Delayed Reaction

When the stock market crashes, and continues falling steeply, no one knows what lies ahead. It's perfectly reasonable to expect a substantial market pullback, after the wild rise, but how long? Caution is in the wind.

If you compare stock prices in 1930 to those in 1928 (instead of the peak year of 1929, which is clearly an abnormal year), the decline is just 3%. So maybe it's just a freak year, without lasting consequences.

A comparison of total economic output for the same two years shows a similar modest decline, of 5%. Based on these two numbers, one could argue that the effects of the great crash are already over. Let the good times resume.
Rebound before the plunge, 1930

  Just a Pause
As 1929 is drawing to a close, people are understandably nervous. But when things seem to be settling back down in 1930, many breathe a sigh of relief.  Just to be safe, however, anxious families are still cutting back on spending, here and there. With sales declining, managers do what they can to protect their businesses. They begin laying off workers.

Renewed Decline, 1932

  Renewed Decline
By the end of 1932, it's apparent that things have definitely not returned to normal. Families which lost their entire income, due to layoffs, have been forced to cut back severely on all spending. There's no choice. This produces a continuing slide in business sales, causing managers to respond with even deeper job cuts. It's a classic vicious cycle. The overall result is a continuing slide in economic health (chart, top left). Production of iron ore, the bedrock of industry, is down an appalling 80% (lower left).


Depth of the Depression, 1933

  Crashing Hard
The future looks bleak, indeed, as America stumbles into its fourth year of decline, in early 1933. In today's modern world, it's difficult to fully grasp what life must have been like during this period. We call a 10% slide in the stock market a 'correction.' A 20% decline is a full-blown 'bear market.' There isn't any term for an 80% plunge in the nation's primary industry, because it never happens. But it does, in 1932. The crash in car sales is also abrupt and dramatic (top left). Something is fundamentally wrong.