Great Depression
The Great Depression began in 1929, when the Dow Jones Industrial Average fell from 381 to 198 in the space of two months. By 1932 that same index had collapsed to a low of 41. Between September 1929 and the 8th of July 1932, the market lost 85% of its value. This was a severe global economic downturn that lasted until 1939, marked by mass unemployment, vanishing trade, and the failure of banks and businesses everywhere.
Before the fall came the Roaring Twenties, a decade of industrial growth and rising fortunes in the United States and Western Europe. Much of that profit poured into speculation. Banks operated under minimal regulation, lending loosely as debt piled up. Then the world's largest economy stumbled and pulled the rest of the planet down with it.
How did a stock market panic in one country reach copper miners in Chile and beef farmers in Argentina? Why did some nations claw their way back by the mid-1930s while others stayed trapped for years? And why, almost a century later, do economists still argue over what truly caused it? The answers run through gold, tariffs, kitchen tables, and the rise of a dictator.
On the 24th of October 1929, a day later called Black Thursday, the American stock market dropped 11% at the opening bell. Efforts to stabilize it failed. The 28th of October brought Black Monday and another 12% fall. The panic peaked the next day on Black Tuesday with a further 11% drop. Thousands of investors were ruined, billions of dollars vanished, and many stocks could not be sold at any price.
Margin requirements during the crash sat at only 10%. Brokerage firms would lend nine dollars for every dollar an investor had deposited. When the market fell, brokers called in those loans, and borrowers could not pay them back. Debtors defaulted, depositors rushed to withdraw their savings, and bank runs spread.
In December 1930 the crisis reached a new pitch with a run on the Bank of United States, a privately run institution with no link to the federal government. Unable to pay all its creditors, it failed. It accounted for a third of the 550 million dollars in deposits lost among the 608 American banks that closed that November and December.
During the first ten months of 1930, 744 American banks failed. Across the whole decade, 9,000 banks collapsed. By April 1933, around 7 billion dollars in deposits had been frozen in failed or unlicensed banks. By 1933 the unemployment rate in the United States had reached 25%, about one-third of farmers had lost their land, and the economy had shrunk by 30%.
On the 17th of June 1930, the United States Congress passed the Smoot-Hawley Tariff Act, raising high duties on foreign imports to shield American producers from competition. The consensus among economists and economic historians, including Keynesians, Monetarists, and Austrians, is that it achieved the opposite of what was intended. In a 1995 survey of American economic historians, two-thirds agreed it at least worsened the Depression.
The numbers show the reversal plainly. The average value-based rate of duties on dutiable imports had been 25.9% across 1921 to 1925. Under the new tariff it jumped to 50% during 1931 to 1935. American exports fell from about 5.2 billion dollars in 1929 to 1.7 billion in 1933. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber.
Other governments retaliated with their own tariffs, import quotas, and exchange controls. By 1933 world trade had been pushed to one-third of its level four years earlier. International trade fell by more than half, and crop prices dropped by as much as 60%. According to the United States Senate's own website, the act ranks among the most catastrophic in congressional history.
The gold standard was the primary mechanism that carried the Depression across borders. Under its price-specie flow mechanism, a country that lost gold but wanted to keep the standard had to let its money supply shrink and its prices fall into deflation. Even nations spared bank failures were dragged into the same deflationary spiral, because higher interest rates elsewhere pulled gold out of countries with lower rates.
The escape route was to leave the standard and let the currency depreciate. That freed central banks to lower interest rates and act as lenders of last resort. The United Kingdom went first. Facing speculative attacks on the pound and draining reserves, the Bank of England stopped exchanging notes for gold in September 1931 and let the pound float. Japan and the Scandinavian countries followed that same year.
A so-called gold bloc, led by France and including Poland, Belgium, and Switzerland, clung to the standard until 1935 or 1936. The pattern proved remarkably consistent across dozens of countries. Those that left early, like the United Kingdom and Scandinavia, recovered sooner than France and Belgium, which stayed on gold far longer. China, on a silver standard, almost avoided the Depression altogether, until the American Silver Purchase Act of 1934 drained its silver coins and forced it off the standard in 1935.
