what happened during the great depression essay

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• US & World Economies
• GDP Growth & Recessions

Great Depression: What Happened, Causes, How It Ended

How Long Did the Great Depression Last?

Unemployment Reached 25%

Life during the depression, what caused it, how did the great depression end.

• Reasons It Could Not Happen Again

Frequently Asked Questions (FAQs)

The Balance / Hugo Lin

The Great Depression was a worldwide economic depression that lasted 10 years. It began in the United States on October 24, 1929, otherwise known as “Black Thursday," when panicked investors sold a record 13 million shares. Over the next four trading days, the Dow Jones Industrial Average, a popular proxy for the U.S. stock market, fell nearly 25%. It continued to decline for the next three years, losing nearly 90% between October 1929 and July 1932.

The stock market crash significantly reduced consumer spending and business investment. Consequently, U.S. GDP decreased dramatically in the first years of the Great Depression, dropping from $104.6 billion in 1929 to $57.2 billion in 1933. In comparison, GDP declined just 2% at the height of the Great Recession between 2008 and 2009.

Key Takeaways

• The Great Depression was a worldwide economic depression that lasted 10 years.
• There is no universally agreed-upon explanation for why the Great Depression happened, but most theories cite the gold standard and the Federal Reserve's inadequate response as contributing factors
• GDP during the Great Depression fell by nearly half.
• A combination of the New Deal and World War II lifted the U.S. out of the Depression.

The Great Depression affected all aspects of society. By its height in 1933, unemployment had risen from about 3% to nearly 25% of the nation’s workforce. Some workers who kept their jobs saw their wages fall, many others had to work lower-paying jobs that they were often overqualified for. From 1929 to 1932 the U.S. gross domestic product was nearly cut in half, dramatically decreasing from $104.6 billion to $57.2 billion, partly due to deflation. The Consumer Price Index fell 27% between November 1929 to March 1933, according to the Bureau of Labor Statistics.

Panicked government leaders passed the Smoot-Hawley tariff in 1930 to protect domestic industries and jobs, but it actually worsened the issue. World trade plummeted 66% as measured in U.S. dollars between 1929 and 1934.

The Depression’s pain was felt worldwide, leading to World War II. Germans were already burdened with financial reparations from World War I. That caused hyperinflation. This added to the pressures that ultimately led the German people to elect Adolf Hitler’s Nazi party to a majority in 1933.

The Depression caused many farmers to lose their farms. At the same time, years of over-cultivation and drought created the “Dust Bowl” in the Midwest, destroying agricultural production in a previously fertile region. Thousands of these farmers and other unemployed workers migrated to California in search of work.

Many ended up living as homeless “hobos.” Others moved to shantytowns called “Hoovervilles," named after then-President Herbert Hoover.

According to Ben Bernanke, a former chairman of the Federal Reserve, the central bank helped create the Depression. It used tight monetary policies when it should have done the opposite. According to Bernanke in 2004, these were the Fed's five critical mistakes:

• The Fed began raising the fed funds rate in the spring of 1928. It kept increasing rates through a recession that started in August 1929. 
• When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value of the dollars held by the U.S. government. Speculators began trading in their dollars for gold in September 1931. That created a run on the dollar. 
• The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for businesses. More bankruptcies followed.
• The Fed did not increase the supply of money to combat deflation.
• Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks' plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew their cash and put it under their mattresses. That further decreased the money supply .

The Fed did not put enough money in circulation to get the economy going again. Instead, the Fed allowed the total supply of U.S. dollars to fall by a third. Later research has supported parts of Bernanke's assessment.

In 1932, the country elected Franklin D. Roosevelt as president. He promised to create federal government programs to end the Great Depression. Within 100 days, he signed the New Deal into law, creating 42 new agencies throughout its lifetime. They were designed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs still exist. They aim to help safeguard the economy and prevent another depression .

New Deal programs include Social Security, the Securities and Exchange Commission, and the Federal Deposit Insurance Corporation.

Many argue that World War II, not the New Deal, ended the Depression. Still, others contend that if FDR had spent as much on the New Deal as he did during the War, it would have ended the Depression. In the nine years between the launch of the New Deal and the attack on Pearl Harbor, FDR increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it added another $64 billion.

Can a Great Depression Happen Again?

While anything is possible, it's unlikely to happen again. Central banks around the world, including the Federal Reserve, have learned from the past. There are better safeguards in place to protect against catastrophe, and developments in monetary policy help manage the economy. The Great Recession, for instance, had a significantly smaller impact.

Some argue that the size of the U.S. national debt and the current account deficit could trigger an economic crisis. Experts also predict that climate change could cause profound losses.

When did the Great Depression end?

Although the lowest economic point of the Depression came in 1933, the sluggish economy continued for much longer. The U.S. didn't fully recover from the Depression until World War II.

How many people died during the Great Depression?

It's difficult to analyze how many people died as a result of the Great Depression. According to a 2009 study, during the crisis, life expectancy actually rose by 6.2 years. This is consistent with findings that economic expansion tends to have more adverse health effects on the population than a recession does. However, deaths from suicide increased by 22.8% between 1929 and 1932—an all-time high.

How did the Great Depression change the role of government in America?

The Great Depression and the subsequent New Deal had a significant impact on Americans' views of the role of the government, particularly at the federal level. Polls taken in the 1930s showed strong support for the New Deal and its major government programs, interventions, and regulations. This level of broad approval for federal interventions has not stayed as high since the Depression era, however.

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U.S Bureau of Labor Statistics. “ Clashing Economic Interests, Past and Present: A Comprehensive Account of American Trade Policy .”

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Gabriel P. Mathy. “ Hysteresis and Persistent Long-Term Unemployment: The American Beveridge Curve of the Great Depression and World War II ," Cliometrica .

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Course: US history   >   Unit 7

• The presidency of Herbert Hoover

The Great Depression

• FDR and the Great Depression
• The New Deal

• The Great Depression was the worst economic downturn in US history. It began in 1929 and did not abate until the end of the 1930s.
• The stock market crash of October 1929 signaled the beginning of the Great Depression. By 1933, unemployment was at 25 percent and more than 5,000 banks had gone out of business.
• Although President Herbert Hoover attempted to spark growth in the economy through measures like the Reconstruction Finance Corporation, these measures did little to solve the crisis.
• Franklin Roosevelt was elected president in November 1932. Inaugurated as president in March 1933, Roosevelt’s New Deal offered a new approach to the Great Depression.

The stock market crash of 1929

Hoover's response to the crisis, what do you think.

• David M. Kennedy, Freedom from Fear: The American People in Depression and War, 1929-1945 (New York: Oxford University Press, 1999), 37-41, 49-50.
• T.H. Watkins, The Hungry Years: A Narrative History of the Great Depression in America (New York: Henry Holt, 1999), 44-45; Kennedy, Freedom from Fear , 87.
• Louise Armstrong, We Too Are the People (Boston: Little, Brown & Co., 1938), 10.
• On bank failures, see Kennedy, Freedom from Fear , 65.
• See Kennedy, Freedom from Fear , 87, 208; Robert S. McElvaine, ed., Down and Out in the Great Depression: Letters from the “Forgotten Man” (Chapel Hill: University of North Carolina Press, 1983), 81-94.
• John A. Garraty, The Great Depression: An Inquiry into the Causes, Course, and Consequences of the Worldwide Depression of the Nineteen-Thirties, as Seen by Contemporaries and in the Light of History (New York: Doubleday, 1987).
• Kennedy, Freedom from Fear , 83-85.
• On Hoovervilles and Hoover flags, Kennedy, Freedom from Fear , 91.

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What Was the Great Depression?

The 1929 stock market crash, the u.s. economy tailspin.

• Mistakes by the Federal Reserve
• The Fed's Tight Fist
• Hoover's Propped-Up Prices

U.S. Protectionism

• The New Deal

New Deal Success and Failure

The impact of world war ii, the bottom line, the great depression: overview, causes, and effects.

• Depression in the Economy: Definition and Example
• Economic Collapse
• Business Cycle
• Boom And Bust Cycle
• Negative Growth
• What Was the Great Depression? CURRENT ARTICLE
• Were There Any Periods of Major Deflation in U.S. History?
• The Greatest Generation
• U.S. Government Financial Bailouts
• Austerity: When the Government Tightens Its Belt
• The Economic Effects of the New Deal
• Gold Reserve Act of 1934
• Emergency Banking Act of 1933

The Great Depression was a devastating and prolonged economic recession that followed the crash of the United States stock market in 1929. It lasted through 1941, the same year that the U.S. entered World War II.

The period was marked by several economic contractions, including the stock market crash of 1929, banking panics in 1930 and 1931. and the Smoot-Hawley Tariff that crashed world trade. Other events and policies helped to prolong the Depression during the 1930s.

Economists and historians often cite the Great Depression as the most significant, if not the most catastrophic, economic event of the 20th century.

Key Takeaways

• The Great Depression was the greatest and longest economic recession in modern world history.
• The Depression ran from 1929 to 1941.
• Investing in the speculative market in the 1920s led to the stock market crash of 1929 and this wiped out a great deal of nominal wealth.
• Other factors also contributed to the Great Depression, including the Fed's inactivity followed by its overreaction.
• Presidents Hoover and Roosevelt both tried to mitigate the impact of the Depression with government policies.

Investopedia / Sabrina Jiang

It's hard to pinpoint exactly what caused the Great Depression but economists and historians generally agree that several factors led to this period of downturn. They include the stock market crash of 1929, the gold standard, a drop in lending, tariffs, banking panics, and contracted monetary policies of the Fed.

The U.S. stock market fell by nearly 50% and corporate profits declined by over 90% during a short depression known as the Forgotten Depression that lasted from 1920 to 1921. The U.S. economy enjoyed robust growth during the rest of the decade. The American public discovered the stock market and dove in headfirst during the Roaring Twenties period.

Speculative frenzies affected both the real estate markets and the New York Stock Exchange (NYSE) . Loose money supply and high levels of  margin trading  by investors helped fuel an unprecedented increase in asset prices.

The lead-up to October 1929 saw equity prices rise to all-time high multiples of more than 19 times after-tax corporate earnings. Coupled with the benchmark Dow Jones Industrial Index (DJIA) increasing 500% in just five years, this ultimately caused the stock market crash .

The NYSE bubble burst violently on Oct. 24, 1929, a day that has come to be known as Black Thursday . A brief rally occurred on Friday the 25th and during a half-day session on Saturday the 26th but the following week brought Black Monday (Oct. 28) and Black Tuesday (Oct. 29). The DJIA fell by more than 20% over those two days. The stock market would eventually fall almost 90% from its 1929 peak.

Ripples from the crash spread across the Atlantic Ocean to Europe, triggering other financial crises such as the collapse of the Boden-Kredit Anstalt, Austria’s most important bank. The economic calamity hit both continents in full force in 1931.

The 1929 stock market crash wiped out nominal wealth, both corporate and private, and this sent the U.S. economy into a tailspin. The U.S. unemployment rate was 3.2% in early 1929. It soared to over 25% by 1933.

The unemployment rate remained above 18.9% in 1938 despite unprecedented interventions and government spending by both the Hoover and Roosevelt administrations. Real per capita gross domestic product (GDP) was below 1929 levels by the time the Japanese bombed Pearl Harbor in late 1941.

The crash likely triggered the decade-long economic downturn but most historians and economists agree that it didn't cause the Great Depression by itself. Nor does it explain why the slump's depth and persistence were so severe. A variety of specific events and policies contributed to the Great Depression and helped to prolong it during the 1930s.

Mistakes by the Young Federal Reserve

The relatively new  Federal Reserve  mismanaged the supply of money and credit before and after the crash in 1929, according to monetarists such as  Milton Friedman  and acknowledged by former Federal Reserve Chair  Ben Bernanke .

The Fed was created in 1913 and it remained fairly inactive throughout the first eight years of its existence. Then it allowed significant  monetary expansion after the economy recovered from the 1920 to 1921 depression.

The total money supply grew by $28 billion, a 61.8% increase between 1921 and 1928. Bank deposits increased by 51.1%, savings and loan shares rose by 224.3%, and net life insurance policy reserves jumped by 113.8%. All this occurred after the Federal Reserve cut required reserves to 3% in 1917. Gains in gold reserves via the Treasury and Fed were only $1.16 billion.

The Fed instigated the rapid expansion that preceded the collapse by increasing the money supply and keeping the federal funds interest rate low during the decade. Much of the surplus money supply growth inflated the stock market and real estate bubbles.

The Fed took the opposite course by cutting the money supply by nearly a third after the bubbles burst and the market crashed. This reduction caused severe liquidity problems for many small banks and choked off hopes for a quick recovery.

World War II created international trading channels and reversed burdensome price and wage controls, which helped the country recover from the Great Depression.

The Fed's Tight Fist

As Bernanke noted in a November 2002 address, before the Fed existed, bank panics were typically resolved within weeks. Large private financial institutions would loan money to the strongest smaller institutions to maintain system integrity. That sort of scenario had occurred two decades earlier during the Panic of 1907 .

At that time, investment banker J.P. Morgan stepped in to rally Wall Street denizens to move significant amounts of capital to banks that were lacking funds when frenzied selling sent the NYSE spiraling downward and led to a bank run. Ironically, it was that panic that led the government to create the Federal Reserve to cut its reliance on individual financiers such as Morgan.

The heads of several New York banks had tried to instill confidence after Black Thursday by prominently purchasing large blocks of blue-chip stocks at above-market prices. These actions caused a brief rally on Friday but the panicked sell-offs resumed on Monday. The stock market has grown beyond the ability of such individual efforts in the decades since 1907. Only the Fed was big enough to prop up the U.S. financial system.

The Fed failed to do so, providing no cash injection between 1929 and 1932. Instead, it watched the money supply collapse and let thousands of banks fail. This and a collapsing financial sector led to deflation and spurred the following depression. Banking laws at the time made it very difficult for institutions to grow and diversify enough to survive a massive withdrawal of deposits (otherwise known as a run on the bank ).

The Fed's harsh reaction may have been the result of its fear that bailing out careless banks would encourage fiscal irresponsibility in the future. Some historians argue that the Fed created the conditions that caused the economy to overheat and then exacerbated an already dire economic situation.

Hoover's Propped-Up Prices

Herbert Hoover has often been characterized as a do-nothing president but he took action after the crash occurred. He implemented three major changes between 1930 and 1932:

• An increase in federal spending by 42% that resulted in massive public works programs such as the Reconstruction Finance Corporation (RFC)
• Taxes to pay for new programs
• A ban on immigration in 1930 to keep low-skilled workers from flooding the labor market

Hoover was mainly concerned that wages would be cut following the economic downturn. He reasoned that prices had to stay high to ensure high paychecks in all industries. Consumers would have to pay more to keep prices high.

But the public was burned badly in the crash, leaving many people without the resources to spend lavishly on goods and services. Nor could companies count on overseas trade because foreign nations weren't willing to buy overpriced American goods any more than Americans were.

Many of Hoover's other post-crash interventions and actions by Congress, such as wage, labor, trade, and price controls, damaged the economy's ability to adjust and reallocate resources.

The bleak reality forced Hoover to use legislation to prop up prices and wages by choking out cheaper foreign competition. He signed the Smoot-Hawley Tariff Act of 1930 into law following the tradition of protectionists and in the face of the protests from more than a thousand of the nation's economists.

The act was initially intended to protect agriculture but it swelled into a multi-industry tariff , imposing huge duties on more than 880 foreign products. Nearly three dozen countries retaliated and imports fell from $7 billion in 1929 to just $2.5 billion in 1932. International trade declined by 66% by 1934. Not surprisingly, economic conditions worsened worldwide.

Hoover's desire to maintain jobs as well as individual and corporate income levels was understandable but he encouraged businesses to raise wages, avoid layoffs , and keep prices high at a time when they naturally should have fallen. The U.S. suffered one to three years of low wages and unemployment , plus cycles of recession/depression, before dropping prices led to a recovery.

The U.S. economy deteriorated from a recession to a depression when it was unable to sustain these artificial levels with global trade effectively cut off.

