Great Depression Start?

How did the Great Depression start? Most of us learned in school or elsewhere that the stock market crashed one day in 1929, rich investors whose fortunes went into free fall started jumping out of buildings. and as a result the economy tanked in short order - thus kicking off the Great Depression. This proved the free market either did not work, or could not be counted on, or inevitably led to such a disaster sooner or later. The truth is not only more complicated, it starkly different.

The stock market did lose 90% of its value in the Great Depression. However, this did not happen in one day. The Dow went from a high of 381 on Sept. 3, 1929 down to a low of 41 on July 2, 1932 - a span of almost 3 years. A lot happened between then. In fact on June 30, 1930, almost a year after Black Tuesday, the Dow stood at 244 - almost the same level it stood on October 1, 1928 when it stood at 240.

The stock market slide began on October 24, 1929, less well known as Black Thursday. The Dow initially fell 33 points. 11 investors committed suicide. However, large banks intervened, and the Dow only lost 6 points that day.

The following Monday and "Black Tuesday", the Dow fell from 298 down to 230, a 68 point drop known as the Great Crash. By Nov. 13, the Dow had hit a low of 198. However, by April of 1930, the Dow was back up to 291, wiping out the losses back up to the level before Black Tuesday.

During the ups and downs, Congress debated enacting a tariff increase to give American products an advantage in American markets. At first, the tariff was to be limited to farm products. However, on October 24, 1929, Black Thursday, it became clear the tariff would be expanded to many products beyond agriculture. The debate went on, back and forth till June 14, 1930 when President Hoover announced he would sign the Smoot-Hawley tarriff law whereupon the Dow began its steady descent to 41 two years later without recovery.

Economists had begged Hoover to veto Smoot-Hawley. They foresaw that such a protectionist measure would surely only lead to retaliatory protectionist tariffs by other trading partners, which is precisely what happened. Once Smoot-Hawley became law, our trading partners soon followed in retaliation by raising their tariff rates on a host of products they wanted to protect within their borders. World-wide trading came almost to a standstill, greatly contributing to a world-wide depression. Investors, seeing this was coming, began to leave the stock market as well as other types of investments. This in part turned what started as a recession into a full-blown depression, though other causes contributed which I will explore in future blogs.

The great economic expansion of the 1920s had to come to an end at some point as the economy went beyond its own capacity. However, it appears that government action helped to turn what should have been a healthy recessionary correction into a full-blown depression. The stock market anticipated the economic downturn, and then panicked as it became clear that the government would, and then did, take action that while intended to protect the American economy, wound up slowing down world-wide trade which precipitated a world-wide depression.