11: The Crash


The Great Depression would have many causes, this episode discusses two of them.



  • China During the Great Depression: Market, State, and the World Economy, 1929-1937 by Tomoko Shiroyama
  • Germany and the Great Depression by Dieter Petzina
  • The Global Impact of the Great Depression: 1929-1939 by Dietmar Rothermund
  • Japan and World Depression: Then and Now Edited By Ronald Dore and Radha Sinha
  • The Failure of Economic Diplomacy: Britain, Germany, France and the United States 1931-36 by Patricia Clavin
  • The Forgotten Man by Amity Shales
  • The Great Crash of 1929 by John Kenneth Galbraith
  • The Great Depression in Europe, 1929-1939 by Patricia Clavin
  • The Politics of Depression in France 1923-1936 by Julian Jackson
  • The Slump: Britain and the Great Depression by John Stevenson and Chris Cook
  • The World in Depression 1929-1939 by Charles Kindleberger
  • Unemployment and the Great Depression in Weimar Germany Edited By Peter D. Stachura
  • The Gold Standard and the Great Depression by Barry Eichengreen and Peter Temin
  • Life Expectancy during the Great Depression in Eleven European Countries by Tim A. Bruckner, Andrew Noymer, and Ralph A. Catalano
  • The Origins and Nature of the Great Slump Revisited by Barry Eichengreen
  • Socialism and Wages in the Recovery from the Great Depression in the United States and Germany by Peter Temin


Hello everyone and welcome to History of the Second World War Episode 11 The Great Depression Part 1 - The Crash. This week a big thank you goes out to Ken, Phil, and Doug who have chosen to support this podcast on Patreon where they now get access to special ad-free versions of all of these episodes plus special members only episodes released once a month, like the one that released just a few days ago which was a deep dive into the Washington Naval Conference which took place in Washington D.C. in late 1921. If that sounds interesting to you head on over to historyofthesecondworldwar.com/members to find out more information. In the early 1930s a wave of economic recessions, contractions, and depressions would effect many nations around the world. This depression, which would later become known as the Great Depression, would have a wide variety of causes and consequences. During the depression international trade would drop dramatically, and nations would take drastic economic actions to try and safeguard their own national economies and to try and ease the economic hardship experienced by their citizens. There had been depressions before, like in 1890 and 1907, however none of them had ever been as pervasive and seemingly unstoppable. In this episode we will discuss two of the contributing factors to the depression, although I hesitate to call them causes because for an international event like the Great Depression specific causation is very hard to prove and instead it is more likely that a huge variety of interconnected events came together to cause the Great Depression. The first of these contributing factors that we will discuss was the emphasis that all of the major economies of the world put on maintaining the Gold Standard. The Gold Standard was seen as a foundational concept before the First World War, and after the war was over many economists began to push for a return to the gold standard, which many felt was the only way to guarantee economic stability. The second contributing factor was the stock market crash in the United States in 1929. This is probably the most well known event that preceded the Great Depression, although there is some disagreement among historians and economics about whether or not it was the cause of the depression itself. Even if the crash did not cause the depression, it certainly was an event that shook the confidence of economic leaders in one of the world’s largest economies. Given the position of the United States in 1939, and both its import and export numbers, any large disruptions within its economy were bound to have ripple effects around the globe. However, today we will be focusing strictly on events in 1929 and the massive drops that would be experienced in the New York Stock Exchange during that year. Most of the discussion of the aftermath of those drops, and then the Great Depression that followed, will be a topic for the next three episodes of the podcast.

