Great Depression

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Supplements to this article include an annotated chronology of the main events in the countries affected  ; a discussion of economic theories concerning causes and remedies; and more detailed accounts of developments in the United States, Germany, the United Kingdom and Japan.

The Great Depression was the longest and deepest downturn in economic activity in modern history. It has had a profound influence upon economic theory, the practice of economic management, and social policy.

Following the Crash of 1929, the United States experienced a deep decline in prices and production. Businesses and banks closed, people lost their jobs, homes, and savings; and in the absence of welfare programs, many depended on charity to survive. At its worst, in 1933, U.S. unemployment reached a poverty-inducing 25 per cent of the working population, and in the ensuing recovery, it did not fall below 15 per cent until the beginning of the Second World War.

At about the same time, the German and Canadian economies suffered downturns of comparable severity. The British economy experienced a substantial though comparatively short-lived downturn. The French economy suffered a modest but prolonged decline. In Japan, the downturn was also modest but shorter. Most other industrialized countries and their suppliers experienced downturns in economic activity that caused hardship and political unrest.

Subsequent investigations have attempted to discover the causes for the length and severity of the depression, its global scope, and the effectiveness of various governmental policies. The answers to those problems remain incomplete but there is a limited consensus among economists concerning its principal features and concerning the appropriate policy response to a threat of a comparable downturn.

Supplementary material

The following supplementary material is available:


In the United States, the Great Depression [1] began in 1929, reached its deepest point in 1933 and lasted until 1939. It was accompanied during that period by a stock change crash, a series of banking crises, a credit crunch, and a severe deflation. It resulted in a massive loss of output, persistently high unemployment and widespread deprivation. A similar sequence of events occurred at about the same time in Germany, downturns of differing severity also occurred in many industrialized and commodity-producing currencies, and there was a general collapse in international trade. Some years after its outset there was a general return to previous levels of economic activity, but the economies of the United States and of several other countries did not fully recover until the outbreak of the Second World War.

The resulting hardships had significant political repercussions, including the replacement of existing national governments—notably in Germany—and a deterioration of international relations, but besides causing widespread human suffering, the great depression stimulated major investigations into its causes; gave birth to macroeconomics as a distinct field of study, and the genesis of the rival theories Keynesianism and Monetarism; and led to the systematic collection and publication of economic statistics. It has exerted a major influence upon political beliefs and ideologies and despite continuing controversy, it has generated major changes in the consensus views of economists and politicians. It has also led to international agreements on economic issues, such as that reached at the Bretton Woods Conference, and to the creation of instruments of international cooperation such as the Bank for International Settlements, the International Monetary Fund, the World Bank and the World Trade Organisation.

The development of the depression

A central cause of the Great Depression were the economic consequences of the Treaty of Versailles. The post-World-War-One recovery required a long and difficult period of adaptation for its European participants. After a turbulent post-war period during which there were deep but short-lived recessions on both sides of the Atlantic, there was renewed economic growth in the United States and Europe. The UK and France had incurred huge wartime debts to the United States and Germany was faced with crippling reparations payments. Suspension of war debt repayment was dismissed by the U.S. and the UK and France had few other easy alternatives than squeezing Germany for reparations. When Germany attempted to meet the reparations schedule, beginning in 1922, it's economy collapsed within months and was in technical payment default by January 1923. This collapse precipitated the Ruhr Crisis, a general strike in Germany, and hyperinflation. The U.S. attempted to stabilize the European flow of capital through the Dawes Plan by which the U.S. essentially bailed out the German economy. With the U.S. and European economies now closely tied together, however, the Dawes Plan (and its modification, the Young Plan) guaranteed that any downturn in the U.S. economy would be quickly exported to Europe.[2]

The return to the gold standard in the following decade, after its wartime suspension, had involved further disruption. The United Kingdom rejoined the gold standard in 1925 at an exchange rate that overvalued the pound, and France rejoined it in 1928 at an exchange rate that undervalued the franc. There followed a series of British trade deficits and gold outflows and a series of French trade surpluses and gold inflows. By 1927, the Bank of England's gold reserves were running so low that its governor persuaded the Federal Reserve Bank of New York to lower its discount rate.

The downturns in activity that led to the Great Depression began at the end of the 1920s following restrictionary policies in the United States and in Germany prompted by the wish to restrain stock exchange speculation and by concern about gold outflows. Both downturns were comparatively mild at first, but they became exceptionally severe in both countries following the stock exchange crash of 1929 and the US banking crises of 1931-33. There were depressions of somewhat smaller magnitude in the UK, France and Scandinavia, and the major price reductions that occurred in the international commodity markets led to severe downturns in the commodity-producing economies of Australia and South America.

In the United States, the recovery began in 1933 after the election of a new administration under the Presidency of Franklin D. Roosevelt and the launching of the New Deal. In 1993, the President suspended the gold standard, imposed a brief banking "holiday", sponsored the insurance of bank deposits, and provided the banks with substantial financial assistance. The Federal Reserve system began to expand the monetary base, and there followed a limited and delayed increase in the money supply [3]. Confidence in the banking system returned, but the credit shortage was only very gradually relieved, and small firms continued to experience credit difficulties for several years after 1933. The New Deal also involved a modest fiscal stimulus [4] and introduced a programme of public works known as the New Deal. There was a slow recovery in output, interrupted by a brief downturn in the Recession of 1937, but it although GDP had returned to its long-term trend by the end of 1938 unemployment continued for some time at an above-trend level .