President Franklin Roosevelt promised massive change when he was elected in 1933. The New Deal program that he initiated was an innovative, unprecedented series of domestic programs and acts that were designed to bolster American businesses, reduce unemployment, and protect the public.

The New Deal was loosely based on Keynesian economics and the idea that the government could and should stimulate the economy. It set lofty goals to create and maintain the national infrastructure , full employment, and healthy wages. The government set about achieving these through price, wage, and even production controls.

Some economists claim that Roosevelt continued many of Hoover's interventions, just on a larger scale. He kept a rigid focus on price supports and minimum wages and removed the country from the gold standard , forbidding individuals to hoard gold coins and bullion. He banned monopolistic business practices and instituted dozens of new public works programs and other job-creation agencies.

The Roosevelt administration also paid farmers and ranchers to stop or cut back on production. One of the most heartbreaking conundrums of the period was the destruction of excess crops despite the need of thousands of Americans for affordable food.

Federal taxes tripled between 1933 and 1940 to pay for these initiatives as well as new programs such as Social Security . These increases included hikes in excise taxes, personal income taxes, inheritance taxes, corporate income taxes, and an excess profits tax.

The New Deal led to measurable results including financial system reform and stabilization. It also boosted public confidence.

Roosevelt declared a bank holiday for an entire week in March 1933 to prevent institutional collapse due to panicked withdrawals . This was followed by a construction program for a network of dams, bridges, tunnels, and roads. These projects opened up federal work programs, employing thousands of people.

The economy showed some recovery but the rebound was far too weak for the New Deal's policies to be deemed successful in pulling America out of the Great Depression. Historians and economists disagree on the reason:

• Keynesians blame a lack of federal spending, saying that Roosevelt didn't go far enough in his government-centric recovery plans.
• Others claim that Roosevelt may have prolonged the Depression, just as Hoover did before him, by trying to spark immediate improvement instead of letting the economic/ business cycle follow its usual two-year course of hitting bottom and then rebounding.

A study by two economists at the University of California, Los Angeles estimated that the New Deal extended the Great Depression by at least seven years.

But it's possible that the relatively quick recovery that was characteristic of other post-depression recoveries may not have occurred as rapidly after 1929 because it was the first time the general public and not just the Wall Street elite lost large amounts in the stock market.

American economic historian Robert Higgs argued that Roosevelt's new rules and regulations came so fast and were so revolutionary that businesses became afraid to hire or invest.

Philip Harvey, a professor of law and economics at Rutgers University, suggested that Roosevelt was more interested in addressing social welfare concerns than in creating a Keynesian-style macroeconomic stimulus package .

Social Security policies enacted by the New Deal created programs for unemployment, disability insurance, old age, and widows' benefits.

Looking at employment and GDP figures, the Great Depression appeared to end suddenly around 1941 to 1942. This was the time when the U.S. entered World War II. The unemployment rate fell from eight million in 1940 to just over one million in 1943. However, more than 16 million Americans were conscripted to fight in the Armed Services. The real unemployment rate in the private sector grew during the war.

The standard of living declined due to wartime shortages caused by rationing. Taxes rose dramatically to fund the war effort. Private investment dropped from $17.9 billion in 1940 to $5.7 billion in 1943 and total private-sector production fell by nearly 50%.

The notion that the war ended the Great Depression is a broken window fallacy but the conflict did put the U.S. on the road to recovery. The war opened international trading channels and reversed price and wage controls. Government demand opened up for inexpensive products and that demand created a massive fiscal stimulus.

Private investments rose from $10.6 billion to $30.6 billion in the first 12 months after the war ended. The stock market broke into a bull run after a few short years.

When Did the Great Depression Start?

The Great Depression began after the stock market crash of 1929, which wiped out both private and corporate nominal wealth. This sent the U.S. economy into a tailspin and the effects eventually trickled out beyond the U.S. border to Europe.

When Did the Great Depression End?

The Great Depression ended in 1941 at around the same time the United States entered World War II. Most economists cite this as the end date because it was the time when unemployment dropped and GDP increased.

How Did the Great Depression End?

Conventional wisdom says that the U.S. was jolted out of the Great Depression by New Deal job creation combined with a flood of government investment in the private sector in preparation for the country's entrance into World War II. This is disputed by some economists who assert that the Depression would have ended earlier with less government intervention.

The Great Depression was the result of an unlucky combination of factors including a flip-flopping Fed, protectionist tariffs, and inconsistently applied government interventionist efforts. The depression could have been shortened or even avoided by a change in any one of these factors.

The debate continues as to whether the interventions were appropriate. Yet many of the reforms from the New Deal exist to this day. They include Social Security, unemployment insurance, and agricultural subsidies .

The assumption that the federal government should act in times of national economic crisis has become strongly supported. This legacy is one of the reasons why the Great Depression is considered one of the seminal events in modern American history.

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Presentation U.S. History Primary Source Timeline

Americans react to the great depression.

The Great Depression began in 1929 when, in a period of ten weeks, stocks on the New York Stock Exchange lost 50 percent of their value. As stocks continued to fall during the early 1930s, businesses failed, and unemployment rose dramatically. By 1932, one of every four workers was unemployed. Banks failed and life savings were lost, leaving many Americans destitute. With no job and no savings, thousands of Americans lost their homes. The poor congregated in cardboard shacks in so-called Hoovervilles on the edges of cities across the nation; hundreds of thousands of the unemployed roamed the country on foot and in boxcars in futile search of jobs. Although few starved, hunger and malnutrition affected many.

In a country with abundant resources, the largest force of skilled labor, and the most productive industry in the world, many found it hard to understand why the depression had occurred and why it could not be resolved. Moreover, it was difficult for many to understand why people should go hungry in a country possessing huge food surpluses. Blaming Wall Street speculators, bankers, and the Hoover administration, the rumblings of discontent grew mightily in the early 1930s. By 1932, hunger marches and small riots were common throughout the nation.

In June of 1932, nearly 20,000 World War I veterans from across the country marched on the United States Capitol to request early payment of cash bonuses for their military service that weren't due to be paid until 1945. The marchers, who the organizers called the "Bonus Expeditionary Force" but who became widely known as the Bonus Army, spent several days in Washington, D.C., pressing their case, but a Congressional bill to pay the bonus was defeated. On July 28, U.S. troops and tanks commanded by General Douglas MacArthur dispersed the marchers and destroyed their makeshift camps in the city.

However, not all citizens were caught up in the social eruptions. Many were too downtrodden or busy surviving day to day to get involved in public displays of discontent. Instead, they placed their hope and trust in the federal government, especially after the election of Franklin D. Roosevelt to the presidency in 1932.

To find more documents in  Loc.gov  related to this topic, use key words such as  Great Depression, begging, unemployment, poverty, stock market crash, Bonus Army , and  Hoovervilles .

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• Letter to President Roosevelt
• Picket line at the King Farm strike. Near Morrisville, Pennsylvania
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• Farm laborite in demonstration at Columbus, Kansas
• Bonus veterans. B.E.F. at the U.S. Capitol

The human impact of the Great Depression: Stories of struggle and resilience

The Great Depression was one of the most significant economic downturns in modern history. It affected millions of people across the United States and around the world, resulting in widespread poverty and hardship.

While many of us are familiar with the statistics and facts surrounding the Great Depression, it is important to remember the human impact of this period in history.

Here, we will explore the stories of struggle and resilience that characterized the human experience during the Great Depression.

What was the Great Depression?

The Great Depression  started in 1929, with the stock market crash that signaled the beginning of an economic crisis.

By 1933, over 15 million Americans were unemployed, and the poverty rate had risen to over 50%.

The impact of this economic collapse was felt by people from all walks of life, regardless of race, gender, or socioeconomic status.

People were unable to find work, and those who were lucky enough to have jobs often faced reduced wages or hours.

Families struggled to put food on the table and keep their homes, and many were forced to rely on government assistance or charity organizations.

How did people cope?

Despite these challenges, many people showed incredible resilience in the face of adversity.

Families and communities banded together to support each other, sharing resources and helping each other find work.

Some people even turned to unconventional means of survival. This included growing their own food or starting their own businesses.

The stories of struggle and resilience during the Great Depression are many, but they are often not heard.

One of the most famous examples is the story of Migrant Mother, a photograph by Dorothea Lange.

The photo, which is now globally recognized as the face of the era, captured the desperation of a mother and her children living in a migrant camp during the Depression.

Flour sack dresses

During the Great Depression, people had to be creative and resourceful in order to cope with the economic challenges they faced.

One example of this creativity was the use of flour sack fabric to make clothing, particularly dresses for women and girls.

Flour sack fabric was a byproduct of the flour industry, and was typically made from a high-quality cotton material.

Manufacturers soon realized that they could market this fabric to women, who were looking for affordable and durable materials for clothing.

To appeal to women, the flour sacks were often printed with colorful patterns and designs, making them both practical and fashionable.

Women soon discovered that they could use these flour sacks to make clothing, including dresses, blouses, and skirts.

They would carefully remove the stitching from the sacks, wash and iron the fabric, and then sew it into a new garment.

The resulting dresses were often simple but stylish, with details like ruffles or lace added to make them more fashionable.

As a result, flour sack dresses became very popular during the Great Depression, as they were a cheap and practical way for women to get new clothing.

They were also a way for women to show their creativity and resourcefulness during a difficult time.

In some cases, women would even trade flour sacks with each other, in order to get different patterns and designs for their dresses.

Hooverville life

In addition to flour sack dresses, people found other clever ways to cope during the Great Depression.

One example was the creation of "Hoovervilles," makeshift communities of homeless people who lived in shanty towns made from cardboard, scrap metal, and other materials.

These communities were named after President Hoover, who was blamed for the economic crisis.

Hoovervilles were a practical solution to the housing crisis faced by many Americans during the Great Depression.

However, they had several problems including a lack of basic services such as sanitation, electricity, and running water, and poor living conditions that led to health problems.

People living in Hoovervilles were often stigmatized and discriminated against by government officials and the public, and had little privacy or security, which made it difficult to protect their belongings and maintain a sense of dignity.

The genius of community gardens

During the Great Depression, community gardens played a significant role in providing relief to many Americans.

Community gardens were an inexpensive and effective way for people to grow their own food, supplement their diets, and provide a sense of community and pride during a time of economic hardship.

One way community gardens helped during the Great Depression was by providing fresh food.

As the economic crisis deepened, many people struggled to afford basic necessities, including food.

Community gardens allowed people to grow their own fresh fruits and vegetables, which were often too expensive to buy.

This helped to supplement people's diets with nutritious food and reduced the reliance on government assistance and charitable organizations.

Another way community gardens helped during the Great Depression was by creating a sense of community.

They brought people together, regardless of their socioeconomic status or background, and provided a sense of purpose and camaraderie during a difficult time.

People worked together to plant, tend, and harvest their crops and shared tips and advice on gardening techniques.

This sense of community helped to foster social cohesion and provided participants with a support network during a time of great uncertainty.

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Article Contents

I. introduction, ii. narrative, iii. analysis, iv. what are the policy lessons, lessons from the 1930s great depression.

We thank Steve Broadberry and Ken Wallis for helpful discussions. Christopher Adam, Ken Mayhew, and, especially, Christopher Allsopp made very thoughtful comments on an earlier draft. The usual disclaimer applies.

• Article contents
• Figures & tables
• Supplementary Data

Nicholas Crafts, Peter Fearon, Lessons from the 1930s Great Depression, Oxford Review of Economic Policy , Volume 26, Issue 3, Autumn 2010, Pages 285–317, https://doi.org/10.1093/oxrep/grq030

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This paper provides a survey of the Great Depression comprising both a narrative account and a detailed review of the empirical evidence, focusing especially on the experience of the United States. We examine the reasons for and flawed resolution of the American banking crisis, as well as the conduct of fiscal and monetary policy. We also consider the pivotal role of the gold standard in the international transmission of the slump and leaving gold as a route to recovery. Policy lessons for today from the Great Depression are discussed, as are some implications for macroeconomics.

The Great Depression deserves its title. The economic crisis that began in 1929 soon engulfed virtually every manufacturing country and all food and raw materials producers. In 1931, Keynes observed that the world was then ‘in the middle of the greatest economic catastrophe . . . of the modern world . . . there is a possibility that when this crisis is looked back upon by the economic historian of the future it will be seen to mark one of the major turning points’ ( Keynes, 1931 ). Keynes was right; Table 1 shows some of the dimensions.

The Great Depression vs Great Recession in the advanced countries

Sources : 1929–38: Real GDP: Maddison (2010) western European countries plus western offshoots; Price level: League of Nations (1941) ; data are for wholesale prices, weighted average of 17 countries; Unemployment: Eichengreen and Hatton (1987) ; data are for industrial unemployment, weighted average of 11 countries; Trade volume: Maddison (1985) , weighted average of 16 countries.

2007–2010: IMF, World Economic Outlook Database, April 2010.

What are the key questions that we should ask about the Great Depression? Why the crisis began in 1929 is an obvious start, but more important questions are why it was so deep and why it lasted so long? Sustained recovery did not begin in the United States until the spring of 1933, though the UK trough occurred in late 1931 and in Germany during the following year. Why and how did the depression spread so that it became an international catastrophe? What role did financial crises play in prolonging and transmitting economic shocks? How effective were national economic policy measures designed to lessen the impact of the depression? Did governments try to coordinate their economic policies? If not, then why not? Why did the intensity of the depression and the recovery from it vary so markedly between countries?

Even in recovery, both the UK and the USA experienced persistent mass unemployment, which was the curse of the depression decade ( Table 2 ). Why did the eradication of unemployment prove to be so intractable? In 1937–8 a further sharp depression hit the US economy, increasing unemployment and imposing further deflation. What caused this serious downturn and what lessons did policy-makers draw from it?

The Great Depression in the United Kingdom and the United States

Note : Unemployment based on the whole-economy series constructed by Weir (1992) .

Sources : UK: Real GDP: Feinstein (1972) ; GDP deflator: Feinstein (1972) ; Unemployment: Boyer and Hatton (2002) ; Stock market prices: Mitchell (1988) . USA : Carter et al . (2006) .

By the late twentieth century, the memory of international financial seizure in the US and Europe, mass unemployment, and severe deflation had receded. However, during 2007–8, an astonishing and unexpected collapse occurred which caused all key economic variables to fall at a faster rate than they had during the early 1930s. As Eichengreen and O’Rourke (2010) report, the volume of world trade, the performance of equity markets, and industrial output dropped steeply in 2008. Moreover, a full-blown financial crisis quickly emerged. The US housing boom collapsed and sub-prime mortgages, which had been an attractive investment both at home and abroad, now became a millstone round the necks of those financial institutions that had eagerly snapped them up. In April 2007, New Century Financial, one of the largest sub-prime lenders in the US, filed for Chapter 11 bankruptcy. In August, Bear Stearns, an international finance house heavily involved in the sub-prime market, teetered on the verge of bankruptcy. The US Treasury helped finance its sale to J. P. Morgan during the following year. During 2008 the financial crisis developed with a sudden and terrifying force. In September, Freddie Mac and Fannie Mae, which together accounted for half of the outstanding mortgages in the US, were subject to a federal takeover because their financial condition had deteriorated so rapidly. At the same time Lehman Brothers, the fourth largest investment bank in the US, declared bankruptcy. It seemed as if financial meltdown was not only a possibility, it was a certainty unless drastic action was taken.

The crisis was not confined to the US. In August 2007, the French bank, BNP Paribas, suspended three investment funds worth €2 billion because of problems in the US sub-prime sector. Meanwhile, the European Central Bank was forced to intervene to restore calm to distressed credit markets which were badly affected by losses from sub-prime hedge funds. On 14 September 2007, the British public became aware that Northern Rock, which had moved into sub-prime lending after concluding a deal with Lehman Brothers, had approached the Bank of England for an emergency loan. Immediately the bank’s shares fell by 32 per cent and queues formed outside branch offices as frantic depositors rushed to withdraw their savings. Such was the pressure that Northern Rock was nationalized in February 2008. The run on Northern Rock was an extraordinary event for the UK. During the Great Depression no British financial institution failed, or looked like failing, but in 2007 there was immediate depositor panic. It was clear that without some assurance on the security of deposits other institutions were at risk. In 2009, UK GDP contracted by 4.8 per cent, the steepest fall since 1921.

