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The 1929 crash and the Great Depression
1929–1939· Crisis or event
Fact, law or dataA rule, statute, definition or measured number.
The 1929 stock crash opened a decade-long slump, the worst in modern history, with US unemployment near 25% by 1933.
See it on the Money & Finance map →How it works
The Dow fell about 89% from its September 1929 peak to July 1932 and did not regain it until 1954. Waves of bank runs closed about 9,000 banks from 1930 to 1933, and the money supply shrank about a third. Prices fell about 25% and real output about a quarter. Gold-standard links spread the slump abroad, and tariffs (Smoot–Hawley) choked trade. Recovery began in 1933, stalled in 1937–38 and was completed by wartime mobilization.
Why it matters
It built much of today's safety net and rulebook, from the FDIC and SEC to Social Security, and a Fed determined never again to let money and banks collapse.
Facts, rules and data
Friedman and Schwartz's 'A Monetary History of the United States' (1963), Bernanke's 1983 bank-failure research, Census and BLS data, NBER cycle dates and Dow price records.
Debates and risks
Causes are still argued: Fed mistakes, the gold standard, bank failures, tariffs or collapsing spending. Most economists now see several working together.
Connections (9)
▸FDR's gold order and dollar devaluation (1933–34) was a response to The 1929 crash and the Great DepressionFact, law or data
The connection
By early 1933 bank runs were draining gold, and gold-standard rules kept the Fed from expanding money. FDR's April order pulled private gold into the Treasury, and the 1934 revaluation from $20.67 to $35 an ounce let the government back more dollars with each ounce. Prices stopped falling once the dollar began sliding in 1933, and recovery took hold.
When and why
Washington, March 1933 to January 1934: the bank holiday, Executive Order 6102 in April, and the Gold Reserve Act.
How we know
The orders and statutes are public, and price data show deflation ending in 1933. Christina Romer's 1992 study credited gold inflows after devaluation, which swelled the money supply, with much of the recovery.
Debates and risks
How much of the 1933–37 recovery came from devaluation and gold inflows versus banking reforms and New Deal spending is still weighed.
▸The gold standard spread deflation during The 1929 crash and the Great DepressionMainstream view
The connection
Under gold rules, a country losing gold had to raise rates and shrink its money supply. As gold flowed to the US and France in 1928–32, others tightened, and the US itself raised rates in 1931 to defend the dollar. Shrinking money supplies carried falling prices and bank failures from country to country.
When and why
Worldwide, 1928–1936. Britain left gold in September 1931, the US in 1933, and France and the rest of the 'gold bloc' in 1936.
How solid is the link?
Barry Eichengreen's 'Golden Fetters' (1992) and Bernanke's research show that countries leaving gold earlier recovered sooner, a pattern most economic historians accept.
Debates and risks
Whether gold itself caused the slump, or the way central banks ran it, especially US and French gold hoarding, is debated.
▸Ben Bernanke, Fed chair 2006–2014 won a Nobel for research on The 1929 crash and the Great DepressionFact, law or data
The connection
Bernanke's 1983 paper showed that bank failures deepened the Depression beyond the drop in money: when banks failed, their knowledge of borrowers was lost, so credit dried up even for sound firms. As Fed chair in 2008 he acted on that lesson to keep banks alive and lending.
When and why
Published in the American Economic Review, June 1983; Nobel prize in economics awarded October 2022, shared with Douglas Diamond and Philip Dybvig.
How we know
The Nobel committee's citation names his Depression analysis, and he cited the research himself when explaining 2008 policy.
Debates and risks
Whether bank failures caused the Depression or mainly amplified it, and how directly that lesson justified 2008's rescues, is debated.
▸Glass–Steagall Act (1933) and its 1999 repeal was a response to The 1929 crash and the Great DepressionFact, law or data
The connection
About 9,000 US banks failed from 1930 to 1933. Senate hearings found banks' securities arms had sold shaky bonds and stock to their own depositors. Congress concluded that mixing deposits with speculation helped cause the collapse, so it separated the two and added deposit insurance.
When and why
Senate Banking Committee hearings led by counsel Ferdinand Pecora, 1932–34, exposed National City Bank (today's Citigroup); the act passed in June 1933.
How we know
The hearing record and congressional debates show the intent. Later research found banks with securities arms failed less often (Eugene White, 1986) and underwrote bonds no worse than others (Kroszner and Rajan, 1994).
