Great Depression

What was the 'Great Depression'

The Great Depression was the greatest and longest economic recession of the 20th century and, by some accounts, modern world history. Contemporary accounts of the Great Depression date its beginning to the U.S. stock market crash of 1929. The economic calamity reached Europe with the collapse of the Boden-Kredit Anstalt, Austria’s most important bank, in 1931.

BREAKING DOWN 'Great Depression'

The Great Depression did not end in the United States until the after World War II, either during or after 1946 according to most statistics. Economists and historians study the Great Depression as the critical economic event of the 20th century.

The depth and persistence of the Great Depression were shocking. In early 1929, the measured U.S. unemployment rate was 3.2%; by 1933, it was 24.9%. Despite unprecedented interventions and government spending by both the Herbert Hoover and Franklin Delano Roosevelt administrations, unemployment was still above 18.9% by 1938. Real per capita gross domestic product (GDP) was still below 1929 levels by the time the Japanese bombed Pearl Harbor.

Black Thursday

After the short forgotten depression of 1920-1921, the U.S. economy enjoyed robust growth during the rest of the decade. Two phenomena helped fuel unprecedented asset price growth: high levels of margin trading by investors and the relatively new Federal Reserve System, which inflated the money supply by 62% between June 1921 and December 1928. Bubbles formed in housing and on the New York Stock Exchange (NYSE).

The NYSE bubble burst violently on Oct. 24th, 1929, known as Black Thursday. A great deal of private wealth evaporated when the stock market crashed, and the economy sank. However, a collapse in equities is not sufficient to explain the depth of the Great Depression. There is no universally accepted explanation for the duration or severity of the crisis, but virtually all economists agree that Black Thursday or declines in the NYSE or DJIA are not sufficient causes.

Potential Causes

There were specific events and policies during the 1930s, in both the United States and Europe, that most economists agree helped prolong the Great Depression. For example, many of President Hoover's interventions damaged the economy's ability to adjust and reallocate resources. The Smoot-Hawley Tariff Act of 1930 triggered a 66% decline in global trade between by 1934. Hoover encouraged businesses to raise wages and keep prices high at a time when they should have fallen, and effectively banned further immigration to the United States in 1930.

FDR's New Deal also failed; federal taxes tripled between 1933 and 1940, including hikes in excise taxes, personal income taxes, inheritance taxes, corporate income taxes and an excess profits tax. FDR continued or expanded many of Hoover's high-wage and high-price programs. The 1936 Anti-Chain Store Act and 1937 Retail Price Maintenance Act prohibited discounting and price competition. When prices do not clear, capitalism cannot work.

From there, economists disagree. Keynesians blame a lack of government spending. Monetarists suggest the Federal Reserve was too tight. Austrians believe monetary policy was too accommodative during the 1920s, creating an unsustainable boom.

RELATED TERMS
  1. Depression

    A severe and prolonged downturn in economic activity. In economics, ...
  2. Economic Collapse

    A complete breakdown of a national, regional or territorial economy. ...
  3. Depressed

    A state or condition of a market, product or security characterized ...
  4. The New Deal

    A series of domestic programs designed to help the United States ...
  5. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  6. Emergency Banking Act Of 1933

    A bill passed during the administration of former U.S. President ...
Related Articles
  1. Markets

    What Caused the Great Depression?

    Learn how government actions may have contributed to this major economic downturn.
  2. Markets

    Recession And Depression: They Aren't So Bad

    Financial downturns are part of the economic cycle and may have important long-term benefits.
  3. Markets

    What Caused The Great Depression?

    When the market crashed in 1929, the Fed cut the money supply by almost a third, choking off hopes for a recovery.
  4. Markets

    The Crash Of 1929 - Could It Happen Again?

    Learn about the series of events that triggered the Great Depression.
  5. Markets

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  6. Markets

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  7. Markets

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  8. ETFs & Mutual Funds

    A Review Of Past Recessions

    Here we look at the biggest economic declines in the U.S. since the Great Depression.
  9. Markets

    The Economic Effects of the New Deal

    While the New Deal failed to revive the U.S. economy during the Great Depression, its legacy lives on today as increasing the social welfare of America.
  10. Markets

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
RELATED FAQS
  1. What role did the Great Depression play in developing America's bank reserve policies?

    Learn about the changes to the Federal Reserve system and bank reserve laws in the United States in the aftermath of the ... Read Answer >>
  2. Why is Keynesian economics sometimes called depression economics?

    Learn how in observing the effects of the Great Depression, Keynes identified flaws in classical economic theory particularly ... Read Answer >>
  3. What is the difference between Keynesian economics and monetarist economics?

    Discover how the debate in macroeconomics between Keynesian economics and monetarist economics always comes down to proving ... Read Answer >>
  4. What caused the stock market crash of 1929 that preceded The Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ... Read Answer >>
  5. What macroeconomic problems do policy makers most commonly face?

    Learn about the macroeconomic factors policymakers have to be concerned with when deciding on economic policies, such as ... Read Answer >>
  6. How do investors lose money when the stock market crashes?

    Over the last hundred years, there have been several large stock market crashes that have plagued the American financial ... Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center