A comparison of the catastrophic banking crisis in 1931 with that of 2007–8 shows that the countries involved in 1931 accounted for 55.6 per cent of world GDP, while the figure for the latter period is 33.5 per cent ( Reinhart, 2010 ; Maddison, 2010 ). This is the most widespread banking crisis since 1931 and it is also the first time since that date that major European countries and the United States have both been involved. The financial tidal wave was totally unexpected and was of such severity that immediate policy action was required to prevent total meltdown. For a while it seemed that the world stood at the edge of an abyss, a short step away from an even greater economic disaster than had occurred three-quarters of a century earlier.

In these circumstances, it has been natural to ask what the historical experience of the crisis of the 1930s has to teach us. The big lesson that has been correctly identified is not to be passive in the face of large adverse financial shocks. Indeed, aggressive monetary and fiscal policies were immediately implemented to halt the financial disintegration. Fortunately, countries were not constrained by the oppressive stranglehold of the gold standard. Both monetary and fiscal policies could be used to support economic expansion rather than to impose deflation or try to restore a balanced budget. Flexible exchange rates gave policy-makers the freedom to use devaluation as an aid to recovery. The exception was in the Eurozone, where weak member states, for example, Greece, Ireland, and Portugal, were forced to deflate their economies ( Eichengreen and Temin, 2010 , this issue).

In the United States, the Fed began aggressively to lower interest rates in January 2008 and by the year’s end had adopted a zero-rate policy. Quantitative easing was used on a massive scale during 2008 through to early 2010 and, as a result, the money supply rose dramatically. The American Restoration and Recovery Act, which became law in early 2009, earmarked $787 billion to stimulate the economy and was described by Christina Romer, distinguished economic historian of the great depression and Chair of the President’s Council of Economic Advisors, as ‘the biggest and boldest countercyclical action in American History’ ( Romer, 2009 ). In the UK, the Bank of England adopted the lowest interest rates since its foundation in 1694, quantitative easing was used aggressively, and bank bail-outs were funded where necessary. In October 2007 the guarantee for UK bank deposits was raised to £36,000 per depositor and further increased to £50,000 during the following year. In both countries, monetary and fiscal policies were pursued on a scale that would have been unacceptable during the 1930s but, crucially, these bold initiatives prevented financial meltdown. Fortunately, the crisis did not encourage the adoption of the beggar-thy-neighbour policies that helped to reduce the level of international trade so drastically during the 1930s.

This represents a dramatic contrast with the policy stances of 80 years ago. Thus far, the upshot is that a repeat of the Great Depression has been avoided ( Table 1 ). A dramatic financial collapse has been averted, economic recovery, though tenuous, is progressing, and unemployment has not reached the levels that some commentators feared when the downturn began. As we shall see, the ‘experiment’ of the 1930s shows only too clearly the likely outcome in the absence of an aggressive policy response.

The 1930s has more to offer. In particular, we can look not only at the downturn but also the recovery phase. Here the issues that had to be addressed included re-regulation of the banking system, avoiding a double-dip recession, and dealing with the various legacies of the depression which included long-term unemployment and the need for a new, post-gold-standard, macroeconomic policy framework.

This paper proceeds in the following way. Section II provides a narrative of events, section III delivers an analysis of the 1930s depression, and section IV identifies important policy lessons from that experience.

(i) The context of the Great Depression

It is sensible to begin an investigation of the Great Depression with an analysis of the world’s most powerful economy, the USA. During the 1920s America became the vital engine for sustained recovery from the effects of the Great War and for the maintenance of international economic stability. Following a rapid recovery from the post-war slump of 1920–1, Americans enjoyed until the end of the decade a great consumer boom, which was heavily dependent upon the automobile and the building sectors. High levels of investment, significant productivity advances, stable prices, full employment, tranquil labour relations, high wages, and high company profits combined to create the perfect conditions for a stock-market boom. Many contemporaries believed that a new age of cooperative capitalism had dawned in sharp contrast to the weak economies of class-ridden Europe ( Barber, 1985 ).

America was linked to the rest of the world through international trade as the world’s leading exporter and second, behind the UK, as an importer. Furthermore, after 1918 America replaced Britain as the world’s leading international lender. The First World War imposed an onerous and potentially destabilizing indebtedness on many of the world’s economies. Massive war debts accumulated by Britain and France were owed to both the US government and to US private citizens. Britain and France sought punitive damages from Germany in the form of reparations. But the post-war network of inter-government indebtedness eventually involved 28 countries, with Germany the most heavily in debt and the US owed 40 per cent of total receipts ( Wolf, 2010 , this issue).

Between 1924 and 1931 the US was responsible for about 60 per cent of total international lending, about one-third of which was absorbed by Germany. American investors, attracted by relatively high interest rates, enabled Germany both to discharge reparations responsibilities and to fund considerable improvements in living standards. Austria, Hungary, Greece, Italy, and Poland, together with several Latin American countries, were also considered attractive opportunities by US investors. By paying for imports and by investing overseas the US was able to send abroad a stream of dollars, which enabled other countries not only to import more goods but also to service their international debts. The fact that a high proportion of the borrowing was short term did not disturb the recipients ( Feinstein et al ., 1997 ).

The majority of the world’s economies were linked to each other by the gold standard, which had been suspended during the First World War, but its restoration was considered a priority by virtually all the major economic powers. It is easy to understand the appeal of the gold standard to contemporaries. The frightening inflations after 1918 and the severe deflation of 1920–1 made policy-makers yearn for a system that would provide international economic and financial stability. To policy-makers the gold standard represented a state of normality for international monetary relations; support for it was a continuation of the mindset that had become firmly established in the late nineteenth century ( Eichengreen and Temin, 2010 ). There was a widespread belief that the rules of the gold standard had imposed order within a framework of economic expansion during the 40 years before 1914 and order was certainly required in the post-war world. In particular, contemporaries believed that the discipline of the gold standard would curb excessive public spending by politicians who would fear the subsequent loss of bullion, an inevitable consequence of their profligacy. Unfortunately, the return to gold was accomplished in an uncoordinated fashion. Several countries (e.g. Belgium and France) adopted exchange rates that were not only significantly below their 1913 levels, but also provided a significant competitive advantage.

The reverse was true for the UK, which, in 1925, returned to gold at the 1913 exchange rate after a deflationary squeeze had made this possible. In general, financiers and bankers supported the return to gold at the pre-war exchange rate, but, as a result, sterling was overvalued and Britain’s export industries were disadvantaged. The achievement of international competitiveness through deflation was the dominant force determining domestic economic policy during the 1920s. Unfortunately, UK exports suffered from war-induced disruption. Markets which had been readily exploited before 1914 offered much reduced opportunities after 1918. UK difficulties would have been more manageable if the bulk of Britain’s exports had been in categories that were expanding rapidly in world markets. Unfortunately coal, cotton and woollen textiles, and shipbuilding faced severe international competition. Over-capacity led to high and persistent structural unemployment in the regions where these industries were dominant. During the 1920s, UK unemployment was double the pre-1913 level and also higher than in all the other major economic powers. On average, each year between 1923 and 1929, almost 10 per cent of the UK insured workforce was unemployed. The jobless were concentrated in the export-oriented staple industries. In those parts of the economy not exposed to foreign competition, unemployment was closer to pre-war levels.

A further problem for Britain, and many other countries too, was the uneven distribution of gold stocks. The US was gold rich throughout the 1920s, but, after the stabilization of the franc in 1926, the Bank of France began to sell its foreign exchange in order to purchase bullion ( Clarke, 1967 ). By 1929, the US and France had accumulated nearly 60 per cent of the world’s gold stock and their central banks sterilized much of their gold so that it did not inflate the money supply. In other words, both countries kept a high proportion of the world’s gold stock in their vaults and withdrawn from circulation. As a result, other countries were forced to deflate in order to compensate for a shortage of reserves. Unfortunately, the gold standard imposed penalties on countries which lost gold while the few which gained did so with impunity.

Gold shortages compelled UK policy-makers to impose relatively high interest rates in order to attract foreign funds—hot money—which bolstered the country’s inadequate bullion reserves. Unfortunately, potential domestic investors suffered as the real cost of credit rose. Nevertheless, as the membership of the gold standard club grew in the 1920s, policy-makers congratulated themselves that all major trading countries were bound together in a system that was dedicated to the maintenance of economic stability.

With the benefit of hindsight, it is clear that the international economy was in a potentially precarious position in 1929. Continuing prosperity was dependent upon the capacity of the US economy to absorb imports and to maintain a high level of international lending. If an economic crisis struck the US, how would the Federal Reserve deal with it? The Fed, created in 1913, was a relatively untested central bank. Would it act aggressively as lender of last resort if the banking system became stressed? Would its decentralized division into 12 regional reserve banks with monetary policy formulated by a seven-member Board demonstrate weakness or strength in fighting a depression? And, should a crisis materialize, would the gold standard’s rules force contracting economies to deflate, thus worsening their plight rather than providing a supportive international framework?

(ii) From boom to slump

In January 1928 the Federal Reserve ended several years of easy credit and embarked on a tight money policy. The Fed began a sale of government securities and gradually raised the discount rate from 3.5 to 5 per cent. The Fed was fully aware that a sudden rise in interest rates could be destabilizing for business and might bring a period of economic prosperity to an unhappy conclusion. To avoid this possibility, the monetary authorities aimed gently to deflate the worrying bubble on Wall Street by making bank borrowing for speculation progressively more expensive. Monetary policy-makers believed that by acting steadily rather than suddenly, speculation could be controlled without damaging legitimate business credit demands. It seemed a good idea at the time, but unfortunately this policy had serious unforeseen domestic and international repercussions. The new higher rates made more funds from non-bank sources available to the ever-rising stock market, and speculation actually increased. Many corporations used their large balances to fund broker’s loans, and investors who normally looked overseas found loans to Wall Street a more attractive option. Unfortunately, countries that had become dependent on US capital imports, for example, Germany, were suddenly deprived of an essential support for their fragile economies.

Adversely affected by Fed policies, the US economic boom reached a peak in August 1929 and after a few months of continuously poor corporate results the confidence of investors waned and eventually turned into the panic which became the Wall Street Crash in October 1929. After the stock-market collapse the Fed embarked on vigorous open-market operations and reduced interest rates. The Wall Street crash markedly diminished the wealth of stock holders and could well have adversely affected the optimism of consumers. But in late 1929 the market seemed to stabilize close to the level it had reached in early 1928. For several months it appeared that the US economy was recovering after a dramatic financial contraction. Overseas lending revived and interest rates throughout the world responded to the Fed’s monetary easing. Optimists saw no reason why vigorous economic expansion should not be renewed, as it had been in 1922.

The optimists were wrong. From the peak of the 1920s expansion in August 1929 to the trough in March 1933 output fell by 52 per cent, wholesale prices by 38 per cent, and real income by 35 per cent. Company profits, which had been 10 per cent of GNP in 1929, were negative in 1931 and also during the following year. The collapse in demand centred on consumption and investment which experienced unprecedented falls. Gross private domestic investment, measured in constant prices, had reached $16.2 billion in 1929; the 1933 total was only $0.3 billion. In 1926, gross expenditure on new private residential construction was $4,920m; in 1933 the figure had fallen to a paltry $290m. Consumer expenditure at constant prices fell from $79.0 billion in 1929 to $64.6 billion in 1933. Durables were especially affected; in 1929, 4.5m passenger vehicles rolled off assembly lines; in 1932, 1.1m cars were produced by a workforce that had been halved. Automobile manufacture and construction had been at the heart of the 1920s economic expansion but, as they fell, supporting industries tumbled, too. Inventories were run down, raw material purchases reduced to a minimum, and workers laid off. In particular, companies producing machinery, steel, glass, furniture, cement, and bricks faced a collapse in demand. The number of wage earners in manufacturing fell by 40 per cent, but many lucky enough to hang on to their jobs worked fewer hours and experienced pay cuts. The producers of non-durable goods, such as cigarettes, textiles, shoes, and clothing, faced more modest declines in output and employment.

The most dramatic price falls were in agriculture and a fall of 65 per cent in farm income was unsustainable for farm operators, especially if they were in debt. Unlike manufacturers, individual farms did not reduce output in response to low prices. Indeed, their reaction to economic distress was to produce more in a desperate attempt to raise total income. The result was the accumulation of stocks which further depressed prices. Nor could farmers lay off workers, as most only employed family members. As banks and other financial institutions foreclosed on farm mortgages, distress auctions caused so much local anger that the Governors of some states were obliged to suspend them. Farmers who were unable to pay their debts put pressure on the undercapitalized unit banks that served rural communities. As bank failures spread unease among depositors, the natural reaction of institutions was to engage in defensive banking. Loans were called in and lending, even for deserving cases, was curtailed; the banks gained liquidity by bankrupting many of their customers. Rural families were forced to reduce their purchases of manufactured goods, adding to urban unemployment. The bitter irony of starving industrial workers unable to buy food that farmers found too unprofitable to sell helped to undermine faith in the free-market economic system.

The slide from mid-1929 to spring 1933 was not smooth and continuous. Periodically, it seemed that the depression had bottomed out and recovery was under way. In spite of a destabilizing fall in consumption during 1930 ( Temin, 1976 ) it seemed possible that the economy would revive. This expectation was quashed by a wave of bank failures at the end of the year. Although mostly confined to small banks in the south east of the US, the failures gave depositors a warning sign. During the first half of 1931 the economy revived, but hopes were dashed in the aftermath of Britain’s abandonment of the gold standard in September, when a wave of bank failures served to undermine the diminishing faith of depositors who rushed to withdraw their money, thus making the closure of their banks inevitable. Many kept their withdrawn funds idle rather than trust another bank with their savings. Economic expansion in the summer and autumn of 1932 was reversed during the policy vacuum between Roosevelt’s electoral victory in November 1932 and his inauguration in March 1933. The uncertainties present during this ‘lame duck’ period led to a further wave of bank failures which became so serious that, by the time Roosevelt delivered his inaugural address in March 1933, the Governors of the vast majority of states had declared their banks closed to prevent almost certain failure ( Calomiris, 2010 , this issue). There was a sharp difference between the British experience, where no financial institution failed, and that of the US, where financial paralysis was the end result.

Friedman and Schwartz (1963) emphasized the contraction by one-third of the US money stock between 1929 and 1933, a reduction which they believe explains fully the severity of the depression. They accused the Federal Reserve of pursuing perverse monetary policies which transformed a recession into a major depression. It was, however, a combination of monetary and non-monetary causes, varying in intensity during these critical years, which accounts for the depth of this crisis (Gordon and Wilcox, 1981 ). Nevertheless, as Fishback (2010, this issue) shows, the judgement of the Fed was at times seriously flawed, although policy errors are sometimes more apparent with the benefit of hindsight. For example, because nominal interest rates had been reduced to a very low level, the Fed believed that it was pursuing an appropriate easy money policy. Indeed, it was difficult to see how interest rates could be forced lower. However, the monetary authorities failed to take account of the savage deflation which caused real interest rates to rise to punitive levels for borrowers. The central bank was convinced that it was pursuing an easy money policy when the reverse was the case. Moreover, when faced with a policy choice, the Fed always opted to follow the gold standard rule. As a result, during late 1931, and also during the winter of 1932–3, the Fed raised interest rates to protect the dollar from external speculation in order to halt gold losses. Unfortunately, this was the exact reverse of the low interest rate, easy credit policy needed to save the battered banking system. Little wonder that so many banks closed their doors. There is no doubt that monetary policy had serious adverse effects during the worst depression years.

Unemployment was one of the great curses of the depression. Widely accepted estimates show that the percentage of the US civilian labour force without work rose from 2.9 in 1929 to 22.9 in 1932 ( Table 2 ). Many classified as employed were on short time and some had also experienced wage cuts. Unlike Britain, the US had no national system of unemployment benefits; the jobless were subjected to a harsh regime which included dependence on miserly, poorly administered, local relief. Those most affected included the young, the old, and ethnic minorities, whose unemployment rates were relatively high. In addition, social workers stressed that those who had been out of work for long periods became increasingly unattractive to employers. Loss of income and employment uncertainty combined to reduce consumer spending.

