Low point of the Dow

On July 8th, 1932, the Dow Jones Industrial Average hit its lowest level of the Great Depression, closing at 41.22. Share prices started to fall on September 4th of 1929, but the big drop was the stock market crash on “Black Tuesday,” October 29th 1929. It began in the US, but it spread elsewhere and lasted until the late 1930s in some places, the most severe economic downturn the industrialized world had ever known.

International trade dropped by 50 percent, and it cut personal incomes, tax receipts, prices and profits. Unemployment hit 25 percent in the US, and 33 percent in some other countries. It was the longest, deepest, and most widespread downturn of the century. Many people lost their entire savings and investments. Construction and heavy industry came to a standstill in some places, while farm communities saw crop prices fall by 60 percent. Many farms ceased to be viable and were abandoned or repossessed.

The Keynesian explanation is that widespread loss of confidence cut consumption and investment. With prices falling, it paid to hold money that could buy more later. It suggests that people avoided the markets for fear of losing more. Milton Friedman and Anna J. Schwartz took a more monetarist approach, arguing that the Great Depression was caused by the shrinking of the money supply. One third of banks went under, leading to a 35 percent monetary contraction that triggered the Great Depression. They said the Federal Reserve Bank should have lowered interest rates, increased the monetary base, and injected liquidity into the banking system. Instead, they did the opposite, turning what would have been a normal recession into the Great Depression.

One reason the Fed found it difficult to act was the presence of the gold standard. The Federal Reserve Act required 40 percent gold backing of Federal Reserve notes issued, and they had almost hit the allowable limit of credit they could back with gold. In April 1933 a Presidential Order outlawed the private ownership of gold bullion, coins and certificates, reducing the pressure of Federal Reserve gold, but by then it was too late.

Humanity does sometimes learn from its mistakes, however, and its response to the Financial Crisis of 2008-2009 was the opposite of their response to the 1929 crash. This time interest rates were slashed, Quantitative Easing flooded money into the market, and liquidity was made available to banks. There was no longer a gold standard to stop this. The result was that there was no 10-year Great Depression. World GDP dropped by about 15 percent from 1929-1932. By contrast, it dropped by less than 1 percent between 2008-2009.

Ben Bernanke, then Chair of the Federal Reserve, put it succinctly when he said:

“I would like to say to Milton and Anna: Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.”

The Financial Crisis and its recession produced a period of low or briefly negative growth, but it was on nothing like the scale of the stagnation and the misery it caused in the Great Depression. At some times we learn lessons, and this was one of them.