The Great Depression: How the Deepest Economic Crisis in History Rewrote Financial Rules

Why Should We Still Understand the Great Depression

The Great Depression is not just old news in history textbooks; it is a required lesson for understanding the vulnerabilities of modern financial systems. From 1929 to 1939, the global economy fell into an unprecedented state of paralysis. Millions lost jobs, businesses went bankrupt, and banks failed—this crisis profoundly changed the way governments around the world handle economic issues and directly led to the establishment of today's financial regulatory systems.

For anyone involved in the financial markets, understanding the causes and evolution of the Great Depression can help us identify risk signals and avoid repeating the same mistakes.

How It All Started: The Perfect Storm of Multiple Factors

The Great Depression was not caused by a single event, but rather by a combination of multiple factors that ultimately triggered a chain reaction.

The madness and collapse of the stock market in 1929

In the 1920s, the American stock market experienced the most frenzied speculative bubble in history. Investors recklessly bought stocks with borrowed money, driving stock prices far beyond their actual value. This “paper prosperity” lasted for the entire decade.

In October 1929, this bubble finally burst. The stock market fell by more than 50% in just a few weeks. On October 24th (Black Thursday) alone, 13 million shares were sold off. Then on October 29th (Black Tuesday), another 16 million shares were dumped. Millions of Americans lost all their savings overnight.

Many people invested with borrowed money, and now they not only lost their principal but also owe large debts to the bank. This created a panic cycle: investors are eager to sell off, and prices continue to plummet.

Chain collapse of the banking system

After the stock market crash, panic spread to the banks. Depositors holding stocks and mortgage losses began to withdraw cash on a large scale. Without the protection of the federal deposit insurance system, banks could not cope with this sudden outflow of cash.

A bank collapsed, followed by another, and then the entire financial system fell into chaos. Between 1930 and 1933 alone, about 9,000 banks in the United States closed. When a bank fails, all the savings of depositors disappear—there are no guarantees, no compensation, everything is gone.

The collapse of banks means that businesses are unable to obtain loans to maintain production and pay employee wages. This further exacerbates the economic recession.

The Collapse of Global Trade

The crisis quickly spread to the international market. In 1930, the U.S. government enacted the Smoot-Hawley Tariff Act, significantly raising import tariffs in an attempt to protect American industries. What was the result? Other countries followed suit, adopting retaliatory trade barriers.

Global trade volume has decreased by 66% over the past few years. This is a deadly blow for countries that rely on exports—especially those European countries that were already struggling after the war. Their markets have disappeared, factories have shut down, and their economies are in a downward spiral.

Global Spread of Catastrophe

Although the crisis originated in the United States, no country was able to escape it. The Great Depression became a global economic disaster.

Scale of the unemployment crisis

The unemployment figures say it all. The unemployment rate in the United States reached 25% in 1933. In some industrial cities, the unemployment rate even exceeded 50%. One in four people was out of work.

The situation is equally dire in Europe. Germany's unemployment rate was close to 30% in 1932. The unemployment rates in countries like the UK and France reached double digits.

Unemployment means no income, and no income means being unable to pay rent or buy food. Long lines for bread have formed in the cities, and slums and “Hoovervilles” (temporary shelters made from scrap materials) have become the new urban landscape.

Large-scale bankruptcies in businesses and agriculture

From small shops to large manufacturing plants, thousands of businesses have gone bankrupt. Farmers are going bankrupt because the prices of agricultural products have fallen to historic lows—sometimes the price of the grain sold is even less than the cost of planting.

If a certain link in the supply chain collapses, it will lead to the disintegration of the entire chain. When factories shut down, they no longer purchase raw materials; raw material suppliers lose customers and also go out of business.

social and political upheaval

Economic disaster has triggered social unrest. Unemployment, poverty, and despair have given rise to extreme political movements. In some countries, this has led to the weakening of democratic institutions and the rise of authoritarian regimes—one of the important background factors that later contributed to World War II.

The Road to Recovery: A Multi-Faceted Solution Is Needed

The Great Depression will not automatically fade away with a single policy. It requires the government to take large-scale, innovative interventions.

Roosevelt's New Deal: The New Role of Government

In 1933, Franklin D. Roosevelt took office as President of the United States. He implemented a series of radical economic reforms collectively known as the “New Deal.” This included:

• Public Works Projects: The government directly employs the unemployed to engage in infrastructure construction, environmental projects, etc. This creates millions of job opportunities while improving the infrastructure of the United States.
• Banking Reform: Establish a federal deposit insurance system to protect depositors' savings and restore public confidence in the banking system.
• Securities Regulation: Establish a Securities and Exchange Commission to regulate the stock market and prevent excessive speculation as seen in the past.
• Social Security System: Introduce pension, unemployment insurance, and other social safety net programs.

These measures changed the nature of the government's economic policy. From now on, the government is no longer a bystander, but an active participant in economic stability.

The Unexpected Contributions of World War II

Ironically, it was war that truly pulled the American economy out of the Great Depression.

The Second World War broke out in 1939, and the United States was drawn into it in 1941. The war required a large amount of weapons, equipment, and supplies. Factories operated at full capacity, and workers were recruited to serve in the military or work in munitions factories. The unemployment rate rapidly decreased, and industrial output soared.

The “Keynesian” effect of war—massive government spending stimulating the economy—successfully rebooted the economic machine. Although the reasons are regrettable, war production did indeed end the Great Depression.

Long-term Impact: The Birth of Modern Financial Regulatory Systems

The Great Depression was not just an economic disaster; it also rewrote the global financial rules.

From Laissez-faire to Regulation

The Great Depression exposed the dangers of a completely unregulated financial market. The government's response established a new regulatory framework:

• Deposit Insurance: Ensures that depositors' money is not completely lost in the event of a bank failure.
• Expansion of Central Bank Functions: The central bank becomes the “lender of last resort” and injects liquidity during times of crisis.
• Securities Market Regulation: Prohibit insider trading and fraud, require information disclosure.
• Social Safety Net: Unemployment insurance, pensions, and other programs prevent poverty and social instability.

These systems played a role in subsequent economic crises. For example, although the 2008 financial crisis was severe, its destructive impact was much less than that of the Great Depression due to these protective mechanisms.

The evolution of economic theory

The Great Depression also changed economics. Keynesian economics, which emphasizes government intervention and fiscal stimulus, gradually replaced pure free market thought. This influenced economic policy-making throughout the 20th century.

What can we learn today

The Great Depression may be in the past, but its lessons remain vivid:

1. Systemic risk is very real: When one sector encounters problems, it can ripple through the entire economy like a domino effect.
2. Speculative bubbles are dangerous: Excessive leverage and asset prices detaching from fundamentals can lead to disastrous consequences.
3. Liquidity depletion can be fatal: When no one is willing to provide funding, even healthy businesses can collapse.
4. Government intervention is sometimes necessary: The market sometimes needs external support to restore functionality.
5. The social safety net is very important: Institutional protection is needed to prevent a complete economic collapse.

The Great Depression reminds us that the fragility of financial markets is greater than we imagine. Understanding history can help us participate more cautiously in contemporary financial markets.