In Germany, the Nazi government under the Chancellorship of Adolf Hitler repudiated all international obligations and adopted a varied programme of reflation and rearmament, which was immediately effective in reducing unemployment and restoring economic growth.

Recovery from the recession began in 1931 in the UK, Scandinavia and Japan [5] following currency devaluations made possible by departures from the gold standard. Recovery did not begin in France until its departure from the gold standard in 1936.


The question of causation

There have been many attempts to establish the cause of the depression and to explain its unprecedented depth and duration - but no definitive explanation has emerged. Because of the complexity of the interactions among the factors that were involved it now seems that any search for a single cause is likely to be confusing and inconclusive. For example, although the popular view that it was initiated by the stock market crash can be shown to be mistaken [6], the crash must be presumed to have contributed to its subsequent severity. Similarly, it can reasonably be presumed that although the 1931 banking panic could not have started the great depression, there is no doubt that it intensified its subsequent severity. In what follows, designation "contributory factor" rather than a "cause" is not intended to suggest that the factor in question is of lesser importance.

Rival Hypotheses

Among rival explanations is the belief that the Great Depression was started by the bursting of a speculative bubble on the New York stock exchange and that it spread abroad from the United States, causing the collapse of a hitherto well-functioning system of international finance. Those beliefs have been challenged by the eminent economists who have studied the evidence. According to Ben Bernanke there is a consensus that the picture of a stock exchange bubble that had been verbally painted by John Kenneth Galbraith and others is mistaken, and that the stock prices did not at that time overstate the value of the issuing companies [7]. Moreover, neither John Maynard Keynes nor Milton Friedman considered the stock exchange crash to have started the downturn, although they both recognised that it must have contributed to its severity. The belief that the depression originated uniquely in the United States has been challenged by Peter Temin, who has identified evidence that it had an independent origin in Germany, and has suggested that it developed jointly from both origins. The belief that the depression put an end to what had been a stable international financial system has been challenged by Charles Kindleberger, who argues that, although the gold standard system had worked well before the first world war, its post-war version had a bias toward deflation that made it inherently unstable. Peter Temin has argued that the belief that the depression had been intensified by economic nationalism should be qualified by the consideration that the "trade war" could not have had much effect upon the United States because international trade had occupied too small a part in its economy; and the belief that trading had been hampered by the competitive devaluation of national currencies has been challenged by Barry Eichengreen on the basis of evidence that it had contributed to world output.

The belief that policy mistakes had contributed to the disaster is generally accepted by economists, but there is disagreement among them concerning the nature of those mistakes, and concerning the economists' beliefs upon which they had been founded. The belief that had been current at the time that economic instability results from government attempts at regulation and that action to counter recessions makes them worse, is not widely accepted nowadays, except by some economists of the Austrian School, and there are few who now believe that maintenance of a balanced budget and adherence to the gold standard are essential for the maintenance of price stability. The principle remaining controversy concerns the roles of fiscal and monetary policy. In their time, Friedrich Hayek had laid the entire blame for the depression upon the Federal Reserve's 1924 monetary expansion, whereas John Maynard Keynes and Milton Friedman had held its 1928 monetary contraction to have been largely responsible. Milton Friedman blamed the Federal Reserve for continuing to restrict the money supply after the depression had started, whereas John Maynard Keynes had warned President Roosevelt against reliance upon expanding the money supply and voiced concern about what he considered to be the President's reluctance to introduce an adequate fiscal expansion.


Among the observable consequences of the Great Depression were personal losses of jobs, savings and homes, and there were reports that in Germany and the United States, in particular, that was accompanied by hunger, ill-health, and even starvation. It must also have had effects upon social attitudes that were not observable, except indirectly in the form of occasional riots and hunger marches. It would be rash to attribute the political upheavals of the 1930s exclusively to the widespread personal hardships that were being suffered at the time, but an association between those developments was certainly evident. Political organisations that offered relief by means of increased social intervention in the conduct of industry and commerce gained power at the expense of the mainly laissez-faire governments of the 1920s. In Germany, Italy and Japan the gains went to totalitarians, in France to social democrats, and in the United States to Roosevelt's New Deal Democrats. The chief exception was the UK, where the social democrat Labour Party was displaced by a conventionally conservative coalition.

In contrast to the reported tendency toward increased social cohesion of the 1930s [8] within countries, it was a period of strained relations and intensified rivalry between countries.


  1. The editors of the British journal The Economist have suggested that the term depression is conventionally applied to a decline in real GDP that exceeds 10%, or one that lasts more than three years. [1]. But The Economist also notes that prior to the Great Depression any economic recession was called a "depression." Economists since 1929 have used the term "recession" "to avoid stirring up nasty memories."
  2. Daniel Costillo: German Economy in the 1920s 2003. Editor's note: Costillo may have made the argument that Germany was attempting to reflate its economy in 1922 which precipitated the German hyperinflation. Someone needs to verify the applicability of Costillo as a source for this paragraph.
  3. See the statistics on the tutorials page of the article on the Great Depression in the United States [2]
  4. The fiscal stimulus is described as modest, because it only amounted to about 3 per cent of gdp [3] in face of a 40 per cent downturn in activity.
  5. Summaries of the recoveries of countries other than the United States are available on the Addendum subpage
  6. Because the economic downturn started before the crash - see the paragraph on the crash on the tutorials subpage
  7. For the evidence supporting the contention that stocks were not overvalued, see the article on the Crash of 1929
  8. Matthew Bruccoli and Richard Layman (eds): 1930's Lifestyles and Social Trends: The Red Decade: Solidarity and Individualism in the 1930s., 2006