Even fortunates who felt secure in their jobs and whose real incomes had risen were deterred by the persistent deflation. Why buy a motor vehicle, or a house, now, when both would be significantly cheaper in a few months’ time? Deflation increased the burden of existing debt and acted as a warning against the accumulation of new obligations. Deflation also intensified business uncertainty and further undermined the confidence necessary to make investment decisions. Traditionally, price falls were seen as one of the natural self-correcting mechanisms of the market economy. Deflation automatically led to a rise in real incomes, it was argued, and consumers would soon start a purchasing drive that would lift the economy out of recession. The persistent price falls over such a long period, however, brought about a paralysis in consumption and investment. Potential spenders wanted to wait until the price falls had reached their nadir before they committed themselves to major purchases and new debt.

Herbert Hoover was hard-working, energetic, and intelligent. He probably had a greater grasp of contemporary economics than any twentieth-century president and was confident enough to be his own economic advisor ( Stein, 1988 ). He was familiar with the current literature on business cycles and was not a man to stand aside and watch as recession accelerated into depression ( Bernstein, 2001 ). Hoover publicly urged business leaders to share scarce work rather than add to the unemployed, and pleaded with them not to cut wage rates, which had been the instant response of employers in 1920–1. Big business held out against wage cuts until mid-1931 when, faced with overwhelming financial losses, the dam broke and they could resist no more. Nominal wage cuts became common, as did mass lay-offs. Some critics see Hoover’s unwavering commitment to high wages and the maintenance of purchasing power as a serious mistake, which added to the severity of the downturn ( Ohanian, 2009 ; Smiley, 2002 ).

Hoover refused to listen to the pleas of 1,038 American economists who, in 1930, urged him to veto the Smoot–Hawley tariff bill. When it became law, this legislation raised US import duties and ultimately led to retaliatory action throughout the world. Not surprisingly, US foreign trade declined once the depression began to bite. The value of US exports was $7 billion in 1929 but only $2.5 billion in 1932; imports declined from $5.9 billion to $2 billion during the same period. Nevertheless, the US balance of payments remained in surplus. It was, however, the rapid income decline in countries that wanted to purchase US goods which was the most significant factor in causing the contraction in international trade ( Irwin, 1998 ). Hoover’s support of tariff increases demonstrated his consistency. His priority was to protect companies that paid high wages from competition from cheap imported goods ( Vedder and Gallaway, 1993 ).

In early 1932, following Hoover’s lead, Congress approved the Reconstruction Finance Corporation (RFC) with a remit to lend to distressed banks. The hope that the RFC, acting as lender of last resort, would bring stability to the financial system was compromised by a Congressional decision to publicize the names of all institutions that approached the RFC for financial help. Hoover also authorized a large increase in federal spending on work relief projects, but the federal budget, at 4 per cent of GNP, was too small to make a noticeable dent in the growing social distress. Inevitably, declining revenue forced the budget into deficit for fiscal year 1931. The deficit was too small to exert an expansionary effect on the economy but it did enable Roosevelt to attack Hoover during the election campaign of 1932 for failing to appreciate the necessity of economy in government. Ironically, the budget deficit of 1931 was the most expansionary of the entire decade, though no one at the time saw this as a benefit. In 1932, Hoover became so concerned about the domestic and foreign disapproval of the federal budget deficit that spending was reduced and the Revenue Act (1932) introduced a raft of substantial tax increases. In spite of his efforts, the budget remained in the red and, not surprisingly, unemployment remained stubbornly high. Unfortunately, Hoover’s understanding of contemporary economics led him to an unshakeable belief in the gold standard. He shared with many contemporary economists the view that fiscal and monetary policies must be directed to support gold rather than directly to promote domestic economic expansion or bank stability.

(iii) The transmission of the depression

It is easy to see that the year-on-year reduction in imports by the main industrial powers and the collapse of international lending placed many economies in great difficulty. In particular, a regular flow of dollars had been crucial to debtor countries, enabling them to buy goods and services and discharge their debt payments. Once the flow dried up, countries had to confront balance-of-payment and debt-repayment problems which were entirely unanticipated. Primary producers had to act quickly to reduce imports and boost their exports as the terms of trade moved sharply against them. Desperate to curb gold and foreign-exchange loss, they used restrictive monetary and fiscal policies to deflate their economies savagely. Public spending was slashed, wages were cut, and misery increased, but all to no avail. It was impossible to earn sufficient foreign currency, or to attract new international loans. Once the cure of deflation was judged more painful than the disease it was supposed to remedy, default on international loans was inevitable. When this happened, foreign investors panicked. In 1931, US lending virtually ceased and did not recover during the rest of the decade.

The key element in the transmission of the Great Depression, the mechanism that linked the economies of the world together in this downward spiral, was the gold standard. It is generally accepted that adherence to fixed exchange rates was the key element in explaining the timing and the differential severity of the crisis. Monetary and fiscal policies were used to defend the gold standard and not to arrest declining output and rising unemployment.

Contemporaries believed that the gold standard imposed discipline on all economies wedded to the system. But in operation the gold standard was not even-handed. As we have seen, states accumulating gold were not forced to inflate their currencies, but when gold losses occurred governments and central banks were expected to take immediate action in order to stem the flow. The action was always deflation but never devaluation ( Temin, 1993 ). Between 1927 and 1932 France experienced a surge of gold accumulation which saw its share of world gold reserves increase from 7 to 27 per cent of the total. Since the gold inflow was effectively sterilized, the policies of the Bank of France created a shortage of reserves and put other countries under great deflationary pressure. Irwin (2010) concludes that, on an accounting basis, France was probably more responsible even than the US for the worldwide deflation of 1929–33. He calculates that through their ‘gold hoarding’ policies the Federal Reserve and the Bank of France together directly accounted for half the 30 per cent fall in prices that occurred in 1930 and 1931. This illustrates a serious flaw in the operation of the interwar gold standard.

When US capital flows to Germany began to dry up in 1928, the German economy was already experiencing an economic downturn and, at the same time, had a formidable reparations debt to discharge. Germany was forced to deflate, even though already in the early stages of a depression. Soon mounting unemployment and violent political unrest gripped the country. In May 1931 Austria’s largest bank, the Credit-Anstalt, experienced such difficulty that speculators attacked the Austrian schilling. Austria’s gold and foreign-exchange reserves were inadequate and soon exhausted and the country was forced to introduce exchange controls. Speculators then turned to Germany, which had a weak economy, a suspect banking system, a high level of short-term debt, and worrying political divisions.

This was an opportunity for decisive coordinated intervention by the major economic powers. A flawed German economy faced the possibility of a catastrophic financial crisis, which, if not contained, could have serious ramifications for others. Who among the great powers would help? Britain was too financially enfeebled to offer more than marginal assistance. In June 1931 President Hoover acted by unilaterally proposing a moratorium, for 1 year, on reparation and war debts payments. The moratorium referred only to inter-government debt. Hoover expected private debts to be honoured. His intervention was opposed by the French, who were furious at the lack of consultation but more fundamentally believed that they lost more than they gained from the moratorium. France, with ample gold reserves, was in a position to assist, but the political conditions attached to its offer of help made it impossible for Germany to accept. In August 1931, Germany abandoned the gold standard, introduced exchange controls, and halted the free flow of gold and marks. Even though this was a time of falling prices, the horrors of post-war hyperinflation were fresh in the memory of the German public and policy-makers. As a result, the mark was not devalued and the government continued with the draconian deflation that had been introduced in accordance with gold-standard rules.

The speculative wave then engulfed sterling. There had been obvious signs of recession in the UK as early as 1928, when the curtailment of US lending affected UK international trade in services. About 40 per cent of UK overseas trade was with primary producing countries, which were forced immediately to restrict their spending when US credit dried up ( Solomou, 1996 ). The crisis worsened in 1929 as world demand collapsed and the UK experienced a sharp fall in the export of goods and services. Following gold-standard rules, real interest rates rose to defend sterling and public-expenditure cuts were imposed in an attempt to achieve budget balance. Like Austria and Germany, Britain was faced with the withdrawal of foreign deposits as the holders of sterling anticipated the potential loss to them from devaluation. The struggle to defend the pound was all to no avail. On 21 September Britain was forced to leave the gold standard, the first major country to do so, and devalue sterling. The devaluation was substantial; sterling, once free to float, fell by 25 per cent against the dollar, though, of course, it is the multilateral effects of devaluation rather than the bilateral which are the most significant. Speculators then attacked the US dollar, which, as we have seen, was defended by the Federal Reserve, though at the cost of compromising the banking system and intensifying an already serious depression.

Curiously, once free from the need to pursue a deflationary monetary policy to defend sterling, the Bank of England actually increased the bank rate. In spite of experiencing one of the largest price falls in modern history, policy-makers worried about the inflationary effects of devaluation. Fortunately, Britain had not lived through the horrors of hyperinflation, or, indeed, the high levels of inflation endured by the French before the stabilization of the franc in 1926. The fears of financial instability quickly subsided and from early 1932 interest rates were reduced and a nominal interest rate of 2 per cent was a persistent feature of the British economy for the remainder of the 1930s. In contrast, fiscal policy was not expansionary until the end of the decade and the attraction of an annual balanced budget remained ( Middleton, 2010 , this issue).

It is clear that unemployment was the major effect of the Great Depression as far as the UK is concerned. The proportion of workers who were unemployed rose to a peak of 17 per cent in 1932 ( Table 2 ). However, other indicators show that the impact of the crisis was relatively benign. No British bank or building society failed during these troubled years. Between 1929 and 1931, the peak-to-trough contraction in real GDP was a mere 5.4 per cent ( Table 2 ). Even in these crisis years, consumption remained relatively stable. The early exit from the gold standard and the robustness of the financial system created a platform for UK recovery which could be exploited. Indeed, between 1929 and 1937, the peak of 1930s performance, real GDP increased by 16.4 per cent. Unfortunately, 10.1 per cent of the insured population remained without work in 1938 and the numbers of long-tern unemployed were seemingly an intractable socio-economic problem ( Hatton and Thomas, 2010 , this issue). Nevertheless, the UK depression experience is a sharp contrast with that endured by the US ( Table 2 ). Even today, no US macro textbook would be complete without a section analysing the causes and the course of the Great Depression. In the UK, apart from persistent unemployment, the downturn was not deep and was over quickly, and the recovery was impressive.

However, 1931 was a watershed for UK economic policy. The gold standard was abandoned and sterling was devalued. Monetary policy was freed from its obligation to support the gold standard and could be used as a tool for economic expansion. The crisis also provided the incentive for Britain to turn away from an emotional commitment to free trade. The Imports Duties Act (1932) imposed a general 10 per cent duty on a range of imports. Within a few months, the Imperial Preference system instituted agreements between Commonwealth countries and Britain to favour each other’s exports.

Early UK recovery was helped by a favourable exchange rate, though within a few years that significant advantage had gone, as other countries devalued and as British tariffs improved the domestic trade balance. It was not foreign trade but a reflationary monetary policy that drove recovery. Cheap money stimulated the housing industry and, with building societies playing a promotional role, this sector became a visible sign of prosperity, particularly in the Midlands and the south-east of England. Unfortunately, the regions dominated by the old staple industries remained depressed. Apart from unemployment, UK macro performance during the recovery period was impressive. Between 1932 and 1937, GDP growth averaged 4 per cent ( Table 2 ).

In 1931, 47 countries were members of the gold-standard club. By the end of 1932 the only significant members were: Belgium, France, Netherlands, Poland, Switzerland, and the US ( Eichengreen, 1992 ). The year 1931 was a dramatic one, when a major financial crisis dealt a mortal blow to the gold standard while output and prices continued to decline throughout the world. Far from providing stability and fulfilling the expectations of its supporters, the gold standard was instrumental in forcing economies to deflate during a period of intense depression. Indeed, departure from gold was a prerequisite for recovery.

For a while the countries freed from the shackles of gold seemed overwhelmed by the enormity of their action. Policy-makers were concerned that devaluation might lead to inflation, so there was no immediate rush for expansionary economic policies. However, by 1935 it was clear that all the countries that had devalued their currencies in 1931 had performed far better than those who had opted for exchange control. In 1933, the US decided to leave the gold standard and devalue the dollar as it was clear that New Deal policies designed to inflate the economy were inconsistent with the rules of the game. Unlike Britain, the US was not forced to leave the gold standard but chose to do so. The performance of the gold bloc, headed by France, was increasingly dismal and in 1936 France, too, abandoned gold.

Devalued currencies gave exports a competitive edge which trade rivals remaining on gold sought to blunt by the imposition of tariffs, quotas, and bi-lateral trade agreements ( Eichengreen and Irwin, 2009 ). In Nazi Germany, a drive for greater self-sufficiency was added to strict exchange controls and these policies were accompanied by a reliance on bilateral rather than multilateral trade ( Obstfeld and Taylor, 1998 ). Japan and Italy also provide examples of autarkic imperialism. Liberal internationalism was no more. Individual countries, or groups, strove to minimize their imports and maximize their exports. Trade restrictions increased dramatically during the 1930s but even when there was some relaxation it was not multinational. With the Reciprocal Trade Agreements Act (1934), the US Congress authorized the President to negotiate bilateral tariff reductions with other countries. By 1939 the US had signed 20 treaties with countries accounting for 60 per cent of its trade ( Findlay and O’Rourke, 2007 ). Unfortunately, during the 1930s, multilateral trade gave way to bilateral arrangements as trading within blocs, of which Imperial Preference was one, grew more common. The outcome was trade diversion rather than creation.

(iv) The post-gold-standard world

Roosevelt (FDR) promised the American people ‘bold persistent experimentation’ and, although scholars see in the New Deal continuity with America’s past, the public saw decisive action and lots of it. Immediately on entering office the new President addressed the banking problem. A bank holiday closed all the nation’s banks and the President assured the public that they would only be permitted to re-open when an independent examination had declared them sound. Roosevelt’s assurances, and a raft of new regulations designed to curb the failings which Congress believed had helped to cause the depression, ushered in a period of banking stability. FDR’s decision to leave the gold standard and significantly devalue the dollar horrified conservatives but banished the need for the Fed to impose deflationary policies on a stricken economy. Indeed, after devaluation, the US became a safe haven for gold, especially from a troubled Europe. The gold flows generated an expansion of the money supply which helped to stimulate recovery.

From the exceptionally low base of 1933, real GDP grew rapidly at an average of over 8 per cent a year until 1937. After a check, growth between 1938 and 1941 was, at over 10 per cent, even more rapid. Between 1929 and 1933 real GDP fell by 27 per cent; between 1933 and 1937 it rose by 36 per cent ( Table 2 ). In 1937, the best year of the decade, output had just reached 1929 levels and there were as many people at work as there had been in the prosperous year of 1929. Unfortunately the labour force had grown by 6m and the unemployment rate, at 14.3 per cent, remained unacceptably high. Private investment failed to revive satisfactorily. Total gross private domestic investment (current $) rose from $1.4 billion in 1933 to $11.8 billion in 1937. The figure for 1929 was $16.2 billion. The recession of 1937–8 was a sudden and devastating blow to an economy functioning far below full capacity. Private investment was driven down to $6.5 billion and full recovery was held back for several years. The economy did not reach its long-run trend until June 1942.

The New Deal is difficult to evaluate economically, partly because of its lack of consistency ( Fishback, 2007 ). In the first New Deal, 1933–5, Roosevelt attacked the surpluses which many commentators believed had dragged the economy down. Farmers were paid to reduce the acreage on which they grew specified crops in the hope that reduced output would increase farm income and, indeed, revive the entire economy. The National Industrial Recovery Act (NIRA) encouraged cooperating businesses to curb competition, which was seen as potentially destabilizing as it led to price reductions. Minimum wages and maximum hours were supposed to increase consumer spending power and help spread the available work. It was a misguided attempt to regenerate the economy by producing less. This bureaucratic nightmare was declared unconstitutional by the Supreme Court in 1935.

