Economic history · The Great Depression
Seven steps, about ten minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
The prices of shares collapsed on two named days in October 1929, and the crash is not what caused the Depression. The American economy had already turned down, and it went on falling for forty-three months.
More than 600 American banks a year failed through the 1920s and it was never called a crisis.
Between the crash of 1929 and the end of 1933 many times that number shut, because a queue at one bank starts a queue at the next one and the next town. Every bank that closed destroyed the savings inside it, so a large share of the money in America disappeared between 1929 and 1933, and prices fell with it. In March 1933 every bank in the country was shut, in the same month that more Americans were out of work than in any month ever recorded.
Seven steps cover the count, why panic spreads, where the money went, how many people were out of work, the week the banks closed, and the promise made in 1934 that ended the runs.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 7
You put your money in a bank so that it is safe. In America, for a while, it was not.
American banks shut in numbers never seen before, between the crash of 1929 and the end of 1933.
Because the bank lends most of it out. A bank keeps a small share of its customers' money ready to hand and lends the rest to other people, for years at a time, as house loans and business loans. That works while only a few customers want their money on any one day. It fails the moment they all want it at once.
Customers lost about $1.3 billion in those banks, because a savings balance in a bank that shuts is not paid back.
Bank failures were not new. More than 600 a year had failed through the 1920s, ten times the rate of the decade before that.
The federal government read the first wave of closures in 1930 as ordinary, because 600 failures a year had never been called a crisis.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
About 600 American banks a year failed through the 1920s. How many shut between the 1929 crash and the end of 1933?
For scale. More than 600 a year had failed through the 1920s, ten times the rate of the decade before.
In November 1930 a company called Caldwell and Company collapsed, and the banks that kept their money with it went down too.
Where those banks closed, customers pulled their money out of other banks in fear. The panic then spread from town to town.
Bankers call a queue of customers all asking for their money at once a run, and a run closes a sound bank as surely as a weak one.
Fear, rather than bad lending, is what carried the closures from one town to the next. 1,350 banks shut in 1930 and about 2,300 shut in 1931.
Why could a bank with sound loans and honest managers still be closed by a queue at its door?
For scale. The first wave came in November 1930, with the collapse of Caldwell and Company.
The 9,000 banks that closed destroyed the deposits inside them, because a savings balance in a closed bank stops being money anybody can spend.
Because a debt does not fall with them. A farmer who borrowed $1,000 in 1929 still owed $1,000 in 1933, and the crop he sold to pay it fetched a third less. Whatever happens to prices, the amount of money you owe stays the same. The second effect works on every buyer: if a thing will be cheaper next month, buying it this month is a mistake, so people wait, firms sell less, and prices fall again.
Deposits are part of the country's , so the money supply fell as the banks shut, from the autumn of 1930 to the winter of 1933.
Prices fell by about the same share across the same four years.
Falling prices sound like relief and were the opposite, because the amount of money you owe stays the same, so makes every debt heavier.
Three research bodies measure it slightly differently. Roughly what share of America's money disappeared between 1929 and 1933?
For scale. Every bank that shut destroyed the savings held inside it, and about 9,000 shut.
About 12,830,000 Americans were out of work in 1933.
No government body did, at the time. There was no monthly survey of who had work and who did not. The figures used today were worked out afterwards, from other records, and the Bureau of Labor Statistics, the government office that counts American jobs, did that work in 1945. Two sources can therefore give slightly different numbers for the same year, and that is the reason a figure is quoted as about 12.8 million.
That is the average across the year, out of a working population of over fifty-one million.
It was about one American worker in four. The figure was built afterwards by the Bureau of Labor Statistics.
One firm shows what that looked like from inside. United States Steel had 224,980 full-time workers in 1929 and none at all on 1 April 1933.
About 12.8 million Americans were out of work on average across 1933. Was the worst single month of the year higher or lower than that average?
A tie counts as correct either way.
For scale. The working population was over fifty-one million.
The American banking system stopped working altogether in March 1933.
March 1933 is the bottom of the whole fall, and nothing after it was worse.
Every state in the country had already ordered its own banks to close by 4 March, the day the new president took office.
The federal government acted only after every state had shut its own banks. Congress then passed the Emergency Banking Act, which let sound banks open again.
Put these four in the order they happened.
For scale. About 9,000 banks shut in all between 1929 and the end of 1933.
It is 5 March 1933, your first full day in office, and every state has already ordered its banks to close.
Banks have been shutting for three years, 1,350 of them in 1930 and about 2,300 in 1931, and roughly a third of the country's money has gone with them.
There is no promise of any kind standing behind anybody's savings, so the moment a bank opens its doors a queue can close it again.
You are Franklin Roosevelt on 5 March 1933. The banks are shut and there is no promise standing behind anybody's savings. What do you do?
