Great Depression

The Great Depression was the worldwide economic collapse that began in 1929 and lasted, in most countries, through the 1930s. It was the longest and deepest downturn of the modern industrial era: in the United States, output fell by roughly a quarter between 1929 and 1933, about a quarter of the labour force was out of work at the low point, and thousands of banks failed.

The Depression is the benchmark against which every later crisis is judged, and the main reason the term economic depression exists as a separate idea from recession. It reshaped economics, giving rise to Keynesian economics and modern macroeconomics, and it produced institutions still in place today, including US federal deposit insurance and securities regulation.

Imagine a chain of shops that all borrow from the same few banks. One bad season makes some shops miss repayments; a rumour starts that the banks are in trouble; customers rush to withdraw their savings; the banks call in loans to raise cash; and healthy shops are pushed under too. Each failure makes the next more likely.

That, on a national and then global scale, is what happened in the early 1930s. Falling prices made debts harder to repay, frightened savers pulled money out of banks, and the rules countries followed to keep their currencies tied to gold stopped them from fighting back. The slump lasted until policies changed.

The US contraction began in August 1929, after the boom of the 1920s, and reached bottom in March 1933. Key stages were:

1. The 1929 crash. The stock market fell sharply in October 1929, after the Federal Reserve had raised rates in 1928 and 1929 to curb speculation.
2. Banking panics, 1930–1931. Waves of bank runs spread across the US Midwest and South; in 1931 Austria's Creditanstalt failed and a European crisis followed.
3. Gold-standard crises. Britain left the gold standard in September 1931; the Fed raised rates to defend the dollar, deepening the US slump.
4. The 1933 bank holiday. With the banking system collapsing, President Franklin Roosevelt closed all banks in March 1933. Recovery began soon after.
5. The 1937–1938 relapse. A second sharp recession followed a tightening of monetary and fiscal policy; full employment returned only with wartime mobilization in the early 1940s.

Economists still debate the weight of each cause, but several explanations dominate:

• Monetary contraction. Milton Friedman and Anna Schwartz argued in 1963 that the Fed allowed the money supply to collapse. According to the Federal Reserve's own history, it fell by nearly 30% from late 1930 to early 1933, with prices falling by a similar amount.
• Financial collapse. Ben Bernanke showed that bank failures destroyed lending relationships and made the slump worse; he shared the 2022 economics Nobel partly for this work.
• The gold standard. Barry Eichengreen and others showed that countries tied to gold had to keep interest rates high and money tight; countries that left gold earlier, such as Britain in 1931, generally recovered sooner.
• Debt deflation and demand. Irving Fisher described how falling prices raised real debt burdens; John Maynard Keynes argued that collapsing investment and spending could leave an economy stuck far below full employment.
• Trade barriers. The US Smoot–Hawley Tariff Act of 1930 and retaliation abroad accelerated a collapse in world trade, a lasting lesson against protectionism, though most economists see it as a secondary cause.

Under Roosevelt's New Deal, Congress passed the Emergency Banking Act of 1933, the Banking Act of 1933 (Glass–Steagall), which created the Federal Deposit Insurance Corporation and separated commercial from investment banking, the Securities Act of 1933 and Securities Exchange Act of 1934, and the Gold Reserve Act of 1934, which revalued gold at $35 an ounce. Public works, farm support and the Social Security Act of 1935 expanded the federal government's role. Historians and economists still disagree about how much the New Deal sped recovery: some credit devaluation and monetary expansion most, others stress fiscal measures, and critics argue that some programmes, such as wage and price codes, slowed the rebound.

The Depression shaped how later policymakers handled crises. Central banks came to see acting as lender of last resort and preventing deflation as core duties, and the Bretton Woods system and the International Monetary Fund were designed in 1944 partly to avoid a repeat of the 1930s currency wars. In 2002 Bernanke, then a Fed governor, told Friedman and Schwartz that the Fed had caused the Depression and would not do so again. His aggressive response as Fed chair in the 2008 financial crisis was shaped directly by that history.

• Federal Reserve History: The Great Depression
• Federal Reserve History: Stock Market Crash of 1929