FDR now abandoned the attempt to cooperate with business and advocated a more competitive society. He denounced the ‘economic royalists’, who, he maintained, were trying to thwart the will of the people by undermining his policies. In order to protect the vulnerable, who would be exposed to exploitation in this new competitive environment, the formation and growth of trades unions was promoted by the Labor Relations Act (1935), more popularly known as the Wagner Act. Roosevelt gained a stunning re-election victory in 1936 but by the following year the 1937-38 recession necessitated another change in direction. FDR, who had always disliked budget deficits, now came to accept that spending was a vital tool for recovery. Extra spending did bring about a revival.

The President’s frequent changes of direction are seen by his opponents as cynicism. His supporters praise him for pragmatism. It is hard to think of the twists and turns of New Deal policies having a uniformly positive effect on economic performance. On the positive side, the achievement of bank stability was an important plus, but Roosevelt’s poor relations with business and the administration’s inclination to balance increases in spending with new taxes did not create a favourable environment for private investment to flourish and negated the expansionary effects of federal spending.

The New Deal was not Keynesian. Neither fiscal nor monetary policy was used as a tool for economic revival. The reaction of many contemporaries to the problem of unemployment, for example, was to promote polices that would share work, promote high wages to aid purchasing power, remove married women from the workforce, and institute a compulsory age of retirement. Although the federal budget was in deficit for every year during Roosevelt’s presidency, these deficits were too small and unplanned to be described as Keynesian ( Fishback, 2010 ). The growing money stock did exert a positive influence, but its cause was the substantial flow of gold entering the banking system from troubled Europe rather than direct policy action by the Fed ( Romer, 1992 ). The inflow also imposed costs even though it provided advantages. The Fed became concerned at the potentially inflationary excess reserves held by member banks and, in 1936 and 1937, raised reserve requirements. The banks responded by reducing their lending. Coincident with this restriction, federal spending was reduced. The combination of restrictive monetary and fiscal policies plunged the economy into a serious yearlong downturn during which real GDP fell by 10 per cent and unemployment rose to 12.5 per cent. Fortunately, the recession bottomed out in May 1938, as both fiscal and monetary policy became expansionary. Recovery was rapid but prices continued to fall for another 2 years. This recession was a serious self-induced wound.

(v) Unemployment

Hatton and Thomas (2010) offer an explanation for the mass unemployment in both the US and the UK during the 1930s. Unemployment in the UK during the 1930s was similar to that of the 1920s. It was concentrated in the regions where the old staple industries, cotton textiles, coal mining, ship building, and iron and steel, dominated. However, in other parts of the country, a private housing boom, encouraged by low interest rates and rising real wages, created many jobs and there was employment growth, too, in the manufacture of consumer durables and in the service sector. By the mid-1930s, UK unemployment was primarily regional and structural.

In contrast, the US had enjoyed low unemployment during the 1920s. The stubborn refusal of unemployment to decline to pre-Depression levels as economic recovery got under way ensured that expenditure on relief was a new and major item in the federal budget. There were other differences between the 1920s and the 1930s. The Roosevelt administration encouraged the growth of trades unions and in the first New Deal, minimum wages and maximum hours raised both real wages and labour costs. Indeed, the support of both Hoover and Roosevelt for polices designed to prevent wage rates from falling helps to explain the extraordinary growth in money wages during a period of mass unemployment. The employed benefited, but real wages increased above market-clearing levels and, as a result, unemployment persisted.

Unlike British policy-makers, the New Dealers were totally opposed to ‘dole’ payments, which they feared would lead to a dependency culture. Instead, they stressed the benefits of work relief with a cash wage and hourly wage rates identical to those in the private sector. Hours worked were restricted so that take-home pay was not so munificent that private-sector work would be rejected if it was offered. Unfortunately, limited funding enabled only 40 per cent of workers eligible for work project placements to find employment on them. Rejected applicants were forced to accept relief from their counties, which was far less generous than that provided by Washington.

Mass unemployment was a worldwide phenomenon during the depression. Sweden, Denmark and Norway, like Britain, endured double-digit unemployment in both the 1920s and the 1930s ( Feinstein et al ., 1997 ). In Germany, the deflationary policies pursued even after the gold standard had been abandoned led to an unemployment total of 6m in 1933, roughly double that of the UK. The social and political distress in Germany, which played a significant part in the election of Hitler as Chancellor in 1933, was widely seen at the time as one of the unacceptable costs of unemployment. The eradication of unemployment was a Nazi priority and the new government acted swiftly by imposing a ‘new deal’ on Germany which was radically different from Roosevelt’s model. The Nazis abolished German trades unions and with them collective bargaining. A mass programme of public works financed by budget deficits was begun immediately. Industrial recovery emphasized the production of capital goods not consumer goods. Labour service, and the introduction of military conscription in 1935, helped to reduce the ranks of the jobless so that, in 1937, unemployment had been reduced to less than 2m. A striking feature of the labour market was the very modest growth in real wages which this totalitarian regime was able to control. When the market became tight and shortages appeared, there were no trades unions to help workers exploit their scarcity.

The contribution of Nazi work-creation schemes and the state’s ability to control wage growth explains why the decline of unemployment in Germany appeared a success story when compared to Roosevelt’s efforts in the US ( Temin, 1989 ). Depressed commentators in the free world wondered if the only way to eradicate unemployment was to embrace the policies of either Nazi Germany, or the Soviet Union. Neither option had great appeal. It was, however, preparation for war which sheltered Britain, France, and Germany from sharing the US experience during 1937–8. Expansionary fiscal policies sustained the European economies as they geared up for conflict and minimized the effects of this contraction.

(i) What caused the downturn?

Economic historians have traditionally viewed the large falls in real GDP that happened in the Great Depression as the result of large aggregate demand shocks. We think this is still appropriate and identify the main sources of these shocks. 1 However, the translation of adverse shifts in aggregate demand into an impact on output as well as the price level, implies that the aggregate supply curve was non-vertical and the reasons for this need to be explored. Moreover, it is now generally accepted that the shocks which started the downward spiral were greatly amplified by the financial crises which characterized the early 1930s. A further key aspect of the Great Depression is that recessionary impulses were not immediately countered by an effective policy response, and this also has to be explained. Here, a central role was played by the gold standard, the fixed exchange-rate system, of which all the major economies were members at the end of the 1920s.

The most important source of shocks to the world economy from the late 1920s onwards was the United States. This was not only because the collapse in output in the world’s largest economy was spectacular, but because other countries responded to deflationary changes in American monetary policy, notably at the end of the 1920s ( Eichengreen, 2004 ). At least since Friedman and Schwartz (1963) , monetary policy errors have been blamed by many economists; the M1 measure of the money supply fell by over 25 per cent between 1929 and 1933 and it is generally agreed that, notwithstanding the constraints of the gold standard, at least through early 1932, there was scope for the Federal Reserve to reverse this decline by an aggressive response. Instead, adhering to the real bills doctrine, it was believed that monetary policy was loose and expansionary policy was inappropriate, even though real interest rates were very high. More details can be found in the paper by Fishback (2010) .

Econometric analysis has supported the view that declines in the money supply tended to have negative effects on real output in the United States in the interwar period; however, the decline in output in the early 1930s was much bigger than would be predicted simply on the basis of the fall in M1 (Gordon and Wilcox, 1981 ). This might imply that there were other demand shocks working through autonomous falls in consumption and investment spending, as argued by Temin (1976) . A major additional factor was the spate of banking crises that engulfed the United States in the early 1930s when more than 9,000 banks failed (comprising about a seventh of total deposits).

In a seminal paper, Bernanke (1983) found that adding changes in deposits of failing banks to an equation to predict output based on money and price shocks substantially improved its predictive power. This should not be surprising since it is well known that systemic banking crises tend to be associated with large output losses ( Laeven and Valencia, 2008 ). Bernanke interpreted his result as an indication that bank failures implied a loss of services of financial intermediation, a ‘credit crunch’, in which output fell consequent on an adverse shift in the supply of loans. This claim, based on correlations at the macro level, has subsequently been strongly supported by micro-level research into bank behaviour ( Calomiris and Mason, 2003 a ; Calomiris and Wilson, 2004 ). So bank failures were an important channel for the transmission of monetary impulses to real-economy outcomes.

Friedman and Schwartz (1963) interpreted the bank failures as primarily a result of a ‘scramble for liquidity’ with the implication that, if the Federal Reserve had acted as a vigorous lender of last resort, they could largely have been averted, at least in 1930 and 1931. Bordo and Lane (2010, this issue) provide support for this view based on an econometric analysis using examiners’ reports on failed banks. That said, it is clear that the United States entered the 1930s with a weak financial system, under-capitalized and based on unit rather than branch banking, and that the probability that a bank would fail strongly reflected fundamentals and insolvency stemming from ex ante balance-sheet weakness rather than panic ( Calomiris and Mason, 2003 b ). It is also clear that high failure rates reflected weaknesses in regulation, notably in terms of capital adequacy, and prudential supervision, in particular because of inadequate standards at the state level; indeed, Mitchener (2007) estimated that the bank failure rate might have been halved had regulatory and supervisory practices across states improved by one standard deviation.

Obviously, a more resilient banking system would have coped better with the stress created by macroeconomic problems. The incorporation of a financial sector into a dynamic stochastic general equilibrium (DSGE) model of the interwar American economy gives similar insights. Christiano et al . (2003) found that shocks that raise liquidity preference (reduce bank deposits relative to currency holdings) lower funds for investment and contribute to a non-neutral debt deflation, but that a monetary policy rule that responded to these money demand shocks could have limited the fall in real GDP in the early 1930s to only about 6 per cent.

Where does the Wall Street Crash fit into this story? To the person in the street, the collapse of stock-market prices is surely the iconic aspect of the Great Depression. The Dow Jones industrial index fell from 381 to 198 between the peak in early September and mid-November 1929, while from peak to the trough in 1932 about five-sixths was wiped off stock-market values. The crash in the autumn of 1929 included the infamous Black Thursday and Black Tuesday (24 and 29 October). In contrast, economists and economic historians have generally thought that the Wall Street Crash played at most a minor role in the downturn. In part, this is because the fundamental value of a share reflects the discounted present value of future earnings and is thus an endogenous variable. That said, share price indices exhibit ‘excess volatility’—they jump about much more than can be explained by an efficient markets hypothesis ( Shiller, 2003 )—and probably were quite a bit ‘too high’ ex ante in 1929. 2 So there is scope to think in terms of an exogenous shock to share prices. The question then is how much effect might this have had on the real economy. The answer is probably a small impact on consumption through wealth effects and postponement of durables as a response to increased uncertainty ( Romer, 1990 ). There is good evidence that increases in uncertainty affected investment quite significantly through increased risk premia, but, that said, this does not seem to result from discrete events such as the stock-market crash ( Ferderer and Zalewski, 1994 ). So, overall, the impact of the Wall Street Crash on the real American economy was very modest in comparison with that of monetary policy and banking crises.

In sum, the collapse in economic activity was the result of large shocks, both monetary and expenditure, to aggregate demand interacting with a fragile financial system so as to magnify the impact. Discretionary policy responses were, at best, too little, too late, while automatic stabilizers were very weak in an economy with a small federal budget together with low tax rates and transfer payments. Although nominal interest rates fell by several percentage points, ex post real interest rates rose steeply, while bank failures and declining asset prices delivered a credit crunch.

For the typical small open economy in the rest of the world, the big problem as the Depression took hold was being subjected to deflationary pressure as world output and prices fell while being severely constrained in making a policy response by membership of the gold standard. The concept of the macroeconomic trilemma tells us that such a country can only have two of a fixed exchange rate, capital mobility, and an independent monetary policy. This last was typically given up while the gold standard prevailed, although in the globalization backlash that ensued capital controls were very widely adopted. It follows that a monetary-policy response to the deflationary shocks needed to be coordinated across countries (thereby allowing interest-rate differentials to remain unchanged) but, as Wolf (2010) explains, international coordination was out of the question. Indeed, non-cooperative behaviour was the order of the day, epitomized by France’s accumulation and sterilization of gold reserves.

Besides having no control over monetary policy, staying on the gold standard required reductions in prices and money wages and entailed high real interest rates and increased the risk of a banking crisis as balance sheets deteriorated. The decision not to leave the gold standard was influenced by the strength of worries about loss of monetary discipline and the degree of pain in terms of price falls and devaluations by important trading partners ( Wolf, 2008 ). Banking crises were experienced in many countries and were associated with weaknesses in banking systems as well as the deflationary pressures which stressed them ( Grossman and Meissner, 2010 , this issue). Banking crises were bad for the real economy, and countries which went through them were exposed to much larger decreases in real output ( Bernanke and James, 1991 ).

It is implicit in this discussion that the aggregate supply curve is positively sloped rather than vertical so that aggregate demand shocks have output as well as price-level effects. This seems to be borne out by the evidence. Bernanke and Carey (1996) , in a careful panel-data econometric study, found both that there was an inverse relationship between real wages and output and that this reflected incomplete (and indeed quite sticky) nominal wage adjustment in the presence of aggregate demand shocks. It is not fully understood why wages were so sticky, but ‘new-Keynesian’ arguments may be relevant. In particular, there is evidence to support an ‘insider–outsider’ explanation. Consistent with this, for the United States, it has been shown that the delay in nominal wage cuts was most pronounced in industries where there was market power ( Hanes, 2000 ). However, the impact of President Hoover’s attempts to persuade employers to agree not to cut wages may have also delayed wage cuts ( O’Brien, 1989 ). 3

The volume of international trade fell dramatically during the Great Depression, both absolutely and relative to GDP, and the period is notable for a surge in protectionism following the Smoot–Hawley Tariff imposed by the United States in 1930. For the advanced countries, real GDP fell by 16.7 per cent between 1929 and 1932, but import volumes fell by 23.5 per cent ( Table 1 ). Grossman and Meissner (2010) review the reasons for the decline in trade in some detail. Obviously a major factor is the fall in world incomes, but increasing barriers to trade clearly played a very significant role; although estimates of their contribution are sensitive to methodology, it seems likely to have been at least 40 per cent, as estimated by Madsen (2001) .

The goals of protectionist policies were typically to safeguard employment, to improve the balance of payments, and to raise prices. Unlike today, there were no constraints from World Trade Organization (WTO) membership. Protectionism is usually thought of as the triumph of special-interest groups but, in this period, it may be more a substitute for a macroeconomic-policy response. For example, Eichengreen and Irwin (2009) found that, on average, tariffs were higher in countries that stayed on gold longer. It seems unlikely that protection generally had any major impact on GDP during the downturn, because with retaliation there were offsetting effects on imports and exports. Eichengreen (1989) estimated that Smoot–Hawley raised American GDP in the short run by about 1.6 per cent after allowing for retaliation and effects on income in the rest of the world.

(ii) What drove the recovery?

The decline in economic activity across the world came to an end in 1932–3, although there were substantial output gaps for a long time afterwards. Changes in economic policy played a major role in promoting economic recovery on the demand side and to some extent by inhibiting it on the supply side. In the United States, the inauguration of the Roosevelt administration in 1933 ushered in the New Deal and most countries left the gold standard and embarked on a new macroeconomic policy regime. There is a large literature that seeks to account for the role of policy in macroeconomic outcomes in the post-Depression years, but, as this section shows, there remains room for debate.

In the United States, recovery after 1933 can be characterized as strong but incomplete. In the 4 years 1933–7, real GDP rose by 36 per cent compared with a fall of 27 per cent in the previous 4 years, taking the level in 1937 back to about 5 per cent above that of 1929. Assuming trend growth at the pre-1929 rate, however, there was still an output gap of some 25 per cent. From 1933 the New Deal swung into action with its alphabet soup of public-spending initiatives. It is natural to assume that this represented a substantial Keynesian fiscal stimulus but, as has been known since the calculations of Brown (1956) and Peppers (1973) , this was not the case.

