Great Depression

Updated on April 4, 2024
Article byPrakhar Gajendrakar
Edited byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Great Depression Definition

The Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939. The Federal Reserve’s failure to regulate the money supply, credit availability and interest rates also contributed to this worldwide economic catastrophe.

The economic downturn severely affected industries in the West and around the world. Global GDP decreased due to reduced consumption, erroneous government policies, and the gold standardGold StandardThe gold standard was a monetary term used when gold exchange was used instead of paper currency.read more. Eventually, nations faced extreme unemployment and deflationDeflationDeflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy.read more. However, the introduction of the New Deal and World War II helped the world economy recover from it.

Great Depression of 1929

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Key Takeaways

  • The Great Depression was the most severe financial crisis in modern history. It began on October 29, 1929, with the Wall Street Crash in the United States that continued for ten years until 1939.
  • The failure of the Federal Reserve to regulate the money supply, credit availability, and interest rates is considered the leading cause of the global economic meltdown.
  • During the economic depression, the unemployment rate in the U.S. rose from 3% to 25%, affecting about 15 million Americans and halving the national GDP.
  • The rest of the world also suffered from the economic crisis due to the gold standard, reduced consumption, poor government policies, and lower industrial productivity in construction, mining, agriculture, and manufacturing.

Understanding The Great Depression Of 1929

The Great Depression of 1929 began in the United States due to its strict monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more to curtail stock market speculation. In the 1920s, the country experienced remarkable growth due to strong investor confidence and consumer expenditure. It prompted banks to provide consumers and businesses with easy financing and profit from it. However, it later became the cause of rising consumer and domestic debts. This decade of prosperity was known as the Roaring Twenties.

Great Depression Effects

Americans started to invest heavily in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more, leading to a constant rise in stock prices, reaching an all-time high in 1929. Subsequently, the Federal Reserve increased credit interest rates to slow down this price rise. But the decision badly impacted the construction and manufacturing industries. Additionally, a slight decline in stock prices in October 1929 made investors lose confidence, causing the stock market bubbleStock Market BubbleA stock market bubble is a phenomenon in which the prices of a company's stock are inflated and cannot be supported by the company's actual performance, resulting in a divide between the real and financial economies caused by irrational exuberance of market participants, herd mentality, or any other similar reason.read more to burst.

The day it began, October 24, 1929, is known as “Black Thursday,” with prices plummeting by more than 20% by October 29, 1929. When the first decline in stock prices occurred, investors panicked. And in a streak of desperate decisions, the stock market crashed, wiping over $30 billion at once. While high margin trading by traders caused asset price increase, panic selling forced investors to liquidate their equities. It threw the New York Stock Exchange (NYSE) into a tailspin, resulting in a bank run.

Great Depression Recovery Factors

The U.S. government tried everything to control the situation. But unfortunately, a series of uncertain events followed one after another, like the Dust Bowl, stretching the Great Depression years. All of this resulted in job losses, lower industrial productivity, and a drop in GDP. It forced world nations to restructureRestructureRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc.read more their economic institutions and policies. Finally, the removal of the gold standard and subsequent monetary growth aided the recovery from the economic depression.

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Video Explanation of Black Tuesday


Causes Of Great Depression

When exploring the Great Depression period, there was more than one reason behind it. The Great Depression years started after 1928 when the U.S. stock market witnessed an enormous expansion. People purchased stocks from the money borrowed from banks. After stock prices soared in early October 1929, shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more panicked and tried to liquidate their investments. It caused the consumer price index to decline by more than 30%. Thus, the infamous stock market crashStock Market CrashA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst.read more occurred on October 29, 1929.

The U.S. Federal Reserve was equally culpable for mismanaging the money supply, credit allocation, and interest rates during the 1920s. The increase in money supply led to stock market expansion and bubble, while a decrease following the market crash and bubble burst caused liquidity issues and panic among banks. By the end of 1933, more than 650 banks were closed.

Another significant cause was the diminishing confidence of investors. Furthermore, a reduction in global trade due to low levels of production, lower wages, and unemployment worsened the condition. At the same time, thousands of farmers lost their farms as they could not afford to harvest crops. So they migrated to California and other regions, which created the Dust Bowl, a key event in the economic depression.

Although economic experts blame governments of that time for being too slow or unwilling to adjust their economic policies, two popular theories explaining causes of the Great Depression are:

  1. Monetarist TheoryMonetarist TheoryMonetarists refer to the believers of the monetarism school of thought, which propagates controlling the money supply to achieve economic stability. Economist Milton Friedman was the major advocate of monetarism theory.read more This theory suggested the failure of the Federal Reserve to implement measures during the recession, leading to the banking crisis and loss of wealth.
  2. Keynesian TheoryKeynesian TheoryKeynesian Economics is a theory that relates the total spending with inflation and output in an economy. It suggests that increasing government expenditure and reducing taxes will result in increased market demand and pull up the economy out of depression.read more This theory held governments responsible for not running deficits, increasing public sector expenditure, cutting taxes, and boosting the employment rate during the recession.

Great Depression Timeline (Dates & Years)

The Crisis

The Recovery

  • 1932: Franklin D. Roosevelt won the U.S. presidential election amid rising unemployment. He took immediate actions to support the U.S. economy, generate employment, and stimulate industrial and agricultural production. Roosevelt created the Federal Deposit Insurance Corporation and Securities and Exchange Commission to monitor and regulate the stock market once again in a better way.
  • 1933: Roosevelt introduced a series of programs and launched 40+ agencies under the New Deal, facilitating government interference in the stock market.
  • 1935: Roosevelt introduced a second New Deal, which was more adamant and aggressive than the last one, in the wake of continuing economic depression. In April 1935, he opened the Works Progress Administration to create employment.
  • 1933-1941: The New Deal regulations helped adjust interest rates and created small job opportunities and work programs. Roosevelt encouraged women to join the workforce by creating more secretarial positions in public offices.
  • 1941: The U.S. entered World War II on December 7, 1941, as Japan attacked Pearl Harbor. The war effectively ended the economic depression by regulating industrial work.

Effects Of Great Depression

Frequently Asked Questions (FAQs)

What is Great Depression?

The Great Depression was the worst financial disaster in modern history. The global economic downturn had a significant impact on sectors in the West and around the world. The global economic output and GDP have both declined. Eventually, countries experienced high unemployment and deflation.

What caused the Great Depression?

The Wall Street Crash of 1929 played a crucial role in the economic depression. It was exacerbated by the Federal Reserve’s failure to regulate the money supply, credit availability, and interest rates, the gold standard, monetary contraction, and panic in the banking system. Further, the decline in global demand, weak government policies, fewer wages, unemployment, and lower productivity in the construction, mining, agricultural, and manufacturing industries fueled the financial crisis.

When did Great Depression end?

Following his election as president of the U.S. in 1932, Franklin D. Roosevelt implemented stringent policies to boost industrial and agricultural production. It helped lower interest rates and created small job opportunities. Under the New Deal, he established several initiatives and 40+ agencies, allowing the government to intervene in the stock market. The U.S. regulated industrial work during World War II in 1941 that ended the economic depression.

This has been a guide to Great Depression and its definition. Here we discuss the Great Depression of 1929, along with its causes, timeline (dates, years), and effects. You can learn more from the following articles –

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