The Great Depression: how an economy collapses

The Roots of a Global Economic Crisis

What can halt a global economy? The Great Depression of the 1930s provides a troubling answer. This major economic crisis did not appear overnight, but resulted from a buildup of factors that intertwined and amplified each other.

It all started with excessive trust in the markets. Throughout the 1920s, stock speculation spread unchecked in the United States. Investors borrowed heavily to buy stocks whose prices seemed destined to rise indefinitely. No one really believed that the bubble could burst.

The “Black Tuesday” of October 1929 shattered this illusion. The ensuing stock market crash triggered a devastating chain reaction: millions of Americans lost their savings instantly.

The Collapse of the Financial System

But the crash was just the starting point. What really transformed a market correction into an economic disaster was the collapse of the banking sector.

Panicked, savers rushed to withdraw their funds. However, without protection mechanisms (deposit insurance did not yet exist), the bankruptcy of a bank meant the total loss of savings for entire communities. A wave of bank failures overwhelmed the country. As credit dried up, businesses could no longer operate, households could no longer spend. The economy came to a standstill.

Global contagion

If the crisis broke out in the United States, it did not spare the rest of the world. European governments, already weakened by the aftermath of World War I, saw their export markets collapse abruptly.

In response, nations erected trade barriers. The American Smoot-Hawley Tariff Act of 1930 is a symptomatic example. These protectionist measures, intended to safeguard domestic industry, provoked retaliations that devastated international trade. Global trade collapsed, taking millions of jobs with it.

An unimaginable human cost

The numbers speak for themselves. In industrialized countries, unemployment reached 25%. Entire families found themselves on the streets. Soup kitchens and queues for bread became iconic images of this era. Thousands of businesses closed their doors, from small shops to industrial giants.

Beyond the statistics, it was an existential catastrophe. Economic misery fueled extremist political movements. Some democracies adopted reforms, while others veered towards authoritarianism.

How did we get through it?

The path to recovery has been long and arduous. No panacea existed. It required a conjunction of factors: government intervention, innovative policies, and ironically, the needs of a world war.

In the United States, President Franklin D. Roosevelt launched the New Deal, an ambitious program aimed at creating jobs and restoring confidence. These initiatives ranged from large infrastructure projects to the creation of banking and securities regulatory agencies. Other nations adopted unemployment insurance and social protection systems.

But it was really the beginning of World War II that marked the turning point. Governments massively invested in military production, industry, and infrastructure, thereby reviving employment and economic production.

Sustainable Lessons for Today

The Great Depression profoundly reformed economic thinking and government action. Regulators established deposit insurance, financial market regulations, and social safety net programs. Governments accepted a more interventionist role in economic management.

These lessons remain relevant. While modern economic challenges differ, the fundamental principles remain: regulatory vigilance, counter-cyclical intervention, and social protections are essential to prevent systemic collapses.

Understanding the Great Depression means understanding why our economies today function as they do, and recognizing the inherent fragility of complex financial systems.