Fishback (2010) points out that the New Deal was largely financed by tax increases and notes that the direct effects of fiscal stimulus were, at most, a very small part of the recovery. The federal deficit in 1936 was about 5.5 per cent of GDP and between 1933 and 1936 the discretionary increase probably amounted to around half of this figure. So, fiscal policy was not really tried. Would it have worked? This turns on the value of the fiscal multiplier. In the circumstances of the mid-1930s, with interest rates at or near the lower bound, there are good reasons to believe that, for temporary government spending increases, fiscal multipliers should be a good deal higher with much less crowding out than in normal times ( Hall, 2009 ). Gordon and Krenn (2010) provide estimates of the fiscal multiplier based on a vector autoregression (VAR) analysis of the impact of government expenditure on preparations for the Second World War in 1940–1 which are 1.8 in 1940 falling to 0.8 by the end of 1941. However, as Fishback (2010) notes, there are few estimates of the fiscal multiplier during the New Deal; his own research at the state level suggests a range of 0.9 to 1.7—perhaps a bit below Hall’s best guess of 1.7 for similar conditions. In any event, this would make dealing with the output gap of 1933 a daunting task.

The New Deal was a package of measures, some of which, notably NIRA in 1933 and later the National Labor Relations Act, were intended to increase the bargaining power of workers vis-à-vis employers and to prevent nominal wage declines. Cole and Ohanian (2004) , in the RBC tradition, argue that the effect was to raise real wages and unemployment compared with competitive market outcomes and that this accounts for a significant part of the shortfall of output in 1937 relative to the pre-1929 trend. Hatton and Thomas (2010) review the evidence for this claim and conclude that the New Deal may well have raised the equilibrium level of unemployment considerably; they find that the non-accelerating inflation rate of unemployment (NAIRU) was 12 percentage points higher in the American economy in the 1930s compared with the 1920s. So, it seems that the adverse supply-side impact of the New Deal probably outweighs any positive demand stimulus that it delivered.

Romer (1992) argued that the main stimulus to recovery in the United States was monetary policy, noting very rapid growth in the monetary base and M1 after 1933. This was driven by (largely unsterilized) gold inflows after the United States left the gold standard. M1 grew at nearly 10 per cent per year between 1933 and 1937 and Romer estimated that this was sufficient to raise real GDP in 1937 by about 25 per cent compared with what would have happened under normal monetary growth. She found a large reduction in real interest rates from 1933 and concluded that this had favourable impacts on investment spending. By implication, the positive effect of monetary policy on nominal GDP was a major reason why the federal debt-to-GDP ratio only went up from 16 per cent in 1929 to 44 per cent in 1939.

This account needs to be supplemented by explicitly considering how the United States escaped the liquidity trap, i.e. delivered monetary stimulus despite interest rates at the lower bound. The key here was ‘regime change’, as was originally stressed by Temin and Wigmore (1990) . They argue that leaving the gold standard was a clear signal that the deflationary period was over. Eggertsson (2008) , working with a standard DSGE model, built on this and provided some quantification. His argument is that Roosevelt’s actions on taking office, comprising leaving gold, announcing an objective of restoring the prices to pre-Depression levels, and implementing New Deal spending, amounted to a credible policy that delivered a major change in inflationary expectations which drove down real interest rates, matching the classic recipe for escape from the liquidity trap ( Svensson, 2003 ). Eggertsson’s calibration implied that the regime change accounted for about three-quarters of the recovery in output between 1933 and 1937. Interestingly, this kind of model makes the New Deal a major factor in promoting recovery, but through its indirect effects in changing expectations rather than through a Keynesian fiscal stimulus.

An important ingredient in recovery in the United States was rehabilitation of the banking system to put an end to the waves of bank failures and to ease the credit crunch; this was, indeed, a major priority for legislators. Both re-capitalization and re-regulation of the banks were required. Following a compulsory closure of all banks for 3 days for inspection of their books, the Roosevelt Administration passed an Emergency Banking Act in March 1933 and this was followed by the Banking Acts of 1933 (Glass–Steagall) and of 1935. About 4,000 banks were declared insolvent and not allowed to re-open after the ‘bank holiday’. Inter alia , these banking acts empowered the Reconstruction Finance Corporation (RFC), a government agency, to buy preferred stock in banks with voting rights that frequently entailed effective control, introduced federal deposit insurance, separated investment from commercial banking, and imposed interest-rate ceilings on bank accounts (regulation Q). However, nationwide branch banking continued to be prohibited.

This approach was successful in part, as Mitchener and Mason (2010, this issue) discuss. Deposit insurance, made permanent under the auspices of the Federal Deposit Insurance Corporation (FDIC), was important in ending the threat of further bank runs, as theory suggests it should ( Diamond and Dybvig, 1983 ). The RFC provided substantial capital; by March 1934 it owned stock in nearly half of all commercial banks and in June 1935 it owned more than a third of the capital ($1.3 billion in 6,800 banks) of the American banking system ( Olson, 1988 ). The RFC imposed conditions on banks which were a good substitute for market discipline on risk taking ( Calomiris and Mason, 2003 c ) and the RFC made money for the American taxpayer. Bank runs ceased and failures returned to normal low levels; the deposits-to-currency ratio which had fallen from 10.9 to 5.1 between 1929 and 1933 went back above 7. Bank lending, however, remained far below pre-Depression levels and deposit-to-reserve ratios continued to fall from 13 in 1929, to 8.2 in 1933, to 5 in 1937, when loans were a little over half but bank capital was over 80 per cent of the 1929 level. This reflected continued efforts by banks to reduce default risk at a time when they found it costly to raise new equity ( Calomiris and Wilson, 2004 ).

The regulatory response to the banking crises, captured by political interest groups intent on preserving unit banking and imbued with the ideology of the real bills doctrine, was highly unsatisfactory ( Calomiris, 2010 ). 4 Calomiris notes that the legislation was designed to support unit banking, yet this was the main structural weakness of the system which inhibited diversification of risks, prevented coordinated responses to shocks, restricted competition, and was a major source of banking instability. In contrast, the Glass–Steagall Act mandated the separation of commercial and investment banking, whereas the evidence is that banks which did both were better diversified and less likely to fail ( White, 1986 ) and that there were no good investor-protection reasons for this legislation ( Kroszner and Rajan, 1994 ). In the longer term, the downside of deposit insurance in terms of encouragement of greater risk taking was an important concern but politically it was impossible to remove; this might be seen as a significant cost of the ineffectiveness of the Federal Reserve as lender of last resort.

A key issue with macroeconomic policies to promote recovery is when to withdraw monetary and fiscal stimulus and revert to normal bank policy: too soon and a double-dip recession ensues, too late and inflation takes off. These ‘exit-strategy’ issues are considered by Mitchener and Mason (2010) . For the United States, the former problem materialized in 1937–8 when there was a short but severe recession in which real GDP fell by 10 per cent from peak to trough. This seems to have been consequent on a combination of monetary and fiscal policy tightening in which the former was probably more important ( Velde, 2009 ). This entailed a doubling of banks’ reserve requirements between August 1936 and May 1937, motivated by fear that excess reserves held by the banks might lead to a rapid rise in bank lending, together with the adoption of a policy to sterilize gold inflows as a result of which M1 growth stalled, and tax increases which saw the full-employment surplus rise by about 3.4 per cent of GDP ( Peppers, 1973 ), motivated by moves to re-balance the federal budget in the face of increases in the public debt-to-GDP ratio.

For countries in the rest of the world, a key factor in recovery was exit from the gold standard, as would be expected on the basis of the earlier discussion. On average, the earlier this happened the shallower was the downturn and the sooner recovery began, as was first shown in a very influential paper by Eichengreen and Sachs (1985) and has subsequently been confirmed for wider samples of advanced and middle-income countries by Bernanke (1995) and Campa (1990) . Bernanke (1995) points to leaving gold as permitting monetary expansion and leading to big declines in real interest rates.

In principle, going off gold also allowed countries with balance-of-payments deficits to escape from the deflationary pressures on fiscal policy that, with sterilization of monetary inflows in surplus economies, bore heavily as they tried to prevent a currency crisis ( Eichengreen and Temin, 2010 ). This might have allowed temporary fiscal stimulus to promote recovery but, as Wolf (2010) explains, for a variety of reasons including continued fear of inflation, many countries were reluctant to follow this path in the first half of the 1930s. Would the injection of fiscal stimulus have been successful? Almunia et al . (2010) obtain results that suggest it might well have been, given near liquidity trap conditions, and believe that there were positive results based on sizeable multipliers where it was employed, as in late-1930s France and Italy.

In similar vein, it should be noted that sovereign default was good for relatively rapid and strong recovery ( Eichengreen and Portes, 1990 ). Continuing to service debt as nominal GDP fell implied severe fiscal austerity and, not surprisingly, default was widespread both in Europe and Latin America in an era when the creditors were typically private bondholders, rather than banks, and creditor governments took a relatively relaxed attitude. 5

These themes can be further illustrated by considering economic recovery in the UK which is covered in some detail in Middleton (2010) . Compared with the United States, the UK experienced a relatively mild downturn, with real GDP falling by only about 5 per cent and an early recovery with real GDP returning to the 1929 level by 1934. 6 This fits the picture. The UK had a concentrated banking system but no universal banking and there were no bank failures. An early exit from the gold standard in September 1931 was a blessing in disguise and the result of a currency crisis driven by the fear that rising unemployment in an economy hard hit by falling exports was incompatible with continuation of deflationary policies ( Eichengreen and Jeanne, 1998 ). Devaluation permitted a ‘cheap-money’ policy together with a significant gain in competitiveness, and this accounts for much of the early recovery which started in a period of fiscal consolidation ( Broadberry, 1986 ). The UK did not default but, in 1932, achieved a significant reduction in debt-interest payments through conversion of a large war loan into lower-interest bonds. Unlike the United States, fiscal policy eventually played a significant part through the rearmament programme associated with a discretionary fiscal stimulus of about 3 per cent of GDP between 1935 and 1938; the evidence suggests a short-run fiscal multiplier of around 1.5 ( Thomas, 1983 ; Dimsdale and Horsewood, 1995 ).

(iii) What were the long-term implications of the Great Depression?

The Great Depression had long-lasting effects on economic policy and performance. In the UK it can be seen as a major step down ‘the road to 1945’ and the favourable reception in the 1940s and 1950s to the ideas of Beveridge and Keynes, while in the United States there is a widely held belief that it was the ‘defining moment’ in the development of the American economy ( Bordo et al ., 1998 ). Obviously, there is a danger of attributing to the Depression changes which would have come about anyway, but there is no doubt that the failures of the market economy in the 1930s were game-changing.

Clearly, one implication was a major re-thinking of macroeconomics by the economics profession which, in the Anglo-American world, rapidly adopted Keynesian thinking. This had implications for policy-making, although these need to be handled with care. In the United States, the main change was that it became generally accepted that the automatic stabilizers would not be over-ridden in pursuit of a balanced budget, and these were now much more powerful, with federal spending considerably bigger, but there was no move to trying to fine-tune the economy through Keynesian demand management ( De Long, 1998 ). In the UK, after the war, activist government intervention to prevent shortfalls of aggregate demand did become the norm and, by the 1950s and 1960s, short-term demand management was very prominent in a way that would have been unthinkable in the early 1930s. 7

There was also a legacy from the 1930s for the framework of macroeconomic policy in terms of the macroeconomic trilemma. The move to controls on international capital movements proved to be long-lasting; in most countries, they continued throughout the Bretton Woods period with the return to pegged exchange rates and freer international trade. These years were characterized by very small current-account positions, very high correlations of domestic savings and investment, and the insulation of domestic from foreign interest rates, thus allowing independent monetary policy ( Obstfeld and Taylor, 2004 ). This has been portrayed by Rodrik (2002) as the ‘Bretton Woods Compromise’ in terms of the acceptable limits on globalization required by domestic politics at the level of the nation state after the debacle of the 1930s.

The crisis of the 1930s surely also contributed to the massive increase in social transfers that characterized the OECD countries in the 50 years from 1930 to 1980, during which time the median percentage of GDP rose from a strikingly low 1.66 to 20.09 per cent ( Lindert, 2004 ). Here, too, the story should not be over-simplified—many other factors played a role, including population ageing, trends in income distributions, and rising prosperity. Nevertheless, the ‘defining moment’ hypothesis for the United States is perhaps at its most persuasive in terms of federal social-insurance schemes; Wallis (2010, this issue) sees a fundamental change in terms of fiscal federalism as the New Deal succeeded in putting rules in place that underpinned the political acceptability of inter-state transfers.

The Great Depression also had big implications for microeconomic policy; Hannah and Temin (2010, this issue) suggest that the immediate impact can be seen as a serious retreat from the capitalist free market, with a new emphasis on government interventions to correct market failures. This implies a greater role for regulation and, in most OECD countries, for state ownership. The short-term implication was undoubtedly a substantial reduction in the extent of competition in product markets, including the rise of cartels encouraged by government and the anti-competitive effects of protectionism. The weakening of competition turned out to be much more pervasive and long-lasting in the UK than in the United States ( Broadberry and Crafts, 1992 ; Shepherd, 1981 ).

It is well known that financial crises can have permanent adverse effects on the level and possibly also the trend growth rate of potential output and this is a major reason why such crises usually have serious fiscal implications, including big increases in structural deficits as a percentage of GDP. Thinking in terms of a production function, there will be direct adverse effects on the amount of capital as investment is interrupted, on the amount of labour inputs through hysteresis effects, and on TFP if R&D is cut back. Indirect effects—either positive or negative—may also be felt depending on the impact the crisis has on supply-side policy. Furceri and Mourougane (2009) estimate that for OECD countries a severe banking crisis reduces the level of potential output by about 4 per cent, while the review of the evidence in IMF (2009) , which covers lower-income economies, suggests 10 per cent; in neither case is long-run trend growth thought to be affected.

What does the experience of the United States in the 1930s reveal? One way to address the issue is through time-series econometrics where the shock in the 1930s has been a focal point in debates about deterministic or stochastic trends. 8 Here the evidence is rather inconclusive and the picture is muddied by the Second World War. In fact, assuming trend-stationarity and extrapolating the pre-1929 trend of per capita income growth into the long run gives quite a good approximation to actual experience, but a more careful look suggests a break in trend in 1929 comprising a levels decrease followed by a modest increase in trend growth through 1955 ( Ben-David et al ., 2003 ). The pre-1929 trend line was crossed in 1942.

More insight may be obtained by considering business-cycle peak-to-peak growth-accounting estimates, as in Table 3 . The obvious feature of the 1930s is that the financial crisis undermined growth in the capital stock. Had growth of the capital stock continued at the pre-1929 rate, by 1941 it would have been about 35 per cent larger and, accordingly, potential GDP perhaps 12 per cent bigger. Growth of labour inputs was sluggish, impaired by the impact of the New Deal. However, TFP growth was very strong, powered by sustained R&D, and Field (2003) labelled the 1930s the most technologically progressive decade of the twentieth century in the United States. This theme is pursued in Hannah and Temin (2010) .

Growth accounting decompositions, United States 1919–41 (% per year)

Notes : Δ A / A is TFP growth derived by imposing an aggregate Cobb–Douglas production function, Y = AK α L 1–α . L is measured in terms of hours worked.

Source : Derived from Kendrick (1961) .

A legacy of the depression was a large rise in the number of long-term unemployed workers and the share of unemployment which was long term. In the UK this was to a large extent the result of job losses in the traditional export industries interacting with the unemployment-insurance system to generate a group of workers who would have liked their old jobs back but could survive on the dole. These long-term unemployed workers seem to have experienced declining re-employment probabilities over time as they became discouraged, their human capital deteriorated, and employers regarded them as damaged goods ( Crafts, 1987 ). The plight of these workers scarred the period and, virtually excluded from the labour market, they did not hold down wage pressures ( Crafts, 1989 ). So, at any level of unemployment, wage pressure was greater than in the 1920s or, equivalently, hysteresis effects had raised the NAIRU—perhaps by about 1.5 percentage points.

The UK did not experience a banking crisis but its supply-side policy was greatly affected by the response to the shocks of the 1930s and the damage limitation of the period had persistent effects well into the post-war period. Booth (1987) pointed to the logic of the so-called ‘managed-economy approach’ that was adopted—namely, that it cohered in terms of trying to promote an increase in prices relative to wages through a combination of devaluation, tariffs, and cartels. This amounted to a big reduction in product-market competition which took a long time fully to reverse. In the late 1950s, tariffs were still at mid-1930s levels and about 60 per cent of manufacturing output was cartelized. The retreat from competition had adverse effects on productivity performance over several decades and provided the context in which industrial relations problems and sleepy management proliferated ( Broadberry and Crafts, 2011 ).

