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.