The Great Depression: Causes, Crash, and Recovery Policies

Posted on Oct 9, 2025 in Business Administration and Management (BAM)

The Great Depression

US Roots of the Crisis

Problems in the Agrarian Sector

The agrarian sector faced significant challenges, transitioning from cereals to cotton production. Key issues included:

  • Decreased foreign demand and falling prices (due to the recovery of Europe).
  • Internal changes (shifting consumption patterns).
  • High indebtedness in rural areas (mortgages taken out to expand and mechanize crop areas), leading to banking problems and demands for protectionism.

Problems in the Manufacturing Sector

  • Productivity and Production: Increased significantly (+50% 1920–1929), but employment (-6%) and wages did not keep pace, leading to unequal income distribution (10% of families held 86% of savings). However, factors like female labor, lower food prices, and reduced working hours created a feeling of improved living standards.
  • Cartelization: Companies formed cartels, maintaining prices instead of lowering them, resulting in increased benefits.
  • Market Saturation: Production grew faster than consumption. The internal market saturated while exports to Europe decreased due to tariffs.

This saturation led to two successive solutions:

  1. Promotion of sales by installments, significantly increasing family indebtedness.
  2. Paralysis of business investments and the orientation of profits toward banking and the stock exchange (to promote credit to families).

Stock Market Speculation

The acquisition of securities was driven by expectations of future sale, regardless of expected dividends (speculative bubble).

  • High income from large firms released liquidity, which was placed in the stock market due to a lack of productive investment opportunities.
  • Psychological Factors: Following the consolidation of the consumer society of the 1920s, small savers accessed the stock market. Propaganda via radio/media and politicians popularized the idea of “popular capitalism.”

From Stock Market Crash to Economic Depression

  1. Speculative Bubble: The stock index reached a historical maximum (381) on September 19th, falling sharply to 198 by November 13th.
  2. Downfall of the Stock Market: October 24th (“Black Thursday”) and October 29th (“Black Tuesday”) were expressions of the underlying economic crisis, not its primary cause.

Theories on the Transformation of the Crash into Depression

Monetarists
Argue that the monetary policy of the Hoover administration turned the recession into a depression.
Keynesians
Believe that while monetary decisions worsened the crisis, the root causes were real factors, including the international context (capital inflows in the US) and the performance of the gold standard.

Internal Diffusion of the Crisis

The crisis spread internally through interconnected linkages:

Stock Market Crisis (Collapse) → Financial Crisis (Banking Bankruptcies) → Industrial Crisis → Commercial Crisis.

  1. The banking system acted as a transmission band, spreading the crisis to the real economy.
  2. Reduced credit to families led to decreased consumption and falling prices.
  3. Without solid demand and credit, business investment dropped, reducing demand for raw materials.
  4. Generalization of Hardship: This resulted in mass layoffs (unemployment rose from 1.5 million in 1929 to 12.6 million in 1933—a 25% rate), 110,000 firm bankruptcies, 50% reduction in capital formation (disinvestment), stock reductions, industrial prices falling 30%, and agricultural prices falling 50%. Production levels across industrial, agricultural, and commercial sectors reached critical lows.

Ways of Recovery

Common Elements of Recovery Policies

Recovery policies marked a shift away from laissez-faire economics toward economic dirigisme and increased State intervention (economic nationalism, where national recovery preceded international cooperation).

  1. Protectionist Measures: Abandonment of laissez-faire principles.
  2. Monetary Measures: Currency devaluation to increase exports and decrease imports; abandonment of the gold standard.
  3. Social Measures: Contention of unemployment through public works, revision of fiscal policy, and implementation of social security.

National Contrasts: The US “New Deal”

In the US, the “New Deal” (a new pact or program) saw the visible hand of the State replace the invisible hand of the market. This interventionism included five major reformist proposals:

  • Monetary and Financial Policy: Supervision of the banking system, suspension of convertibility, and dollar devaluation to reactivate exports, despite the US holding one-third of global gold reserves and maintaining a positive commercial balance.
  • Budgetary Policy: Public spending increased dramatically from 2% to 50% of GDP.
  • Agrarian Policy: Financing of crops and surplus reduction aimed at recovering agrarian prices; promotion of rural credit (40% of exploitations were mortgaged).
  • Industrial Policy: Specific measures were implemented.
  • Social Policies: Acknowledgment of unions and promotion of collective bargaining.

Change in Economic Policies: A Triple Compromise

The shift in economic policies was the result of a triple compromise:

  1. Doctrinal Shift: Conventional economic doctrines failed to solve the crisis, necessitating new approaches.
  2. Organized Social Pressures and Interests: Great social mobilization occurred amid interwar tension and instability. Financial groups, workers’ organizations, and companies demanded greater participation in income. This change in economic policy was seen as a way to guarantee the survival of the capitalist system within parliamentary democracy.
  3. Ideological and Cultural Conditioning: A change in social perception and sensibility toward the economy occurred—moving from the confidence in enrichment of the 1920s to pessimism and distrust in the market. This included a critical vision of capitalism and its institutions (market, stock market, monopolies). Broad support for Nazism and Fascism demonstrated a regression of faith in capitalist and democratic solutions.