Finally, it should be noted that international trade did not return to pre-Depression levels until well after the Second World War. As of the late 1930s, it looked as though the increase in trade costs in the 1930s had ‘permanently’ reduced total trade (exports + imports) to income ratios by about 30 per cent for the advanced countries. Using modern research on the impact of trade on the level of income which allows for impacts on capital stock and TFP (rather than welfare triangles), following in the tradition of Frankel and Romer (1999) , suggests that the long-term effect would have been to reduce the level of GDP per person by about 15 per cent. 9

This section pulls out the strongest policy lessons from the 1930s that have emerged from the above. Some of these are well understood and, fortunately, in the Great Recession of the last 2 years many of the worst mistakes of 80 years ago have not been repeated. The economic history of the Great Depression is, of course, well known to key players such as Ben Bernanke and Christina Romer, who are distinguished contributors to the literature. We are, of course, aware that some things are different now—for example, there was no European Monetary Union or too-big-to-fail doctrine in the 1930s— and that policy decisions and outcomes were contingent on the circumstances of the time; nevertheless, we believe that there is value in re-visiting the experience of that decade.

Starting with monetary and fiscal policy, the headlines from the American experience are clear enough. Monetary policy bears a big responsibility for the early-1930s slump; subsequent research has refined rather than refuted the claims of Friedman and Schwartz (1963) . Monetary policy errors were of both commission and omission. Inappropriate tightening of policy precipitated the downturn, while the subsequent failure to provide greater monetary stimulus allowed recession to develop into depression. In particular, as Bordo and Lane (2010) show, the Federal Reserve failed in its role as lender of last resort and thus made the financial crisis much more serious. These mistakes were not repeated in 2008–9 when monetary policy was aggressively expansionary ( Wheelock, 2010 ).

In the 1930s recovery, by contrast, monetary growth provided a major impetus, while there was virtually no fiscal stimulus, even though it is reasonable to suppose that the fiscal multiplier was quite big. It is important not to be misled by the frenetic activity of the New Deal; fiscal policy did not fail, rather it was not tried. It should also be recognized that a strong recovery was rudely interrupted by the severe recession of 1937–8 and this seems to be explained by deflationary moves in both monetary and fiscal policy.

The British fiscal-policy experience offers rather different messages. In the rearmament phase of the later 1930s, fiscal stimulus had a substantial positive impact on real output. On the other hand, in the crisis at the start of the decade, attempts to prevent the budget deficit rising as the recession deepened reduced aggregate demand appreciably, with the structural deficit being reduced by over 2.5 per cent of GDP ( Middleton, 1985 ). The big difference compared with the present day is that the government attempted to over-ride the automatic stabilizers. 10 The context, in terms of the very unpleasant budgetary arithmetic arising from wartime borrowing and being on the gold standard, is important. 11 This drastically reduced freedom to manoeuvre in the face of fears of an adverse reaction from financial markets and of deflation. The lessons here are that falling prices greatly magnify worries about fiscal sustainability, and that, at times when fiscal policy is a valuable weapon, it is highly advantageous to enter the crisis with a history of fiscal prudence.

The experience of the 1930s tells us to expect that a legacy of the current crisis will be a substantial increase in long-term unemployment and economic inactivity. It seems clear that once again this will imply that the NAIRU goes up and the level of potential output goes down. The analysis in Guichard and Rusticelli (2010) suggests that the average increase in NAIRU through hysteresis effects, both across the OECD as a whole and also in the UK, could be around 0.75 percentage points. The adverse impact on the well-being of those who become long-term unemployed will be severe and sustained ( Clark et al ., 2008 ). As Hatton and Thomas (2010) point out, this represents a major challenge for active labour-market policies.

There is a further major lesson from the recovery phase of the 1930s, namely, the importance of regime change for escaping the liquidity trap. Exit from the gold standard by the United States in 1933, together with New Deal policies, changed inflationary expectations and produced a dramatic fall in real interest rates. More generally, abandoning the gold-standard rule restored independence of monetary policy which was valuable for many countries in a world with no policy coordination and bedevilled by wage stickiness. Devaluation promoted early recovery and made fiscal consolidation much less painful. Here was a classic case where adhering to the wrong policy rule made things worse.

This obviously has resonance for current Eurozone problems and, especially, for Greece, which does not have readily available the classic 1930s escape route of devaluation. Eichengreen and Temin (2010) argue that it is virtually impossible for a country to impose capital controls and leave the Eurozone and that, as the failure of the interwar gold standard illustrates, successful fixed exchange-rate systems generally need to be managed in ways that share burdens of adjustment between surplus and deficit countries. Wolf (2010) sees the Eurozone crisis as reinforcing the need for binding fiscal rules together with a credible commitment to a permanent European Stabilization Mechanism to preclude the financial crisis that sovereign default would bring.

At the beginning of the current crisis, international trade collapsed and it was widely remarked that there was a chilling parallel with the trade-wars period of the early 1930s with its seriously adverse implications for income levels in the long term. Subsequently, research has found that the contribution of trade barriers to falling world-trade volumes in 2008–9 was very small, perhaps only 2 per cent ( Kee et al ., 2010 ), which is well below estimates of 40 per cent or more in the Great Depression. It seems that the structure of world trade has changed in ways that make volumes much more sensitive to demand shocks; the evidence is reviewed by Grossman and Meissner (2010) .

This raises the important question of why we have seen creeping rather than rampant protectionism this time. Research on the interwar period by Eichengreen and Irwin (2009) finds that protectionist policies were less likely to be adopted by countries which left the gold standard early, i.e. where there was more freedom to adopt expansionary monetary and fiscal policies. They argue that this makes protectionism much less likely now because the scope for a macroeconomic policy response is much greater.

Even so, another big difference from the 1930s may also be relevant, namely, that now we have the trade rules overseen by the WTO including bound tariff agreements. Evenett (2009) points out that these tariff bindings have held. Unfortunately, it is also true that there is a great deal of leeway for WTO-legal increases in trade barriers, partly because in many cases tariffs are well below bound levels and partly because anti-dumping is not well addressed by the rules. This underlines the importance of reducing the scope for governments legally to raise levels of protection and emphasizes that there could be real value from concluding the Doha Round ( Hoekman et al ., 2010 ).

Banking crises were at the heart of the Great Depression in the United States. That experience and the wider evidence base tells us that such crises are typically very expensive in terms of the depth and length of the downturns with which they are associated and the fiscal legacy that they bequeath through increased structural deficits and government debt-servicing ( Laeven and Valencia, 2008 ). The costs are greater when pre-crisis regulation and supervision are weak ( Ahrend et al ., 2009 ), as is borne out by the variance of bank failure rates across the states of the USA in the 1930s.

Microeconomic analysis incorporating implications of asymmetric information predicts that there is the potential for serious market failures in the banking sector with attendant risks of banking crises; for example, a bank run (a coordination failure) can happen even though agents are rational and banks are solvent ( Diamond and Dybvig, 1983 ). Moral hazard leading to excessive risk-taking which is rational for banks may compound this problem in the context of free-riding in monitoring by depositors. Banks’ lending decisions do not take into account the (potentially large) social costs of bank failures via the threat to financial stability that they entail.

As the catastrophic experience of the United States in the 1930s makes clear, the policy implication is that there is a need both for regulation to reduce the possibility of a crisis by curtailing excessive risk-taking and also for crisis-management measures to reduce the impact of any crisis ( Freixas, 2010 ). The latter might include deposit insurance together with a central bank that acts effectively as a lender of last resort. The former might just comprise regulation that improves the quality of publicly available information to facilitate market discipline of banks. In practice, however, deposit insurance tends to exacerbate moral hazard, especially if implicit full-insurance guarantees are given de facto when banks are deemed too big to fail. This makes strict regulation of bank behaviour, for example, in terms of capital-adequacy rules, or of the size and/or scope of banking activities imperative ( Bhattacharya et al ., 1998 ).

In 1929, the United States had a badly regulated and under-capitalized banking system, an inexperienced and incompetent lender of last resort, and no federal deposit insurance. At the end of the crisis, responses were made both in terms of prudential regulation and crisis management. In 1933, ending the waves of banking crises was both an economic and a political imperative. As today, reliance on market discipline appeared unrealistic. The lender of last resort had failed. So, the solution was deposit insurance plus regulatory reform, and the political attractions of the former meant that it would be a permanent feature of the American banking system ( Calomiris, 2010 ). Many other countries have followed down this path, a choice reinforced by the present crisis. For this solution to work effectively, it is crucial that regulation is well designed. The lesson from the 1930s is that it most probably will not be, because vested interests are likely to hijack the politics of regulatory design. In particular, it is clear that the Glass–Steagall Act introduced unjustified restrictions on universal banking while failing to address the real structural problem, namely, unit banking. Nevertheless, given the scope for, and potentially large costs of, market failure in banking together with the unavoidable presence of deposit insurance, in principle, tighter regulation to contain moral hazard was appropriate both then and now. 12

In late 2008, the Queen pertinently asked why no one had seen the crisis coming. A similar question would have been entirely appropriate in 1931. In some sense, such a lack of foresight represents a failure of economics but it is important to be clear what this comprises. As the research reviewed in this essay shows, economics has powerful tools that explain the reasons for and the consequences of financial crises, ex post . There is no great mystery about what went wrong in the United States in the early 1930s and, in principle, it is known how to prevent a repetition. Forecasting the course of the depression ex ante would, however, have been extremely difficult, then as now. Inter alia , it would have required detailed knowledge of bank balance sheets and a model of when banks would fail, together with an estimate of the impact of bank failures on economic activity, plus an ability to predict the Federal Reserve’s policy moves and when the United States would leave the gold standard.

The key point is surely the need to take banking crises seriously. Microeconomic analysis based on incentive structures in the presence of asymmetric information explains why these are likely to happen ( Dewatripont and Tirole, 1994 ), while economic history tells us that they have been quite frequent and often very costly (Reinhart and Rogoff, 2009 ). This suggests that there is a clear need to supplement conventional macroeconomic forecasting models with models for policy analysis and simulation which incorporate a financial intermediation sector with incentive distortions and information frictions ( Bean, 2010 ) and with ‘early-warning’ models that focus on threats to financial stability.

Unfortunately, the latter are still far from satisfactory. For example, the preferred model in Davis and Karim (2008) gave the probability of a banking crisis in the UK in 2007 as 0.6 per cent while Giannone et al . (2010) show that the recent financial crisis was more severe on average in countries which had very high-quality financial regulation according to existing indicators! Moreover, economists have not yet identified with any precision ex post the initial conditions which made for greater vulnerability ( Claessens et al ., 2010 ). The policy implication is to recognize that maintaining financial stability is a policy objective that will not be achieved by inflation targeting but requires additional policy instruments.

Finally, it is worth noting that in some very important ways economics has had a good crisis and lessons from the 1930s have been well heeded. Accepting that the financial crisis was allowed to happen and was not predicted, at least the policy response based on economic analysis and historical experience prevented a repeat of the trauma of the Great Depression.

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Until relatively recently, this was also commonplace among macroeconomists, even those of a strong neoclassical persuasion. Since Cole and Ohanian (1999) there have been attempts to explain the Great Depression in a real business cycle (RBC) framework. This would naturally look to adverse total factor productivity (TFP) shocks as the recessionary impulse; in common with most economic historians—for example, Pensieroso (2007) and Temin (2008) —we do not believe that this venture has been successful. The strong point of RBC modelling of the 1930s has been to point out and seek to quantify impacts of the New Deal on aggregate supply during the recovery phase ( Cole and Ohanian, 2004 ). Indeed, in that tradition the term ‘Great Depression’ is applied to the whole of the 1930s for the United States on the grounds that, despite quite a strong recovery after 1933, real GDP remained well below what would have been predicted on the basis of 1920s trend growth.

Whether there was a ‘bubble’ in the 1929 stock market has been controversial. The most persuasive evidence that there was a substantial bubble comes from the pricing of loans to stockbrokers and the valuation of closed-end mutual funds; see Rappoport and White (1993) and De Long and Shleifer (1991) .

Bordo et al . (2000) constructed a DSGE model incorporating overlapping Taylor-wage contracts and found that sluggish wage adjustment could have been a powerful aspect of the transmission mechanism from monetary shocks to real output effects.

The real bills doctrine held that the Federal Reserve should simply supply credit to meet the needs of trade and should not seek to target monetary growth or inflation; adherents believed in the separation of investment and commercial banking.

Eichengreen and Portes (1990) list 12 ‘heavy’ and 16 ‘light’ sovereign defaulters; the former include Germany and Greece and the latter include Canada, France, Italy, and Spain.

This raises the question as to why British folklore thinks the 1930s were so bad. The answer probably relates to regional trends in unemployment. In particular, adjustment to declines in the export-staple industries concentrated in ‘Outer Britain’ proved very difficult, cf. Hatton and Thomas (2010) . This is symbolized by the Jarrow March, which took its participants in 1936 from the depressed North-east to the prosperous South-east.

The initial stance of the Labour government in the late 1940s was to embrace planning rather than fine-tuning. It should also be noted that there has been a vigorous debate among economic historians about the validity of the concept of a ‘Keynesian revolution’ in British economic policy-making; see Booth (2001) for an introduction and further references.

With a stochastic trend, a shock only has a temporary effect and the economy then returns to the previous trend growth path; in contrast, if the trend is a non-stationary stochastic process, shocks have an enduring effect on the future growth path and long-run forecasts are affected by historical events.

This is based on the point estimate of an elasticity of 0.5 for the effect of trade exposure on income found for the period 1960–95 by Feyrer (2009) using an improved estimation technique. As far as we know, a similar study has not yet been performed for the interwar years. For the pre-1914 period, Jacks (2006) found larger elasticities based on the original Frankel–Romer methodology.

The large UK budget deficit in 2009–10 of about 11 per cent of GDP mainly results from the fiscal impact of the crisis on top of a pre-existing structural deficit of about 3 per cent of GDP; discretionary fiscal stimulus was equivalent to only about 1.5 per cent of GDP ( IFS, 2010 ). But the key point is that there was no attempt through fiscal stringency to stop the deficit from increasing, quite unlike 1931.

Using the standard formula that for fiscal sustainability b > d ( r – g ) where b is the primary surplus/GDP, r is the interest rate on government debt, and g is the growth rate of nominal GDP with the data set from Middleton (2010) , in the late 1920s, d = 1.7, r = 4.6, and g = 2.5; if inflation is zero then b = 3.6 per cent, but if prices fell at 5 per cent per year, b rose to 12.1 per cent. Conversion of the war debt and gently rising prices in the post-gold-standard world changed this so that b fell below 2 per cent. The value of b is quite small in each of these scenarios if d is at the 1913 level of 0.25.

The claim that there is a market-failure-based justification for stronger regulation is related to the special features of banking that create instability risks and clearly does not generalize to a case for state intervention across the board on the grounds that the market economy as a whole has failed. That error was commonplace in the 1930s but should not be repeated now. It should also be apparent that 1930s experience does not offer a blueprint for the optimal details of regulation in the different world of today.

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48e. Social and Cultural Effects of the Depression

No nation could emerge from the cauldron of national crisis without profound social and cultural changes. While many undesirable vices associated with hopelessness were on the rise, many family units were also strengthened through the crisis. Mass migrations reshaped the American mosaic. While many businesses perished during the Great Depression, others actually emerged stronger. And new forms of expression flourished in the culture of despair.

The Great Depression brought a rapid rise in the crime rate as many unemployed workers resorted to petty theft to put food on the table. Suicide rates rose, as did reported cases of malnutrition. Prostitution was on the rise as desperate women sought ways to pay the bills. Health care in general was not a priority for many Americans, as visiting the doctor was reserved for only the direst of circumstances. Alcoholism increased with Americans seeking outlets for escape, compounded by the repeal of prohibition in 1933. Cigar smoking became too expensive, so many Americans switched to cheaper cigarettes.

