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The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries.

It was the largest and most important economic depression in the 20th century, and is used in the 21st century as an example of how far the world's economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday.

The depression had devastating effects in virtually every country, rich or poor. International trade plunged by half to two-thirds, as did personal income, tax revenue, prices and profits. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by roughly 60 percent.

Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as farming, mining and logging suffered the most. However, even shortly after the Wall Street Crash of 1929, optimism persisted; John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again."

The Great Depression ended at different times in different countries; for subsequent history see Home front during World War II. The majority of countries set up relief programs, and most underwent some sort of political upheaval, pushing them to the left or right. In some states, the desperate citizens turned toward nationalist demagogues—the most infamous being Adolf Hitler—setting the stage for World War II in 1939.


The deflation spiral - DOES THIS SOUND FAMILIAR?

The Great Depression was triggered by a sudden, total collapse in the stock market. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worse in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the US economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade - THIS IS THE DIFFERENCE (SO FAR). By late in 1930, a steady decline set in which reached bottom by March 1933.

There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Peter Temin and Barry Eichengreen) point to Britain's decision to return to the Gold Standard at pre-World War I parities (US$4.86:£1).

Recession cycles are thought to be a normal part of living in a world of inexact balances between supply and demand.

What turns a usually mild and short recession or "ordinary" business cycle into a great depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of government efforts to regulate interest rates, curtail widespread bank failures, and control the money supply. Those who believe in a large role for the state in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem.

Current theories may be broadly classified into three main points of view. First, there is orthodox classical economics: monetarist, Austrian Economics and neoclassical economic theory, which focus on the macroeconomic effects of money supply, how central banking decisions lead to overinvestment (economic bubble), or the supply of gold which backed many currencies before the Great Depression, including production and consumption.

Second, there are structural theories, most importantly Keynesian, but also including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The only consensus viewpoint is that there was a large-scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods.

Third, there is the Marxist critique of political economy. This emphasizes the tendency of capitalism to create unbalanced accumulations of wealth, leading to overaccumulations of capital and a repeating cycle of devaluations through economic crises. Marx saw recession and depression as unavoidable under free-market capitalism as there are no restrictions on accumulations of capital other than the market itself.


Debt deflation

Irving Fisher argued that the predominant factor leading to the Great Depression was overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles. He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows:

SEEN ANY (OR ALL) OF THESE?

1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%. Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.

Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.

Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated.

Q: WAS THERE ONE MAJOR BANK WHICH FAILED AND THEN OTHERS FOLLOWED SUIT?

Q: IF CITIBANK, BANK OF AMERICA, HBOS, UBS, LLOYDS, WACHOVIA WAS LEFT TO FAIL WOULD THIS HAVE THE SAME CONSEQUENCES TODAY?

Q: IF ANSWER TO ABOVE IS YES, THEN WILL PROTECTION (NATIONALISATION) BE ANY BETTER? OR SHOULD THE US ALLOW THE FREE MARKET TO WORK?


The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.


Trade decline and the U.S. Smoot-Hawley Tariff Act

Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists partly blame the American Smoot-Hawley Tariff Act (enacted June 17, 1930) for worsening the depression by seriously reducing international trade and causing retaliatory tariffs in other countries. Foreign trade was a small part of overall economic activity in the United States and was concentrated in a few businesses like farming; it was a much larger factor in many other countries. The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.

In dollar terms, American exports declined from about $5.2 billion in 1929 to $1.7 billion in 1933; but prices also fell, so the physical volume of exports only fell by half.

Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber. According to this theory, the collapse of farm exports caused many American farmers to default on their loans, leading to the bank runs on small rural banks that characterized the early years of the Great Depression.


U.S. Federal Reserve and money supply

Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argue that the Great Depression was caused by monetary contraction, the consequence of poor policymaking by the American Federal Reserve System and continuous crisis in the banking system.

In this view, the Federal Reserve, by not acting, allowed the money supply as measured by the M2 to shrink by one-third from 1929 to 1933. Friedman argued that the downward turn in the economy, starting with the stock market crash, would have been just another recession. The problem was that some large, public bank failures, particularly that of the New York Bank of the United States, produced panic and widespread runs on local banks, (THIS ANSWERS THE QUESTIONS ABOVE) and that the Federal Reserve sat idly by while banks fell. He claimed that, if the Fed had provided emergency lending to these key banks, or simply bought government bonds on the open market to provide liquidity and increase the quantity of money after the key banks fell, all the rest of the banks would not have fallen after the large ones did, and the money supply would not have fallen as far and as fast as it did.

With significantly less money to go around, businessmen could not get new loans and could not even get their old loans renewed, forcing many to stop investing. This interpretation blames the Federal Reserve for inaction, especially the New York branch.