The first item we have to discuss today, would be very important to the governments and economic leaders in the 1920s and its demise in the 1930s would be seen as important, and that is the Gold Standard. The Gold Standard is a relatively simple concept, especially when compared to most macro-economic theory, essentially it was the idea that all nations would have their national currencies, the pound, franc, dollar, etc. set at a fixed rate of exchange to gold. Along with this, there was the expectation that a nation would keep the appropriate amount of gold as backing for its currency, and so the amount of money that the nation would have in circulation at any one time would be dictated by how much gold it had access to. So just as an example maybe the French franc would be set at 1 franc per ounce of gold, and the British pound would be set at 2 pounds per ounce of gold. When this is done, because the exchange rate of currencies was a fixed value based on a known currency of gold, there was no uncertainty for any party about what the value of a foreign currency was or how and when it could be converted between currencies. This arrangement was a very important aspect of international finance up to the First World War. During the century before that war the vast majority of international trade occurred between nations and empires that held to, and strongly believed in, the gold standard. This was also a period of relative economic stability, and it was generally a very lucrative period for Europe, which was the driver of most international trade at the time. Part of this stability, and in some ways a restriction of the gold standard, was that most nations were forced into a measured and conservative economic choices. However, they were guaranteed stability to make these choices due to the massive inflows of money from worldwide empires. For example the Bank of England was seen as kind of the rock upon which a lot of this economic stability was built because it had the capital available to act as a lender of last resort, even to other nations. There were still economic downturns, but when these occurred there was often enough international cooperation and the largest economies had the ability to take the actions necessary to contain and then resolve most economic issues around the world. This stability was often attributed to the Gold Standard itself, and it was seen as a very important policy by politicians, economists, and even private citizens. One of its features, or drawbacks depending on your view, was that it also placed tight constraints on the actions that a government could take in response to negative economic trends. This was caused by the fixed exchange rate between currencies, which meant that there was little that one nation could do to isolate its economy from events in other nations. When things were good this had a tendency to cause positive effects to spread, but when the worst happened there was little that could be done within the constraints of the Gold Standard.

All of this theory and practice of the gold standard occurred before the First World War. With the cost of the war, and its disruption of international economic systems around the world, all of the major participants in the war broke away from the gold standard early in the conflict. This was essentially mandatory, and it gave the nations involved the economic flexibility to finance the war. After the war was over many nations experienced a short economic boom, booms that were very strong in the British Empire and France as consumer demands which had been held down by the war blossomed and there were massive amounts of government spending to repair and replace infrastructure and other spending was done on things neglected during the war. The years after the war would also see massive, and sometimes crippling, inflation. Sometimes this would manifest as hyperinflation, like in Weimar Germany, but almost every nation in Europe experienced large inflation rates. The inflation rate in Britain in 1919 was 40%, and in Eastern Europe inflation rates in the thousands of percent were not unheard of. Such massive inflation wiped out savings and had drastic effects on economies, and was a frequent target for people to complain about and try to find a solution to. One of the consequences was a general desire to return to the time before the war, when stability and economic prosperity were more prevalent. The Gold Standard was seen as an important part of this stability, and public pressure to return to the standard began to increase. During this period the discussion about a return was not seen as an if, but instead a when, nations would begin rejoining the standard. However, a return to the gold standard was not as simple as just flipping switch. There were many important decisions that had to be made, the most important of which was the rate between the currency and gold that a nation would choose as its exchange rate. If a currency was overvalued, as in each unit of currency held too much gold value, then it was often difficult to export goods, because for other nations those goods would be very expensive, however, important might be much cheaper. If a currency was undervalued, imports were expensive, but exports were very cheap on the international market. Some nations would overvalue, like the British, and suddenly imports were very cheap, which sounds good, but it also made it very challenging for British goods to compete on the international market. It also made it challenging for domestic goods to compete with some imported items, because they were very cheap. Obviously the answer to this problem is to just pick the correct rate, which in and of itself was not easy, but there was also a tendency to make the rate decision with considerations beyond the strict economic situation. There was a prestige associated with having a strong currency, which was one of the reasons that the British would overvalue, there was also a trench among many nations to return directly to the prewar exchange standard, which was in retrospect a very bad idea due to the differences in economic realities from before and after the war. Other nations like France and Belgium made what would be better choices when they re-engaged with the Gold Standard, and their experiences during the 1920s and 30s would make it clear that they made the correct choice, which was in some ways only possible because so many other nations made mistakes.

After nations had returned to the Gold Standard, there were certain expectations in place that should have regulated any imbalances. For example two of the largest economies, France and the United States, had both undervalued their currencies. This meant that gold started absolutely pouring into the banks. As part of the gold standard the expectation was that in such a situation the nation would lower interest rates so that the supply of their currency increased, which would eventually allow for some of that gold to flow back out of their banks and into other nations. However, instead of doing this they instead just kept the gold, and stashed it away in reserves. This process was called gold sterilization, and it involved a nation capturing the gold and instead of printing money to represent that gold in the world economy, the gold was instead just hoarded in reserves. When this was done on a small scale it really did not cause too much harm, however by the end of the 1920s between France and the United States they had about 1/2 the entire world gold reserve stashed away, much of it having been sterilized. During good economic times this might have been a manageable problem, if not ideal, but in other nations there were monetary shortages, because there simply was not enough gold to go around. It made the economies very brittle, and if there was a sudden economic downturn there were essentially unable, within the confines of the Gold Standard, to react in an appropriate manner. One of the more interesting parts of the Gold Standard saga, is that France who was probably the most vocal and adamant believer in the gold standard, by its own actions which were contrary to the expectations of that system, caused other nations to abandon it.