Debates and risks
Did Congress diagnose the wrong cause? Many economists think so, blaming failures more on deflation, small undiversified banks and Fed inaction.
▸Smoot–Hawley Tariff Act (1930) worsened The 1929 crash and the Great DepressionMainstream view
The connection
By raising import prices and prompting retaliation, Smoot–Hawley cut US exports, especially farm goods, just as demand was collapsing, and world trade fell sharply. But exports were only about 5% of US GDP, so most economists judge it worsened the Depression modestly; the bigger cause was the collapse of money and banks.
When and why
Signed June 17, 1930, as the downturn deepened; retaliation came from Canada, Spain, Italy, France and others through 1930–32.
How solid is the link?
Trade statistics show steep falls in US exports and imports; Douglas Irwin estimates the tariff explains perhaps a quarter of the drop in US imports, falling incomes most of the rest.
Debates and risks
How much it damaged confidence and spread the Depression abroad, beyond its direct trade effects, is debated.
▸Monetarism and Milton Friedman blames the Fed for the depth of The 1929 crash and the Great DepressionMainstream view
The connection
Friedman and Schwartz argued the Fed turned a recession into the Great Depression. As about 9,000 banks failed from 1930 to 1933, the Fed neither lent freely nor added money, so the money supply fell by about a third and prices collapsed. In their view, active Fed support would have kept a bad downturn ordinary.
When and why
A Monetary History of the United States (1963), whose chapter on 1929–1933 named the period the 'Great Contraction'.
How solid is the link?
The money-supply collapse is well measured. In 2002 Ben Bernanke, then a Fed governor, told Friedman and Schwartz: 'Regarding the Great Depression. You're right, we did it. We're very sorry.'
Debates and risks
Whether falling money caused the slump or reflected it, and how much the gold standard and debt deflation mattered, is still debated.
▸The 1929 crash and the Great Depression led to the creation of FDIC deposit insurance (up to $250,000)Fact, law or data
The connection
Waves of bank failures wiped out savings and fed more runs, ending in the national bank holiday of March 1933. Representative Henry Steagall pushed deposit insurance past Roosevelt's and big bankers' doubts; Senator Arthur Vandenberg added a temporary fund that started January 1, 1934, made permanent in 1935.
When and why
Banking Act of 1933, signed June 16, 1933; made permanent by the Banking Act of 1935.
How we know
The statutes, congressional records of Steagall's and Vandenberg's roles, and the FDIC's official history.
Debates and risks
Historians debate how much credit deposit insurance deserves versus the bank holiday, leaving gold and capital injections from the Reconstruction Finance Corporation.
▸The 1929 crash and the Great Depression led to the creation of Securities and Exchange Commission (SEC)Fact, law or data
The connection
The 1929 crash and the Senate's Pecora hearings exposed stock pools, insider deals and banks selling bad bonds to their own customers. Congress answered with the 1933 Securities Act, first run by the Federal Trade Commission, and then the 1934 Exchange Act, which created a dedicated Securities and Exchange Commission to police markets.
When and why
Washington, 1932–34; Senate Banking Committee counsel Ferdinand Pecora led the hearings, and Franklin Roosevelt signed the Exchange Act on June 6, 1934.
How we know
The Pecora hearing transcripts and the committee's 1934 report; the statutes themselves. The Dow had fallen about 89% from its 1929 peak by 1932.
Debates and risks
Historians debate how much fraud and speculation caused the crash versus Fed policy and bank failures; the SEC targeted market abuses more than the Depression's causes.
▸California's one-action and anti-deficiency rules were largely shaped by The 1929 crash and the Great DepressionFact, law or data
The connection
As values collapsed in the early 1930s, lenders bought foreclosed property cheaply at their own sales, then sued borrowers for large deficiencies. California's legislature responded in 1933 with fair-value limits (580a) and a purchase-money ban (580b), and in 1940 with 580d, as other states passed foreclosure moratoriums.
When and why
California, 1933–1940; a Minnesota moratorium was upheld by the US Supreme Court in Home Building & Loan v. Blaisdell (1934).
How we know
The statutes' enactment history and California Supreme Court opinions describing their Depression-era purpose.
Debates and risks
Whether these protections lower borrowers' overall costs or simply shift risk onto guarantors and higher rates is debated by economists.