One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit the Federal Reserve could issue was limited by laws which required partial gold backing of that credit. By the late 1920s the Federal Reserve had almost hit the limit of allowable credit that could be backed by the gold in its possession. This credit was in the form of Federal Reserve demand notes.

Since a "promise of gold" is not as good as "gold in the hand", during the bank panics a portion of those demand notes were redeemed for Federal Reserve gold. Since the Federal Reserve had hit its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. On April 5 1933 President Roosevelt signed Executive Order 6102 making the private ownership of gold certificates, coins and bullion illegal, reducing the pressure on Federal Reserve gold.


Austrian School explanations

Another explanation comes from the Austrian School of economics. Theorists of the "Austrian School" who wrote about the Depression include Austrian economist Friedrich Hayek and American economist Murray Rothbard, who wrote America's Great Depression (1963). In their view, the key cause of the Depression was the expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. In their view, the Federal Reserve, which was created in 1913, shoulders much of the blame.

One reason for the monetary inflation was to help Great Britain, which, in the 1920s, was struggling with its plans to return to the gold standard at pre-war (World War I) parity. Returning to the gold standard at this rate meant that the British economy was facing deflationary pressure. According to Rothbard, the lack of price flexibility in Britain meant that unemployment shot up, and the American government was asked to help. The United States was receiving a net inflow of gold, and inflated further in order to help Britain return to the gold standard. Montagu Norman, head of the Bank of England, had an especially good relationship with Benjamin Strong, the de facto head of the Federal Reserve. Norman pressured the heads of the central banks of France and Germany to inflate as well, but unlike Strong, they refused. Rothbard says American inflation was meant to allow Britain to inflate as well, because under the gold standard, Britain could not inflate on its own.

In the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. By the time the Fed belatedly tightened in 1928, it was far too late and, in the Austrian view, a depression was inevitable.

The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. According to Rothbard, government intervention delayed the market's adjustment and made the road to complete recovery more difficult.

Furthermore, Rothbard criticizes Milton Friedman's assertion that the central bank failed to inflate the supply of money. Rothbard asserts that the Federal Reserve bought $1.1 billion of government securities from February to July 1932, raising its total holding to $1.8 billion. Total bank reserves rose by only $212 million, but Rothbard argues that this was because the American populace lost faith in the banking system and began hoarding more cash, a factor quite beyond the control of the Central Bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, and this, Rothbard argues, was the cause of the Federal Reserve's inability to inflate.


Business

Franklin D. Roosevelt, elected in 1932 and inaugurated March 4, 1933, primarily blamed the excesses of big business for causing an unstable bubble-like economy. Democrats believed the problem was that business had too much money, and the New Deal was intended as a remedy, by empowering labor unions and farmers and by raising taxes on corporate profits. Regulation of the economy was a favorite remedy. Some New Deal regulation (the NRA and AAA) was declared unconstitutional by the U.S. Supreme Court. Most New Deal regulations were abolished or scaled back in the 1970s and 1980s in a bipartisan wave of deregulation. However the Securities and Exchange Commission and Social Security won widespread support.

IS THIS WHAT OBAMA's TEAM ARE NOW SUPPORTING?


Keynesian models

British economist John Maynard Keynes argued in General Theory of Employment Interest and Money that lower aggregate expenditures in the economy contributed to a massive decline in income and to employment that was well below the average. In this situation, the economy might have reached a perfect balance, at a cost of high unemployment. Although Keynes never mentions fiscal policy in The General Theory, and instead advocates the need to socialize investments, Keynes ushered in more of a theoretical revolution than a policy one. His basic idea was simple: to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector will not invest enough to increase production and reverse the recession. Keynesian economists called on governments during times of economic crisis to pick up the slack by increasing government spending and/or cutting taxes.

As the Depression wore on, Roosevelt tried public works, farm subsidies, and other devices to restart the economy, but never completely gave up trying to balance the budget.

According to the Keynesians, he needed to spend much more money; they were unable to say how much more. With fiscal policy, however, government could provide the needed Keynesian spending by decreasing taxes, increasing government spending, and increasing individuals' incomes. As incomes increased, they would spend more. As they spent more, the multiplier effect would take over and expand the effect on the initial spending. The Keynesians did not estimate what the size of the multiplier was. Keynesian economists assumed poor people would spend new incomes; however, they saved much of the new money; that is, they paid back debts owed to landlords, grocers and family. Keynesian ideas of the consumption function were upset in the 1950s by Milton Friedman and Franco Modigliani.