Many of the problems that the Gold Standard created, especially around rising interesting rates in some nations as they were forced into deflationary policies, caused the greatest hardship among those sections of society least able to bear them. For example, rural peasants and farmers were put in a very challenging position whenever interest rates increased due to the relatively large amounts of debt among that section of the population. In theory these higher interest rates would have been counteracted by the actions of nations with low interest rates, which should have been purchasing a lot more goods from other nations. However, many of those nations began to put in place economic protectionist measures to protect their own domestic production. The simplest of these measures were new tariffs. This protectionism was a political necessity for many governments in Europe as they tried to combat the high rates of unemployment and the agricultural challenges that their nations were faced with. These measures would help alleviate the problems in some nations, but just made it worse in others as some of the export markets that were previously available evaporated behind tariff barriers.

All of these problems would be made exponentially worse when the depression started to move around the world in 1930. The Gold Standard made it basically impossible for governments to insulate their nations from economic problems elsewhere in the world, thus when there was a massive destabilizing event in a nation like the United States, say a stock market crash, the resulting economic issues would be felt by every nation. Regardless of these problems there would always be those who believed that the gold standard was still the answer, and no matter how much deflation was necessary or how much economic hardship it caused for the average citizen, it was the only way that a nation’s economy should work. However, looking back from after the depression it is pretty clear that the Gold Standard, the faith placed in it, and its inherent problems, were some of the causes of the economic instability of this period. What seems clear is that the gold standard did not create the stability before the First World War, as many economists believed. Instead the stability, and relative economic prosperity of that period had been what had allowed the Gold Standard to function at all. When that standard was then applied to the economic uncertainty of the post-war years, instead of a return to stability, it just exacerbated that uncertainty, and caused even more problems. Eventually many nations would come to this conclusion as well, and one of the themes of the early years of the depression was nation after nation abandoning the gold standard altogether.

For the New York Stock Exchange the 1920s were a very good time. From 1920 until early 1929 the market saw almost constant gains month after month and year after year. During the early 1920s these increases seemed pretty natural, or at least what we would consider to be pretty normal today. Corporate profits were generally increasing as the world began to recover from the war, a war which had been relatively good for the United States on the economic front. However, in the late 1920s something started to change, and instead of being pretty natural increases the stock market began to increase very rapidly, without the economic activity to back up those increases, it was a stock boost based primarily on speculation of future stock increases. There were still brief dropped, but these were always fleeting and the market generally recovered in only a few days. In the second half of 1928 the market constantly was hitting new highs, and this trend continued into 1929. As with any market there were many people who wanted to stock market to continue to increase in size in perpetuity, that is how people made money. However, there were limits to how much money could be put in, and how many buyers there were that could and would continue to buy. During 1928 and into 1929 there was one important aspect that had the effect of providing a constant stream of new money to be used by speculators. In January 1929 the rate at which the Federal Reserve would lend money to banks stood at 5%. These banks could then loan that money out to individuals and businesses for the purpose of stock market investment at interest rates as high as 12%. To be clear here, these are businesses and individuals who are taking out loans from the bank at up to 12% interest to then put into the stock market because it was rising at more than 12%. This had the effect of making the entire structure of the speculation boom incredibly brittle. It also meant that there were a lot of businesses and a lot of people who wanted, basically needed the stock market to continue to boom. Then in January 1929 there was a day when there were some serious drops. This was the first major market stumble in many months, and it saw huge swings in the market, there were points when certain stocks were down upwards of 30%, although they would not end the day at that level. This would also be the first time that the Stock Exchange saw over 8 million shares trade hands on a single day. It was a worrying moment, but it was only one day and the recovery started the very next day. However, it would set a trend for the first few months of the year, where instead of always going up, instead the market had some up and down swings, but the trend was still in the positive. Throughout the spring and summer this continued. In June the market reached new heights, and from the end of May until August many stocks would increase more than they had in all of 1928. Things were looking very good, and even if there had been a few missteps during the first 9 months of the year they were mostly forgotten.

