Great Depression

The Great Depression was the longest and deepest downturn in economic activity in the history of the modern industrial world. It was the unintended consequence of practices that were unquestioned at the time of its outset, and it has since prompted a critical examination of those practices that has had a profound influence upon both economic theory and the practice of economic management.

In 1929, the United States experienced a deep decline in prices and production. Bussinesses and banks closed, people lost their jobs, homes, and savings; and in the absence of welfare programmes, many depended on charity to survive. At its worst, in 1933, 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 economy suffered a downturn of comparable severity, causing disruption and hardship that had disastrous political consequences; the British economy experienced a substantial though comparatively short-lived downturn; the French economy suffered a modest but prolonged decline; and most of the other industrialised countries experienced substantial downturns in economic activity that caused hardship and political unrest.

Subsequent investigations have attempted to discover why the downturn in economic activity had been so deep and so prolonged, why there it had happened in so many different countries, and what policy actions might have been effective in combatting it. The answers to those questions remain controversial but a limited consensus has emerged concerning the appropriate policy response to a threat of a comparable downturn.

Note on numerical sources

The ability to make reliable quantitative statements about events in the 1930s is limited by the availability and accuracy of the economic statistics of that time. By the late 1930s the League of Nations was publishing a limited range of statistics of unemployment and production collated from national sources, but many countries had not yet to begun publication of national statistics.

Links and subpages

For an annotated chronology of the main events in the countries affected, see the Timelines subpage;

for more about events within the United States, see the article on the Great Depression in the United States;

for more about the events in countries outside the United States, see the Addendum subpage; and,

for a discussion of economic theories concerning causes and remedies, see the Tutorials subpage.)

An economic disaster and its consequences - an overview

The great depression, which is generally considered to have started in the United States in 1929, reached its zenith there in 1933 and lasted until 1939. Severe downturns in economic activity also occurred during that period in most of the other industrialised countries and among their suppliers of raw materials; and there was a major reduction in the volume of international trade.

In the United States, it was accompanied during that period by the stock exchange crash of 1929, the banking crisis of 1931, a credit crunch, and a severe deflation; and it resulted in a massive loss of output, persistently high unemployment and widespread deprivation. There were depressions of comparable severity in the industrialised economies of Canada and Germany, and of lesser magnitude in Britain, France and Scandinavia. There were major price reductions reductions in the international commodity markets, and severe downturns in the commodity-producing economies of Australia and South America.

Besides causing widespread human suffering, the great depression stimulated major investigations of its causes and 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 continues to exert a major influence upon economists' beliefs and policy recommendations and political ideologies and to provoke controversy, but it has also generated a major change in the consensus views of those matters among economists and politicians.

The development of the depression

Although it ended eleven years earlier, there are reasons to suppose that the first world war played a part in the development of the great depression. Professor Temin of MIT argues that it , in fact, the shock that set the process in motion, by producing a disruptive changes to its structure that required a difficult period of adaptation. The pattern of international capital movements in particular had been disrupted by the fact that when the war ended, the American economy was much stronger and European economies were much weaker, and by the fact that Britain had to repay the debts to America that it had incurred during the war. After a turbulent post-war period, during which there were deep but short-lived recessions on both sides of the Atlantic, growth returned to the United States economy but the German

according to John Maynard Keynes "...the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history" .

Explanations: the question of causation

There have been a great number of attempts to establish the cause of what has come to be seen as an unprecedented self-inflicted injury, and a great deal of disagreement. However, the unprecedented feature of the great depression was not its initiation (there had been a succession of recessions in the United States throughout the previous eighty years , and it was no worse in its early months than the preceding recession of 1921 ) - but, rather, its unprecedented severity and persistent depth. That consideration and others suggest 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 , it 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, it intensified its subsequent severity.

Contributory factors

(the discussion in the following paragraphs is based upon material that is set out in more detail on the tutorials subpage)

Trade protection

U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.