Neoclassical approach

Recent work from a neoclassical perspective focuses on the decline in productivity that caused the initial decline in output and a prolonged recovery due to policies that affected the labor market. This work, collected by Kehoe and Prescott, decomposes the economic decline into a decline in the labor force, capital stock, and the productivity with which these inputs are used. This study suggests that theories of the Great Depression have to explain an initial severe decline but rapid recovery in productivity, relatively little change in the capital stock, and a prolonged depression in the labor force. This analysis rejects theories that focus on the role of savings and posit a decline in the capital stock.


Inequality of wealth and income

Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.


Turning point and recovery

In most countries of the world recovery from the Great Depression began between late 1931 and early 1933. Economic studies have indicated that just as the downturn was spread worldwide by the rigidities of the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did most to make recovery possible. What policies countries followed after casting off gold and what results they got varied widely.

In the United States recovery began in the spring of 1933. There is no consensus among economists regarding the motive force for the U.S. economic expansion that continued through most of the Roosevelt years (and the sharp contraction of the 1937 recession that interrupted it). According to Christina Romer, the money supply growth caused by huge gold inflows was a crucial source of the recovery of the United States economy, and that fiscal policy and World War II were of little help. The gold inflows were partly due to devaluation of the U.S. dollar and partly due to deterioration of political situation in Europe.

In their book, A Monetary History of the United States, Milton Friedman and Anna J. Schwartz also laid the recovery to monetary factors, and contended that it was much slowed by poor management of money by the Federal Reserve System. Current Chairman of the Federal Reserve Ben Bernanke agrees that monetary factors played important role both in the worldwide economic decline and eventual recovery. Bernanke, also sees a strong role for institutional factors, particularly the rebuilding and restructuring of the financial system, and points out that the Depression needs to be examined in international perspective. Many economists, exemplified by Harold L. Cole and Lee E. Ohanian, believe that the economy should very quickly have returned to normal except for continued depressing influences, and point the finger to the lack of downward flexibility in prices and wages, encouraged by Roosevelt Administration polices such as the National Industrial Recovery Act. Some economists have called attention to the expectations of reflation and rising nominal interest rates that Roosevelt's words and actions portended.


Facts and figures

Effects of depression in the United States:

1. 13 million people became unemployed. In 1932, 34 million people belonged to families with no regular full-time wage earner.

2. Industrial production fell by nearly 45% between the years 1929 and 1932.

3. Homebuilding dropped by 80% between the years 1929 and 1932.

4. In the 1920s, the banking system in the U.S. was about $50 billion, which was about 50% of GDP.

5. From the years 1929 to 1932, about 5,000 banks went out of business.

6. By 1933, 11,000 of the US' 25,000 banks had failed.

7. Between 1929 and 1933, U.S. GDP fell around 30%, the stock market lost almost 90% of its value.

8. In 1929, the unemployment rate averaged 3%. In 1933, 25% of all workers and 37% of all nonfarm workers were unemployed.

9. In Cleveland, Ohio, the unemployment rate was 60%; in Toledo, Ohio, 80%.

10. One Soviet trading corporation in New York averaged 350 applications a day from Americans seeking jobs in the Soviet Union.

11. Over one million families lost their farms between 1930 and 1934.

12. Corporate profits had dropped from $10 billion three years ago to $1billion in 1932.

13. Between 1929 and 1932 the income of the average American family was reduced by 40%.

14. Nine million savings accounts had been wiped out between 1930 and 1933.

15. 273,000 families had been evicted from their homes in 1932.

16. There were two million homeless people migrating around the country. One Arkansas man walked 900 miles looking for work.

17. Over 60% of Americans were categorized as poor by the federal government in 1933.

18. In the last prosperous year (1929), there were 279,678 immigrants recorded, but in 1933 only 23,068 came to the U.S.

19. In the early 1930s, more people emigrated from the United States than immigrated to it.

20. The U.S. government sponsored a Mexican Repatriation program which was intended to encourage people to voluntarily move to Mexico, but thousands were deported against their will. Altogether about 400,000 Mexicans were repatriated.

21. New York social workers reported that 25% of all schoolchildren were malnourished. In the mining counties of West Virginia, Illinois, Kentucky, and Pennsylvania, the proportion of malnourished children was perhaps as high as 90%.

22. Many people became ill with diseases such as tuberculosis (TB).

23. The 1930 U.S. Census determined the U.S. population to be 122,775,046. About 40% of the population was under 20 years.


Australia

Australia's extreme dependence on agricultural and industrial exports meant it was one of the hardest-hit countries in the Western world, amongst the likes of Canada and Germany. Falling export demand and commodity prices placed massive downward pressures on wages. Further, unemployment reached a record high of 29% in 1932 with incidents of civil unrest becoming common. After 1932, an increase in wool and meat prices led to a gradual recovery.