The Reichsbank lost 150 million marks in the first week of June 1931, then 540 million in the second week, and another 150 million in just two days, the 19th and the 20th of June. The crisis had begun in May with the collapse of the Creditanstalt in Vienna. Germany depended heavily on American loans, and when the Wall Street crash forced American banks to halt the lending that funded reparations, the country was already in political turmoil.
President Herbert Hoover called for a moratorium on war reparations, which angered Paris but slowed the bleeding by July 1931. On the 19th of August a standstill agreement froze Germany's foreign liabilities for six months. A major bank closed in July, a two-day holiday for all German banks was declared, and business failures spread to Romania and Hungary.
Unemployment in Germany climbed to nearly 30% by 1932. Fearful of repeating the hyperinflation of 1923, the government refused to raise spending. The political ground shifted violently. The Nazi Party rose from the margins to take 18.3% of the vote in the September 1930 election, while moderate parties lost seats and the Communists gained.
Governing by decree under President Paul von Hindenburg became routine. Hitler lost the 1932 presidential race to the incumbent, yet by the July 1932 general election the Nazis and Communists together held a Reichstag majority. Hitler was appointed Chancellor in January 1933, then maneuvered over the following months toward a single-party dictatorship. His later choice to press ahead with rearmament and autarky, in the words of historian Ian Kershaw, could only be partially accomplished without territorial expansion and therefore war.
The League of Nations labeled Chile the country hardest hit by the Depression, because 80% of its government revenue came from exports of copper and nitrates, both in low demand. By 1932 Chile's economy had shrunk to less than half of its 1929 size. Australia, leaning heavily on agricultural and industrial exports, saw unemployment reach a record 29% in 1932 before wool and meat prices revived it.
Canada suffered nearly as deeply as the United States. Its industrial production had fallen to just 58% of the 1929 figure by 1932, the second-lowest in the world, and unemployment reached 27% in 1933. France felt the crisis later, around 1931, and more mildly. Unemployment there peaked below 5%, production fell at most 20%, and the country avoided a major banking crisis, thanks partly to a high degree of self-sufficiency.
Far from the industrial centers, the damage took different shapes. In the Belgian Congo, the price of peanuts fell from 125 to 25 centimes, and employment in the Katanga mining region dropped by 70%. The population of Leopoldville fell by 33% as workers returned to their villages. In Iceland, the value of exports fell from 74 million kronur in 1929 to 48 million in 1932.
The Dominion of Newfoundland gave up its autonomy within the British Empire, becoming the only region ever to voluntarily relinquish democracy. Many democracies across Europe and Latin America fell to dictatorship or authoritarian rule. Greece, by contrast, found a strange resilience. Behind protectionist walls and a weak drachma, its industrial output in 1939 reached 179% of its 1928 level, even as the Bank of Greece admitted those industries were built on sand.
Birthrates fell everywhere as couples postponed children until they could afford them. Across 14 major countries the average birthrate dropped 12%, from 19.3 births per thousand people in 1930 to 17.0 in 1935. In Canada, half of Roman Catholic women defied Church teaching and used contraception to delay births. A woman's primary role was as housewife, and without steady family income, feeding, clothing, and caring for a household grew far harder.
In rural and small-town areas, women expanded vegetable gardens to grow as much food as possible. In the United States, agricultural organizations ran programs teaching housewives to optimize gardens and raise poultry for meat and eggs. Rural women sewed dresses and household items from feed sacks. In American cities, African American quiltmakers enlarged their work, trained newcomers, and built camaraderie from inexpensive materials.
Oral histories record how city housewives stretched scarce money, often reviving the strategies their own mothers used. They cooked soups, beans, and noodles, bought the cheapest cuts of meat, sometimes even horse meat, and turned the Sunday roast into sandwiches and soup. They patched clothing, traded with neighbors, took in boarders, and did laundry or sewing for cash. Extended families pooled food, spare rooms, and small loans to help cousins and in-laws.