Roosevelt closed them all. He ordered every bank in the country shut on 6 March 1933, Congress met on 9 March and passed the Emergency Banking Act the same day, and government examiners then judged which banks were sound enough to open again.
What followedBanks began opening again on 13 March, and within two days the ones that had opened again held 90 per cent of the country's banking money. About 4,000 never opened again. March 1933 was the bottom of the whole fall.
The promise came the year after, and it is what stopped the runs for good.
From the start of 1934 the American government promised to pay customers back, up to a fixed amount each, if their bank failed.
The promise is called , and it took away the reason to be first in the queue at the door.
Nine insured banks shut in the whole of 1934, against about 2,300 banks in 1931, when no promise of any kind stood behind them.
The government raised the fixed amount it promised each customer on 1 July 1934, within six months of the promise being made.
Nine insured banks shut in 1934. Some banks had not taken the insurance. How many of those shut in the same year?
For scale. Savers lost about $1.3 billion in the banks that shut between 1929 and 1933.
Module 2 of 7 in The Great Depression
Banks that shut, 1929 to 1933
about 9,000The ordinary rate through the 1920s
more than 600 a yearWhat customers lost
about $1.3 billionThe money in America, 1929 to 1933
down roughly a thirdPeople out of work in 1933
about 12,830,000, and 15.5m in MarchEvery bank in the country shut
6 March 1933Insured banks that shut in 1934
nine, against 2,300 in 1931You met three terms in this module
, ,
America was not alone in this, and the reason is a promise every country had made about gold.
[1] How many banks went, and when: Federal Deposit Insurance Corporation, The First Fifty Years: A History of the FDIC 1933-1983, via FRASER. "From the stock market crash in the fall of 1929 to the end of 1933, about 9,000 banks suspended operations, resulting in losses to depositors of about $1.3 billion." "An average of more than 600 banks per year failed between 1921 and 1929, which was ten times the rate of failure during the preceding decade." "In all, 1,350 banks suspended operations during 1930." "About 2,300 banks suspended operations in 1931." "By March 4, Inauguration Day, every state in the Union had declared a bank holiday." "The temporary plan of deposit insurance initially limited protection to $2,500 for each depositor", raised to $5,000 on 1 July 1934. "Only nine insured banks and 52 uninsured licensed banks suspended operations during 1934."
[2] Why one closing bank closed the next: Federal Reserve History, The Great Depression and Banking Panics of 1930-31. "In communities where these banks closed, depositors panicked and withdrew funds en masse from other banks. Panic spread from town to town." The trigger named is the collapse of Caldwell and Company in November 1930 and the banks that kept money with it. The companion essay states: "The downturn hit bottom in March 1933, when the commercial banking system collapsed and President Roosevelt declared a national banking holiday", and "From the fall of 1930 through the winter of 1933, the money supply fell by nearly 30 percent." It also records that deflation "increased debt burdens; distorted economic decision-making; reduced consumption; increased unemployment; and forced banks, firms, and individuals into bankruptcy".
[3] What let the banks open again: Federal Reserve History, Emergency Banking Act of 1933 and Bank Holiday of 1933. The proclamation suspending all banking transactions was issued on 6 March 1933. Congress convened on 9 March and the Emergency Banking Act was signed the same day, letting banks open again once government examiners judged them sound. Banks in Federal Reserve cities began opening again on 13 March, and "within two days banks holding 90 percent of banking resources had opened again". About 4,000 never opened again.
[4] How far the money fell: Economic History Association, Randall Parker, An Overview of the Great Depression. "The money supply had fallen 35 percent, prices plummeted by about 33 percent." The Federal Reserve gives nearly 30 per cent for a slightly different window and the Cato Institute gives one third, which is why no single figure is printed as the answer.
[5] A third measure of the money: Cato Institute, Monetary Contraction and the Great Depression. Cato puts the weight on the consumer debt and mortgage debt households already owed, and on the money supply, which it says dropped by a third between 1929 and 1933.
[6] Why falling prices hurt: Bank of England, KnowledgeBank, What is deflation?. "Deflation can make it more expensive to repay your debts. Regardless of the general prices for goods and services, the amount of money you owe remains the same." The page also records a second effect: people spending less today in the hope of buying at a cheaper price tomorrow.
[7] What it did to work: Congressional Research Service, Labor Market Data: Great Depression vs. Recent Recession, R40655. The unemployment rate rose from 3.2% in 1929 to 24.9% in 1933, and the report notes that the 1930s figures are estimates made afterwards, built so that they can be compared with the survey used today.
[8] How many people that was: US Department of Labor, History, Chapter 5: Americans in Depression and War. "The Bureau of Labor Statistics later estimated that 12,830,000 persons were out of work in 1933, about one-fourth of a civilian labor force of over fifty-one million." "March was the record month, with about fifteen and a half million unemployed." The same chapter records United States Steel employing 224,980 full-time workers in 1929 and none on 1 April 1933, which is what a collapse looked like inside one firm.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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