On September 5th the Time Industrial Average, and with it the Stock Exchange, dropped significantly. Trade volume quickly shot up to above 5.5 million as some people tried to get out, but then between that Thursday and the weekend the situation stabilized. Throughout September the markets were tepid, and a very gentle downward trend developed as October began. Then on October 21st over 6 million shares were traded, the third highest amount in the exchange’s history, and once again they were all moving the market down. Just in the last hour of the day 2.6 million shares were traded, a massive amount and they represented a sudden drop right before the markets closed. At the end of the day the Times Industrial average was down to its level from June, before many months of rapid increases. There is a very important facet to these days of very high trade volume, which is also the reason I have focused so heavily on trade volume up to this point. In the modern age stock trading all happens electronically, all done by computers at the speed of light in fiber optic cables. This means that billions of shares can be traded very day and people do not really bat an eyelash. However in 1929 it was a very different story. Trades were done manually, and the price of stocks was recorded on the ticker, which recorded all transactions done throughout the day. But, on these days of high trade volume the ticker could not keep up with the number of transactions that were happening. This created the very real possibility that it could take hours for all of the trades from the day to resolve, and the ticker would be hours behind for the entire day. Traders and businesses could go bankrupt and not know it for hours as prices dropped precipitously. This created an atmosphere of fear and uncertainty and when a market becomes volatile uncertainty was the worst possible thing that could happen. On October 21st over 6 million shares were traded and that uncertainty began to hit a breaking point. On October 24th the true panic began as almost 13 million shares were traded. There were often very few buyers, and instead the prices just kept dropping because there was nobody there to scoop them up. Accounts began to hit bust with lightning speed, even if some of them did not know it until after 7PM when the ticker finally stopped running for the day. It would have been even worse, except for the fact that at noon a group of bankers had met at the J.P. Morgan offices in New York and they quickly announced news that they were planning to pool their resources to try and support eh market. This made the afternoon slightly less chaotic, but there were still countless speculators that found out by the evening that they were being asked for money that they simply did not have. An important feature to remember is that many investors were financing their speculation on credit, on those loans that the big banks were handing out from loans they had received from the Federal Reserve. For people using this money for speculation they did not even need the market to be dropping to be in trouble, they were already losing money if it was just growing less quickly. Soon profits began to evaporate, then losses mounted and shares had to be sold no matter what the cost was to try and maintain liquidity. This caused the prices to drop further, which caused other investors to have to do the same, and so it would go on cascading from one investor and investment group to another.

High trade volume continued into Friday and Saturday, however during these two days the prices mostly just stayed even. Then again on Monday October 28th over 9 millions shares were traded, and at a catastrophic loss. This time, the bankers had a meeting at 4:30PM, which lasted for two hours and had a very different result. At 6:30PM a statement was released that made it clear that the banks no longer felt the responsibility to prop up prices at any specific level. This announcement, when combined with the previous week of activity, saw the bottom drop out of whatever confidence there was in the market. On Tuesday, October 29th, which would go down in history as Black Tuesday the markets opened to an absolute fire sale. For the first half of an hour the market was on pace to reach 33 million in share volume, which probably would have left the ticker running all night. But the pace slowed after the first initial onrush, if only because nobody really knew what was happening, and the final figure for the day was just over 16.4 million. One of the really important features of this day, one of the reasons that the share volume was so high, was that the people unloading on October 29th were the big players. Individuals, small businesses, and those without solid bank rolls had already been cleared out because they had lost so much money so rapidly that they were out of the market. The 29th was different, the 29th cleaned out the big fish, the wealthy individuals, the well funded brokerages. This is why the share trade volume so was much higher on the 29th than any other day, because the big fish were selling very large blocks of stocks not just a few here and there. The drops would continue after the 29th, and throughout November they would just keep on going. By the middle of November the market was back to where it had been in early 1928, before a year of massive growth. From the period of September 3 to November 13th the Times Industrial average lost half of its value, there would be a slight recovery during the spring of 1930, but it would soon begin a slow and steady decline that would not end until 1932. Just to mention a few specific examples of what happened during this period, from the period of September 3 1929, the height of the boom, to the summer of 1932 at the low point US Steel went from 262 dollars a share to 22, General Motors from 73 to 8, Montgomery Ward from 138 to 4. And those numbers, those massive drops were not in anyway exceptional, that is just what happened to a lot of stocks during this period.

There was no way of getting around it, the stock market crash had the effect of removing a huge amount of wealth from the stock market, and it caused many individuals and businesses, both well meaning and speculators, to go bust. The effects of the crash were not limitless though, not everybody had money in the stock market in 1929 it is therefore important not to overstate how much the normal American was effected by the actual crash the far more damaging effects for most individuals would only come later, as the effects of the huge drop in stock value began to cascade out into businesses, banks, and other important pieces of the economy. These effects will be one of our topics for next episode.