Great Depression

Harvard Business School

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Rev. June 18, 1993

The Great Depression: Causes and Impact (Abridged)

The American Economy in the 1920s

In the early months of 1929 few Americans questioned the strength and vitality of the American economy. After a decade of impressive economic growth, even better times seemed to be in the offing. Such an attitude was supported by the phenomenal performance of the stock market. In February, 1928, stock prices had begun to climb, and with only temporary lapses continued to do so for the next year and a half. The daily number of shares traded on the New York Stock Exchange had averaged between two and three million during most of the Twenties; but in 1928 and early 1929 six, seven, and eight million share days were not uncommon, and the total occasionally topped 12 million. Thousands of Americans were investing for the first time, and the speculative mania was fueled by easy credit offered by brokerage firms (margin rates were often as low as 10%). While a few skeptical economists warned that the boom could not continue, most Americans saw no end to prosperity and nodded with approval in August of 1928 when Secretary of Commerce (and Presidential candidate) Herbert Hoover announced, "We in America are nearer to the final triumph over poverty than ever before in the history of any land." In early October of 1929 few took issue with Irving Fisher, the well-known Yale economist, who announced confidently that "stock prices have reached what looks like a permanently high plateau." The decade of the 1920s began with a brief recession that sharply cut industrial production and investment but had little effect on overall consumption. Prices fell rapidly, but after the recovery there was remarkable price stability between 1921 and 1929. During those years real GNP grew at an average rate of 4.7% per year, and real per capita income for the economy as a whole grew by a total of 28%. However, not every segment of American society...