of bank failures, loss of savings and assets, lack of the Fed’s responsibility as “lender of last resort” all contributed to lengthening the depression and making the recovery difficult. Many of the government recovery programs of the Hoover Administration and the early Roosevelt Administration were substitutes for a financial sector that had ceased to function.  

The American economy in the 1920s became not only larger but also more complex. There were more “fault lines.” Recent studies of “complex adaptive systems” indicate they can go from seemingly stable to unstable very quickly. New potential fault lines were added in the 1920s – stock market speculation,  agricultural stagnation and debt, consumer durables bought with loans, and America’s involvement in international finance. 

The structure (including rules and lack of rules) of the financial sector when the crisis hit was important. The banking structure and much of the rest of the financial markets had not adjusted to the economic changes of the 1920s. Fragmented domestic banking, the gold standard, lack of information and analysis, absence of oversight, and widespread manipulation and fraud all contributed to a financial sector that was ill-prepared to handle the stresses beginning in 1929. Changing the rules - increasing the confidence of depositors, borrowers and investors - was an important part of the New Deal.

The depression was made worse by the antiquated mentalities of those in power. They were faced with the instabilities and dislocations of an international financial system radically changed by World War I. Their response was to revert back to the rigidity and deflationary pressure of the gold standard. American officials and the three Republican presidents in the 1920s  refused to decrease Allied war debt, a necessary condition to stabilize the international financial system. In America, an increasingly industrialized, mass consumption economy fueled by financial capital and consumer debt depended on a fragmented banking system of small, local banks designed for a decentralized agrarian economy.  Fed and government officials strongly believed in market competition and laissez-faire, which was ill-suited to an economy dominated by large, mass production corporations and a greatly expanded financial sector.

Conclusion

The real economy was growing rapidly, probably around 6% per year, in 1928 and the first half of 1929. This growth rate was unsustainable. Part of it was because of pent-up demand for autos; many consumers were waiting for Ford to get back up to full production. There was a big increase in the purchase of autos and other consumer durables during this period. A high percent of consumer durables were bought on credit.

Rising domestic optimism was behind the big increases in both output and the stock market. Employment levels were high. This optimism is hard to quantify but it was pervasive outside of some rural districts.

Recessions start with an unexpected shock. They are often outside of economic models used at the time of the shock. One source is an unexpected rise in inflation and nominal interest rates. 

In 1929, the stock market decline was mostly independent of the real economy recession. In 1930, stock market recovers 50% in first quarter, indicating investors believed the decline was a “correction” and stock prices were cheap. But the real economy continued its rapid deterioration. When recognized, investors realized their optimism was misplaced and the stock market turned down again. 

The recession of 1930 does not show up in financial figures except for stock market and more than the usual number of bank closings. The number of rural banks failing was rising, supplemented by the beginning of small savings banks failures.

As the buying of consumer durables and other mass-produced consumer products declined, profits fell. Investment in manufacturing declined, as the reason for increasing capacity disappeared. The government did not make up any of the loss of income in 1930 through welfare programs or fiscal deficits. (Even during the 1930s, Roosevelt’s budget deficits were much smaller than the decline in private incomes. A misguided policy to balance the budget in 1937 led to a severe recession that wiped much of the output and employment gains of the prior four years.)

The structure of the economy had fundamentally changed since the last depression that occurred in the 1890s. New domestic fault lines appeared in both rural and industrial America. 

The situation was made more dangerous as the global economy struggled to recover from World War I and its chaotic aftermath. Only the New York Fed and large New York banks worried about international instability and its possible consequences. Eventualy, all Americans would become aware of the consequences of post-WWI overseas problems, the stock market crash of 1929, and the beginning of the Great Depression in 1930. On December 7, 1941.

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