Recovery from Great Depression
The Great Depression was a lengthy economic downturn which came after an initial stock market crash in 1929.
The stocks of banks and of public utility holding companies--two sectors with pending "top-down" regulation allowing for much graft--had shot up in price in 1929, due to insiders trading on the information that those stock prices will be forced up even further (by future regulatory intervention) [1].
To get in on the new, government-backed "get-rich-quick" scheme, investors engaged in Ponzi borrowing--buying stocks on margin from a broker and sometimes only paying 10% of the stock price.
The price-earnings ratio on the bank stocks and public utility holding company stocks exceeded 60--meaning that, at past earnings, you'd have to hold the stock 60 years to cover the price you paid to buy it in the first place.
Relatively safe corporate bonds of the time were yielding 5-6% a year, so there was no logical reason to invest in stocks with P/E ratios so high.
Question: Who invests in something which takes almost an entire lifetime to pay itself off?
Answer: Someone with "inside knowledge" that it will NOT take an entire lifetime to get your money back (ie, someone who knows the government will be forcing the prices higher, so that you can cash in, early and often).
It was government intervention which caused the stock market crash of 1929, and it was further government intervention which lengthened the recovery phase (ie, which "caused" the Great Depression).
Burton Fulsom, Jr.--on page 248 of his book, New Deal or Raw Deal [2]--cites how people were polled in 1939 and again in 1945, after FDR died. In 1939, over twice the respondents said that FDR's New Deal interventionary stance was hurting business prospects (as those answering that it wasn't).
In mid-1945, eight times as many people said Truman will be better for the economy than FDR--as there would be less business uncertainty, so that prospects would open up. Confirming this sentiment, data on private domestic investment [3,4] shows that US recovery began just a few years after WWII ended.
As you can see, investment recovery began after the government stopped spending so much money on New Deal programs and on WWII. This investment recovery of the late 1940s then led the way to a recovery in the stock market by the middle-to-late 1950s [5,6]
It's important to remember that the free market didn't cause the crash in the first place (it was due to inside knowledge regarding government intervention, instead), and it is also important to remember that government spending didn't affect a recovery--and that we only fully recovered when government "stopped" spending so much on the New Deal and on WWII.
Footnote
--------
Check the P/E ratios on National Bank of New York (bank) and also on American Power & Light (public utility). Preliminary research indicates they were over 100 (over 100 years to get your money back from investing in them).
The public utility stocks mentioned in the New York Times article of 3 Feb 1929 had already went up by almost $3 billion by January 1929.
If they rose another $3 billion throughout 1929, and bank stocks rose the same--that's $12 billion in "under-fundamentals/over-valuation" (80% of the losses from Black Thursday to Black Tuesday).
The January gain alone, annualized, represents public utility market capitalization growing by $12 billion/yr in capital gain valuation--or 14% of the entire stock market, per year.
If one single kind of stock is, itself, adding 14% to the entire market (overall) growth each year, you're overheating. Imagine a world with just 7 stocks, each lifting total market capitalization by 14% a year--overall growth is 100% a year (it takes just one year to double your money in the market).
Now try to imagine that world not overheating--where prices don't soar past fundamentals. You can't, can you?
--------
Reference
[1] [New York Times story about how public utility stocks seemed to have "inside-traders" who had got in early, knowing the stock would later be forced to rise, by government price controls] New York Times online. https://www.nytimes.com/1929/02/03/archives/stock-of-utilities-continue-to-soar-gain-of-943000000-added-in.html. Quote:
"STOCK OF UTILITIES CONTINUE TO SOAR; Gain of $943,000,000 Added in January to $1,780,000,000 Made Last Year.
The rise of public utility stocks that has taken place since the beginning of 1929 affords some interesting contracts with the advance in such issues during 1928, which was of substantial proportions."
[2] Burton W. Folsom, Jr. (2008). New Deal or Raw Deal? New York, NY: Threshold Editions.
[3] U.S. Bureau of Economic Analysis, Gross Private Domestic Investment [GPDIA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GPDIA
[4] U.S. Bureau of Economic Analysis, Gross Domestic Product [GDPA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPA
[5] National Bureau of Economic Research, Dow-Jones Industrial Stock Price Index for United States [M1109BUSM293NNBR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M1109BUSM293NNBR
[6] U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCNS
Image Attribution
Page URL: https://commons.wikimedia.org/wiki/File:American_union_bank.gif
Attribution: This work is in the public domain in the United States because it is a work prepared by an officer or employee of the United States Government as part of that person’s official duties under the terms of Title 17, Chapter 1, Section 105 of the US Code.