Governments tried to direct this private thrift. Japan, pursuing a deflationary policy, urged households to cut consumption. Germany's Four-Year Plan of 1936 aimed to reshape household spending toward self-sufficiency for the coming war, with Nazi women's organizations preaching traditional thrift. France, troubled by slow population growth, passed the Code de la Famille in 1939, increasing state aid to families with children and protecting the jobs of fathers, even immigrants.
Milton Friedman and Anna J. Schwartz, in A Monetary History of the United States, argued that an ordinary recession became a catastrophe because the money supply contracted by 35%, a fall they named the Great Contraction, producing a 33% drop in prices. They blamed the Federal Reserve for sitting idle while one-third of all banks vanished. In a 2002 speech honoring them, Federal Reserve Governor Ben Bernanke said plainly, Regarding the Great Depression, you're right. We did it. We're very sorry. But thanks to you, we won't do it again.
John Maynard Keynes offered a different lens. In The General Theory of Employment, Interest and Money, he argued that falling aggregate spending dragged income and employment far below normal, leaving the economy stuck at low activity. His fix was government deficits during downturns, since the private sector would not invest enough on its own. Irving Fisher added a third mechanism, a vicious circle of debt and deflation in which the more debtors paid, the more they effectively owed.
The Austrian School, represented by Friedrich Hayek and Murray Rothbard, who wrote America's Great Depression in 1963, blamed the credit-driven boom of the 1920s itself. In February 1929 Hayek published a paper predicting a crisis in the stock and credit markets. Yet Friedman called the leave-it-alone liquidationism of that era dangerous nonsense, recalling Hayek and Lionel Robbins in London saying you just have to let the bottom drop out of the world.
A later view points to expectations. Peter Temin, Barry Wigmore, Gauti Eggertsson, and Christina Romer note that key indicators turned positive in March 1933, the very month Franklin D. Roosevelt took office, even though the money supply was still falling. When Roosevelt signaled a break from the gold standard, the balanced budget, and small government, people began to expect inflation and growth. That shift in expectation, the analysis suggests, accounts for roughly 70 to 80% of the recovery in output and prices from 1933 to 1937.
Common questions
When did the Great Depression start and end?
The Great Depression was a severe global economic downturn that ran from 1929 to 1939. The Wall Street crash of 1929 is often considered its beginning, and the outbreak of World War II in 1939 is widely seen as its end.
What caused the Great Depression?
The precise causes are still disputed. Explanations include the Wall Street crash, a 35% contraction of the money supply that Milton Friedman and Anna Schwartz called the Great Contraction, falling aggregate demand as described by John Maynard Keynes, Irving Fisher's debt-deflation spiral, the rigidity of the gold standard, and the 1930 Smoot-Hawley Tariff Act.
How bad was unemployment during the Great Depression?
Unemployment in the United States reached 25% by 1933. Germany's rate climbed to nearly 30% in 1932, Australia hit a record 29% in 1932, Canada reached 27% in 1933, while France peaked below 5%. In some countries unemployment rose as high as 33%.
How did the Great Depression spread around the world?
The gold standard was the primary transmission mechanism. Countries that lost gold but wanted to keep the standard had to let their money supply and prices fall, spreading deflation. Falling American trade, capital movement, and the Smoot-Hawley Tariff Act also pushed the downturn into other countries.
How did the Great Depression lead to the rise of Hitler?
Germany depended heavily on American loans, which stopped after the Wall Street crash, pushing unemployment to nearly 30% by 1932. The Nazi Party rose from the margins to take 18.3% of the vote in September 1930, and Hitler was appointed Chancellor in January 1933 before consolidating a single-party dictatorship.
How did the Smoot-Hawley Tariff Act affect the Great Depression?
The Smoot-Hawley Tariff Act, passed on the 17th of June 1930, raised the average rate on dutiable imports from 25.9% to 50% and triggered retaliatory tariffs abroad. American exports fell from about 5.2 billion dollars in 1929 to 1.7 billion in 1933, and two-thirds of economic historians surveyed in 1995 agreed it worsened the Depression.
How did the Great Depression end?
The common view among economic historians is that the Great Depression ended with World War II. War mobilization after 1939 ended unemployment, and in the United States the late-1941 mobilization moved about 10 million people out of the civilian labor force, bringing unemployment below 10%.