The world experienced its most severe economic crisis of the 20th century beginning at the end of the 1920s in the United States and extending into the 40s in some countries2. This period of time is known as The Great Depression and is often used as a yardstick for the comparison of current financial environments. The era also serves as a warning about the sustained cycles of despair that can result from such an economic downturn. Historic accounts of the crisis provide evidence about the multitude of variables that led to and sustained The Great Depression and could threaten contemporary economic markets if left unchecked. Similarly, records also contain important pieces of information regarding the measures that led to the end of the crisis and could therefore provide clues of the actions that could be taken to pre-empt or quickly respond to indications of a similar situation emerging in the present and future.
The Great Depression originated in the United States and is often cited to have begun with the stock market crash of October, 1929. However, this event was preceded by a period of recession that may have served as an indication of worsening economic environments and the crisis that would follow. The recession was fueled by a number of factors, including interest hikes, maintenance of the traditional gold standard, and the eventual collapse of major banks coinciding with the crash itself. The reaction of the government along with many businesses was to increase spending in an attempt to boost the market. However, the losses suffered by the general public in the crash resulted in significantly reduced spending on their behalf, leaving businesses in even more dire straits with new debts that could not be recovered through the consumer. Almost a year after the stock market crash the central US suffered from severe drought, causing damage throughout the agricultural industry and perpetuating the economic hardship. Further attempts to stabilize the American economy failed due to spending resistance from an understandably distraught and financially impaired public. Production suffered due to necessary price decreases and deflationary processes proceeded to drive a cycle of wage reductions and unemployment increases. Further countries were negatively impacted by the originally American crisis through financial associations with and speculations based on the nation, but would respond individually in a variety of manners that proved successful in some cases and woefully inefficient in others.
The year 1933 is commonly associated with the key developments that led to the easing and eventual cessation of The Great Depression in most countries, though some like the United States would not return to pre-crisis economic levels for several years. There is no clear agreement on the factors that supported the end of the depression but several potential variables have received a significant amount of academic interest1. Some responsibility for the recovery has been attributed to Roosevelt’s New Deal policies. The package introduced many socioeconomic reform measures that were made in direct response to the flaws that had been made painfully obvious following the market crash. However, it is generally agreed that the measures were not aggressive enough to have been the primary source of economic stabilization during the recovery period. Perhaps more telling is the rollback of many New Deal policies that was necessary to avoid a similar crisis in 1937. As a result of these conflicting results it has been suggested that Roosevelt’s New Deal actually sustained the crisis for up to 7 extra years.
Reductions in the value of gold are identified as potent contributors to the easing the effects of The Great Depression throughout the world and eventually bringing the crisis to an end. Countries recognized the impact that gold prices had in The Great Depression and began to withdraw en masse from the gold standard economic model. Great Britain was the first to implement this change in 1931 with many counties following closely behind, though the most stubborn holdouts like France and Belgium would last for about five years. The earliness of switching from the gold standard has been demonstrated to be directly associated with the quickness of a country’s recovery from The Great Depression.
A third influence on the end of the depression was the development of WWII. The war effort gave the United States a reason to spend that was not aimless as previous spending attempts had been. Jobs were perhaps the most positively impacted aspect of the economy as new production needs and departing soldiers left a huge gap in the workforce to be filled by the public and led to greatly reduced unemployment rates. WWII also provided the American public with a sense of responsibility to support the cause by actively participating in the economic system, eliminating the impact of fears that had been prominent without this patriotic perspective. Debts became of little concern to businesses as economic growth rates doubled and recovery from the depression was finally achieved. Similar events occurred in many wartime countries, though several were already economically stabilized by the time of America’s entry into WWII.
The beginning of The Great Depression is often marked by the stock market crash of 1929, but several factors were responsible for creating the environment in which such a crisis could occur and be sustained. Reliance on the gold standard and rising interest rates were especially influential in the creation of the depression. Coinciding bank failures, public fears, and failed government spending projects allowed the crisis to continue throughout the 1930s. Roosevelt’s New Deal was designed to aid in the recovery process but may have been counterproductive in some aspects. However, withdrawal from the gold standard system proved to be of great benefit to many countries. The United States completed their recovery only after spurring on national spending and job creation as a part of the WWII home effort.
Eichengreen, Barry, and Douglas A. Irwin. “The slide to protectionism in the Great Depression: Who succumbed and why?.” Journal of Economic History 70, no. 4 (2010): 871.
McElvaine, Robert S. The Great Depression: America 1929-1941. Broadway, 2010.