A Brief on The Great Depression (1929-1939)

In the world of constant changes, history is one which is constant. Plus, analysing history also helps to provide valuable lessons which if applied in future can lead to reduced chances of repeating same mistakes. With that in mind lets start with one of the most debated and researched times in modern history, 'The Great Depression', which plagued America for a decade.

In the year 1918, the first world war ended. The United States being among the victorious countries was now expecting a period of growth and prosperity. 

That's how it started. In fact the renovation work and restart of many businesses meant that more workforce was required, which led to increase in employment. People started earning good salaries and add to that more involvement of women in the corporate industries meant that the households could earn more. This increased earning led to higher consumption by households which fueled liquidity in the economy and led to invention of new electronic items like vacuum cleaners and washing machines. So, things were looking pretty good. 

This increased liquidity also meant that banks had money. What would they do with money? Of course look to earn interests. So, they lent this money to the public. Ease of loan facilities means, people could use money for getting the newer gadgets and of course, Henry Ford's latest automobile 'T-Model', the mass production of which was started in 1918.

But people were not content with just consumption. They wanted something more. They wanted their money to produce even more money. How could that happen?

Probably you know it by now. Yes! That's exactly what people got attracted to, 'INVESTING'.

Investing became a pretty popular practice. With all people buying, it was becoming easy for investors to earn profits. Everybody was pouring money into the stock market. You name it - drivers, cooks, shoe sellers, everybody was acting like a wall street tycoon. 

People start over hyping the stock market

 

But the question is the way they proceeded. They started taking money out of the depositors' accounts *coughs*. But when everybody is drunk in the party, nobody notices wallet theft. Overall things were going pretty well in America.

Between 1922 and 1929, Dow Jones Industrial Average grew a whopping 218%. Due to incessant growth, the period from 1920 to 1928 has also been termed as 'The Roaring 20s'. 

But growth projection was increasing at such pace that it became difficult for the companies itself to compliment their stock rise. The production rate started slowing down. Demand for goods also started reducing.

This led to falling wages in order to cut costs. And easily available debt? People had taken up quite a lot of it. Thus, interest rates started to rise.

Downturn in the economy seemed imminent but the investors without understanding the situation kept putting money in the stock market. This proves it was nothing more than just gambling or speculation in more sophisticated terms. 

But with each passing day investor uncertainty started rising which brought us to the day of realisation, October 24th, 1929 famously known as 'Black Thursday'. On this day people were brought back to their feet, to find that they had lost the ground.

On the next day, news of stock market crashing came out and as the market opened investors started selling. Selling to the extent of 12.9 million shares, creating the record of biggest sell out ever. The sell off became this crazy that people didn't even know at what price they were letting go of their shares. They had just one aim get rid of them. 

This was followed by an even larger sellout on October 29th, which was a Tuesday. The Dow Jones fell 12%. This day came to be known as 'Black Tuesday'. They record of total shares sold last Thursday was successfully broken. Yeah, the new record was 16.4 million shares on a single day. Shares became worthless and people lost their life saving.

In the next 3-4 years, DJAI (Dow Jones Industrial Index) lost 90% of its value. Companies shutdown and Americans became jobless.

Even banks lost their money and people who had accounts in those banks went broke. In the years to come around 8000 banks went bankrupt. Whether one invested, borrowed money or held money in a bank account, all were hurt badly.

The effects of the Great Depression were not only confined to America. Its effect had spread to nations across the world.

This was also the time of rise of Hitler in Germany and creation of Nazi Party. And then started World War II in 1939. Depression would start fading away as war created requirement of manpower and thus, more jobs in the US and all over the world.

There some super valuable lessons to learn from this event for everyone:

• It's very evident, how greed is a ticking time bomb. But people did not learn this lesson even during the times of 2000-01 Dot-com Bubble, nor during 2008 Financial Crisis. Well these are separate case studies in themselves. In fact greed is one common element behind any chaotic times in world history.
• The debt facility if used carelessly can take the entire system down. In recent years as well there been leakages in economies here and there. If data is referred to, debt pile is increasing in the modern times as well.
• Another important thing to be noted is the unprecedented destruction potential of speculation. That's why, today there official bodies set up in every country to educate people entering stock markets against speculation. That's why in today's world financial education is being deemed as essential.
• One can also not forget the load human emotions have during tough situations in the markets. That's why it is said stock markets is not for the faint hearted and one must be aware of what action they are pursuing, taking into consideration its possible effects, risks and rewards.

Stay inquisitive 💡

Written by: Aastik Pasricha