Economic Tsunami: How to Understand the Evolution of the Great Depression

Overview — A Global Economic Transformation

The Great Depression was the most profound economic disaster of the 20th century, lasting from its outbreak in 1929 until the late 1930s, troubling the world. This crisis triggered a series of chain reactions, including a sharp drop in employment rates, a collapse in industrial output, and a drastic decline in living standards. When the stock market crashed, the banking system collapsed, and international trade dried up, governments around the world were forced to re-examine their economic management systems. The subsequent New Deal reforms and wartime industrial mobilization laid the foundation for gradual economic recovery. This period of history also profoundly influenced the establishment of modern social security systems and financial regulatory frameworks.

Tipping Point: Risk Accumulation Beneath the Facade of Prosperity

The Prelude to the Stock Market Crash of 1929

The Great Depression did not arrive suddenly, but lurked for many years beneath the seemingly prosperous surface. The United States in the 1920s experienced an unprecedented investment boom, with a large number of retail investors flooding into the stock market, many of whom even traded using leveraged funds. Asset prices were severely detached from their actual value, and the market had already become a bubble.

On that Black Tuesday in October 1929, everything collapsed. Investor confidence shattered, a wave of stock sell-offs surged, and the market entered free fall. Millions of Americans lost their life savings in an instant, many of whom were unaware of how much they actually owed in financial leverage.

The domino effect of the banking system

The stock market crash is just the beginning. Depositors are frantically rushing to banks to withdraw their savings, while the banks themselves are trapped in bad loans and stock investments. In the absence of deposit insurance and effective regulation, the failure of one bank often triggers a chain reaction. The entire United States is caught in a vicious cycle of bank runs—bank failures lead to greater panic among depositors, and the panic accelerates the bankruptcy of more banks.

The lending channels have dried up. Companies are unable to obtain working capital for daily operations, let alone expand production. This further depresses economic growth, and the unemployment rate has soared.

Global Transmission of Trade Barriers

The economic crisis did not have to be global, but protectionist policies changed all of that. The Smoot-Hawley Tariff Act (1930) implemented by the United States imposed high tariffs on imported goods in an attempt to protect domestic industries. However, this move angered trade partners. Countries in Europe, Japan, Canada, and others retaliated by imposing tariffs on American goods.

Global trade volume has plummeted dramatically. Export-dependent European economies (many of which are still recovering from World War I) have been severely impacted. Supply chains have broken down, factory orders have vanished, and unemployment has spread across the Atlantic.

spiral decline in demand

As bank failures and unemployment rates rise, consumers and businesses are falling into a panic-saving mode. Everyone is tightening their belts, which directly leads to a sharp decline in demand for goods. Factories are reducing production or even closing due to poor sales, further exacerbating unemployment. Those who are unemployed are even less able to consume, and demand continues to decline. This creates a vicious cycle that is difficult to break.

Social Cost: The Life Dilemmas Behind the Digital

Digital Speaks: Unemployment and Poverty

In some countries, the unemployment rate has reached as high as 25%. In industrialized nations like the United States and Germany, one in four people is unemployed. Homeless individuals are found on city streets, and long lines at food banks have become a daily sight. Farmers are going bankrupt due to the collapse of agricultural product prices, and urban workers have lost their wage income.

Families are destroyed. The position of men as traditional economic pillars is shaken, and many feel ashamed for being unable to support their families. Children suffer from malnutrition and education is interrupted. Medical services are also hindered due to families' inability to pay.

significant corporate downsizing

From retailers to heavy industry, from financial institutions to agricultural enterprises, thousands of companies have gone bankrupt in just a few years. Small shops have closed, factories have shut down, and every link in the supply chain has come to a standstill. The economic ecosystem of local communities has collapsed.

Political and social turmoil

Economic despair has given rise to political radicalism. Some countries have witnessed the rise of extreme movements—fascism gaining support in Europe, with many people turning to seek strong leaders who promise to restore order and prosperity. Democratic systems are facing challenges in certain places, while authoritarian regimes are seizing the opportunity to expand their influence. Social class conflicts have intensified, and revolutionary ideas have found space for dissemination.

The Path to Breakthrough: A New Paradigm of National Intervention

The experiment of the new policy

President Franklin D. Roosevelt recognized that the market's self-regulation had failed and that government intervention was necessary. He introduced a series of reforms known as the “New Deal.” These policies included large-scale public works programs (such as building dams and paving roads) to create temporary job opportunities for the unemployed. The government also established new regulatory agencies to reform the banking system and stock market, restoring investor confidence.

Unemployment insurance, pension plans, and other social security systems have emerged. These innovations were radical at the time and represented a fundamental shift in the role of government—from a passive night watchman to an active economic manager and social protector. Other developed countries also followed the example of the United States and launched their own social security programs.

Turning Point of War Production

The economic recovery is not yet complete, but the arrival of World War II changed the situation. The warring nations began to invest heavily in military industry and infrastructure construction. Factories operated at full capacity, producing weapons, equipment, and supplies for the war. The unemployment issue was quickly resolved through wartime mobilization—millions were drafted into the military or entered war-related industries.

Although this is not a recovery plan for peacetime, the recovery of industrial capacity and the rise in employment mark the true end of the Great Depression. After the war, the economic systems of many countries were rebuilt, and a new international economic order was established.

Historical Heritage: Institutional Innovation and Policy Reflection

The Great Depression left a profound institutional legacy. To prevent similar crises from occurring again, countries established the following protective mechanisms:

Financial Regulatory Framework: The government has begun to regulate the banking industry and has established a deposit insurance system to prevent systemic risks caused by bank runs.

Social Safety Net: Unemployment insurance, pensions, and welfare programs form the foundation of the modern welfare state, ensuring basic living security during economic crises.

Antitrust and Market Regulation: Stock exchanges are subject to stricter regulation, prohibiting many speculative behaviors that lead to the formation of bubbles.

Macroeconomic Policy Tools: The government has learned to use fiscal spending and monetary policy to stabilize the economic cycle.

From now on, the level of government intervention in the economy has significantly increased in various countries. The past laissez-faire approach of “letting things take their course” has been abandoned, replaced by a more proactive macroeconomic management.

Conclusion

The Great Depression was a disaster that rewritten the modern economic system. It demonstrated how fragile an unregulated financial market and an economy lacking social security can be. Although nearly a century has passed, this history still provides valuable lessons for contemporary decision-makers. Whenever the modern economy faces new challenges, people always look back at the Great Depression and think about how to avoid repeating the same mistakes. This history reminds us that prosperity and recession can switch very quickly, and only by establishing sound systems and regulatory frameworks can we protect the economy from systemic risks.