Higher education remained out of reach for most Americans as the nation's universities saw their student bodies shrink during the first half of the decade. High school attendance increased among males, however. Because the prospects of a young male getting a job were so incredibly dim, many decided to stay in school longer. However, public spending on education declined sharply, causing many schools to open understaffed or close due to lack of funds.

Demographic trends also changed sharply. Marriages were delayed as many males waited until they could provide for a family before proposing to a prospective spouse. Divorce rates dropped steadily in the 1930s. Rates of abandonment increased as many husbands chose the "poor man's divorce" option — they just ran away from their marriages. Birth rates fell sharply, especially during the lowest points of the Depression. More and more Americans learned about birth control to avoid the added expenses of unexpected children.

Mass migrations continued throughout the 1930s. Rural New England and upstate New York lost many citizens seeking opportunity elsewhere. The Great Plains lost population to states such as California and Arizona. The Dust Bowl sent thousands of "Okies" and "Arkies" looking to make a better life. Many of the migrants were adolescents seeking opportunity away from a family that had younger mouths to feed. Over 600,000 people were caught hitching rides on trains during the Great Depression. Many times offenders went unpunished.

Classic films like Frankenstein , It Happened One Night , and Gone with the Wind debuted during the Great Depression. Radio flourished as those who owned a radio set before the crash could listen for free. President Roosevelt made wide use of radio technology with his periodic "fireside chats" to keep the public informed. Dorothea Lange depicted the sadness of Depression farm life with her stirring photographs.

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Home — Essay Samples — History — History of the United States — Great Depression

Essays on Great Depression

Great depression essay topic examples, argumentative essays.

Argumentative essays on the Great Depression require you to take a stance on a specific aspect of this historical event and provide evidence to support your viewpoint. Consider these topic examples:

• 1. Argue for the primary causes of the Great Depression, emphasizing the role of economic policies, banking practices, and global factors in triggering the crisis.
• 2. Debate the effectiveness of New Deal programs in alleviating the suffering of Americans during the Great Depression, discussing their long-term impact on the nation's economy and social fabric.

Example Introduction Paragraph for an Argumentative Great Depression Essay: The Great Depression remains a defining moment in American history, marked by economic turmoil and widespread suffering. In this argumentative essay, we will examine the primary causes of the Great Depression, focusing on economic policies, banking practices, and global factors that contributed to this devastating crisis.

Example Conclusion Paragraph for an Argumentative Great Depression Essay: In conclusion, the analysis of the Great Depression's causes underscores the complexity of this historical event. As we reflect on the lessons learned from this era, we are reminded of the importance of sound economic policies and vigilant oversight in preventing future economic crises.

Compare and Contrast Essays

Compare and contrast essays on the Great Depression involve analyzing the similarities and differences between various aspects of the era, such as its impact on different countries or the approaches taken to address the crisis. Consider these topics:

• 1. Compare and contrast the effects of the Great Depression on the United States and Germany, examining the economic, social, and political consequences in both nations.
• 2. Analyze and contrast the approaches taken by Franklin D. Roosevelt's New Deal and Adolf Hitler's economic policies in response to the Great Depression, exploring their divergent ideologies and outcomes.

Example Introduction Paragraph for a Compare and Contrast Great Depression Essay: The Great Depression had a global impact, affecting nations differently and prompting diverse responses. In this compare and contrast essay, we will explore the effects of the Great Depression on the United States and Germany, examining the economic, social, and political consequences in both countries.

Example Conclusion Paragraph for a Compare and Contrast Great Depression Essay: In conclusion, the comparison and contrast of the Great Depression's effects on the United States and Germany reveal the profound and lasting consequences of economic crises. As we study these different experiences, we gain insights into the resilience of nations facing adversity.

Descriptive Essays

Descriptive essays on the Great Depression allow you to provide detailed accounts and analysis of specific aspects, events, or individuals during this period. Here are some topic ideas:

• 1. Describe the everyday life of a typical American family during the Great Depression, detailing their struggles, coping mechanisms, and aspirations for a better future.
• 2. Paint a vivid picture of a significant event from the Great Depression era, such as the Dust Bowl or a famous protest, discussing its impact on society and the lessons learned.

Example Introduction Paragraph for a Descriptive Great Depression Essay: The Great Depression left an indelible mark on the lives of ordinary Americans, shaping their daily experiences and aspirations. In this descriptive essay, we will delve into the everyday life of a typical American family during this challenging period, exploring their struggles and hopes for a brighter future.

Example Conclusion Paragraph for a Descriptive Great Depression Essay: In conclusion, the descriptive exploration of a typical American family's life during the Great Depression reminds us of the resilience and determination of individuals in the face of adversity. As we reflect on their experiences, we are inspired by their unwavering spirit.

Persuasive Essays

Persuasive essays on the Great Depression involve advocating for specific actions, policies, or changes related to economic recovery, social welfare, or preventing future economic crises. Consider these persuasive topics:

• 1. Persuade your audience of the importance of implementing social safety net programs to prevent another Great Depression-like economic catastrophe, highlighting the potential benefits and challenges of such initiatives.
• 2. Advocate for increased financial literacy education in schools as a means to empower individuals with the knowledge and skills to make informed financial decisions, potentially preventing future economic crises.

Example Introduction Paragraph for a Persuasive Great Depression Essay: The lessons of the Great Depression continue to shape economic and social policies today. In this persuasive essay, I will make a compelling case for the implementation of social safety net programs aimed at preventing future economic catastrophes like the Great Depression, emphasizing the potential benefits and challenges of such initiatives.

Example Conclusion Paragraph for a Persuasive Great Depression Essay: In conclusion, the persuasive argument for social safety net programs underscores the importance of proactive measures to safeguard against economic crises. As we advocate for change, we contribute to a more resilient and equitable society.

Narrative Essays

Narrative essays on the Great Depression allow you to share personal stories, experiences, or observations related to this historical period, your family's history during the era, or the impact of the Great Depression on your community. Explore these narrative essay topics:

• 1. Narrate a family story or anecdote passed down through generations about how your family coped with the challenges of the Great Depression, highlighting the resilience and resourcefulness of your ancestors.
• 2. Share a personal narrative of how the Great Depression era shaped the values and principles of your community, discussing the lasting impact on your town or neighborhood.

Example Introduction Paragraph for a Narrative Great Depression Essay: The Great Depression was not just a historical event; it was a period that defined the experiences and values of countless individuals and communities. In this narrative essay, I will share a family story that has been passed down through generations, illustrating how my family coped with the challenges of this era and the lasting impact on our values.

Example Conclusion Paragraph for a Narrative Great Depression Essay: In conclusion, the narrative of my family's experience during the Great Depression serves as a reminder of the resilience and resourcefulness that emerged during this challenging period. As we reflect on our history, we find inspiration in the strength of those who came before us.

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The Great Depression: America's Biggest Financial Collapse in Economic History

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1929 - c. 1939

Europe, United States

Franklin D. Roosevelt: As the President of the United States from 1933 to 1945, Roosevelt implemented the New Deal, a series of economic and social programs aimed at alleviating the effects of the Great Depression. John Steinbeck: An influential American author, Steinbeck wrote novels such as "The Grapes of Wrath" (1939), which depicted the plight of migrant workers during the Great Depression. His work shed light on the social and economic injustices faced by many Americans during that time. Dorothea Lange: A renowned documentary photographer, Lange captured powerful images of individuals and families affected by the Great Depression. Her iconic photograph "Migrant Mother" became a symbol of the hardships faced by ordinary Americans. Eleanor Roosevelt: The wife of President Franklin D. Roosevelt, Eleanor Roosevelt was a prominent advocate for social and economic reform. She played an active role in promoting the New Deal policies and was a strong voice for marginalized communities during the Great Depression.

The Great Depression, one of the most severe economic crises in history, occurred during the 1930s. It started in the United States with the stock market crash of 1929, often referred to as "Black Tuesday." This event led to a chain reaction of economic downturns worldwide, resulting in high unemployment rates, widespread poverty, and a significant decline in industrial production. The effects of the Great Depression were felt across various sectors, including agriculture, manufacturing, and banking.

The Great Depression was preceded by a series of factors that set the stage for its occurrence. In the aftermath of World War I, the global economy experienced a period of instability and rapid growth known as the Roaring Twenties. However, beneath the surface of apparent prosperity, there were underlying vulnerabilities. One of the key factors contributing to the Great Depression was the rampant speculation in the stock market, fueled by easy credit and speculative investments. This speculative bubble eventually burst in October 1929, triggering the stock market crash and initiating a chain reaction of economic collapse. Additionally, international economic imbalances played a role in exacerbating the crisis. Protectionist trade policies, war reparations, and a decline in global trade contributed to a decline in industrial production and widespread unemployment. The collapse of the banking system further deepened the crisis, as bank failures wiped out people's savings and caused a severe liquidity crisis.

Stock Market Crash: On October 29, 1929, known as Black Tuesday, the stock market experienced a catastrophic crash, signaling the start of the Great Depression. This event led to a massive loss of wealth and investor confidence. Dust Bowl: In the early 1930s, severe drought and poor farming practices led to the Dust Bowl in the Great Plains region of the United States. Dust storms ravaged the land, causing agricultural devastation and mass migration of farmers to seek better opportunities elsewhere. New Deal: In response to the crisis, President Franklin D. Roosevelt implemented the New Deal, a series of programs and reforms aimed at providing relief, recovery, and reform. This included measures such as the creation of jobs, financial regulations, and social welfare initiatives.

Economic Collapse: The Great Depression plunged the global economy into a severe downturn. Industries faced widespread bankruptcies, trade declined, and unemployment soared. Poverty levels skyrocketed, leaving many families without basic necessities. Social Unrest: The economic hardship led to increased social unrest. Breadlines, shantytowns, and soup kitchens became common sights as people struggled to survive. Homelessness and hunger became prevalent, straining social structures. Global Impact: The Great Depression had a global reach, affecting countries around the world. International trade declined, leading to a sharp decline in exports and imports. This interconnectedness contributed to a worldwide economic slowdown. Political Shifts: The economic crisis paved the way for significant political shifts. Governments faced pressure to address the crisis, resulting in the rise of interventionist policies and increased government involvement in the economy. This gave birth to the concept of the welfare state. Cultural and Artistic Expression: The Great Depression influenced art, literature, and music, reflecting the hardships and struggles of the era. Artists and writers depicted the human suffering and the search for hope amid despair.

Literature: John Steinbeck's novel "The Grapes of Wrath" (1939) is a powerful depiction of the Great Depression's impact on migrant workers in the United States. It follows the Joad family as they face poverty, displacement, and exploitation while searching for a better life. The book explores themes of resilience, social injustice, and the human spirit in the face of adversity. Photography: The Farm Security Administration (FSA) hired photographers, including Dorothea Lange and Walker Evans, to document the effects of the Great Depression. Their iconic photographs, such as Lange's "Migrant Mother," captured the hardships faced by rural communities, evoking empathy and raising awareness about the human toll of the economic crisis. Films: Movies like "The Grapes of Wrath" (1940) and "It's a Wonderful Life" (1946) depicted the struggles and resilience of individuals and communities during the Great Depression. These films offered social commentary, showcased the impact of economic hardship, and explored themes of hope, perseverance, and the importance of human connections. Music: Artists like Woody Guthrie composed folk songs that reflected the experiences of those affected by the Great Depression. Guthrie's "This Land Is Your Land" and "Dust Bowl Blues" expressed the struggles of the working class and the desire for a more equitable society. Art: Painters such as Grant Wood and Thomas Hart Benton created works that captured the hardships and rural landscapes of the Great Depression. Wood's painting "American Gothic" became an iconic representation of the era, symbolizing the resilience and determination of the American people.

1. The Gross Domestic Product (GDP) of the United States dropped by approximately 30% during the Great Depression. 2. Between 1929 and 1932, over 9,000 banks in the United States failed, causing immense financial instability. 3. The poverty rate in the United States surged during the Great Depression. By 1933, around 15 million Americans, representing approximately 30% of the population at that time, were living below the poverty line.

The topic of the Great Depression holds significant importance as it marks a critical period in global history that profoundly impacted economies, societies, and individuals worldwide. Exploring this topic in an essay provides valuable insights into the causes, consequences, and responses to one of the most severe economic downturns in modern times. Understanding the Great Depression is essential to grasp the complexities of economic cycles, financial systems, and government policies. It allows us to reflect on the vulnerabilities of economies and the potential ramifications of economic crises. Moreover, studying the Great Depression enables us to analyze the various social, political, and cultural transformations that took place during that era, including the rise of social welfare programs, labor movements, and governmental interventions. By delving into this topic, we gain valuable lessons about resilience, adaptability, and the role of leadership during challenging times. Exploring the experiences of individuals and communities during the Great Depression also helps us empathize with their struggles and appreciate the importance of collective efforts to overcome adversity.

1. Bernanke, B. S. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. The American Economic Review, 73(3), 257-276. 2. Eichengreen, B. (1992). Golden fetters: The gold standard and the Great Depression, 1919-1939. Oxford University Press. 3. McElvaine, R. S. (1993). The Great Depression: America, 1929-1941. Times Books. 4. Rothbard, M. N. (2000). America's Great Depression. Ludwig von Mises Institute. 5. Badger, A. J. (2014). The Great Depression as a revolution. The Journal of Interdisciplinary History, 44(2), 156-174. 6. Temin, P. (2010). The Great Depression: Lessons for macroeconomic policy today. MIT Press. 7. Kennedy, D. M. (1999). Freedom from fear: The American people in depression and war, 1929-1945. Oxford University Press. 8. Leuchtenburg, W. E. (2015). The FDR years: On Roosevelt and his legacy. Columbia University Press. 9. Roth, B. (2017). The causes and consequences of the Great Depression. OpenStax. 10. Galbraith, J. K. (1997). The Great Crash, 1929. Houghton Mifflin.

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Banking Panics of 1930-31

November 1930–august 1931.

John Poole, president of the Federal American National Bank in Washington, D.C., stands on a narrow ledge outside the building and declares to the crowd that the institution was sound, February 5, 1931. 

In the fall of 1930, the economy appeared poised for recovery. The previous three contractions, in 1920, 1923, and 1926, had lasted an average of fifteen months. 1   The downturn that began in the summer of 1929 had lasted for fifteen months. A rapid and robust recovery was anticipated. In November 1930, however, a series of crises among commercial banks turned what had been a typical recession into the beginning of the Great Depression .

When the crises began, over 8,000 commercial banks belonged to the Federal Reserve System, but nearly 16,000 did not. Those nonmember banks operated in an environment similar to that which existed before the Federal Reserve was established in 1914. That environment harbored the causes of banking crises.

One cause was the practice of counting checks in the process of collection as part of banks’ cash reserves. These ‘floating’ checks were counted in the reserves of two banks, the one in which the check was deposited and the one on which the check was drawn. 2    In reality, however, the cash resided in only one bank. Bankers at the time referred to the reserves composed of float as fictitious reserves. The quantity of fictitious reserves rose throughout the 1920s and peaked just before the financial crisis in 1930. This meant that the banking system as a whole had fewer cash (or real) reserves available in emergencies (Richardson 2007).

Another problem was the inability to mobilize bank reserves in times of crisis. Nonmember banks kept a portion of their reserves as cash in their vaults and the bulk of their reserves as deposits in correspondent banks in designated cities. Many, but not all, of the ultimate correspondents belonged to the Federal Reserve System. This reserve pyramid limited country banks’ access to reserves during times of crisis. 3    When a bank needed cash, because its customers were panicking and withdrawing funds en masse, the bank had to turn to its correspondent, which might be faced with requests from many banks simultaneously or might be beset by depositor runs itself. The correspondent bank also might not have the funds on hand because its reserves consisted of checks in the mail, rather than cash in its vault. If so, the correspondent would, in turn, have to request reserves from another correspondent bank. That bank, in turn, might not have reserves available or might not respond to the request. 4

These problems turned the collapse of Caldwell and Company into a painful financial event. Caldwell was a rapidly expanding conglomerate and the largest financial holding company in the South. It provided its clients with an array of services – banking, brokerage, insurance – through an expanding chain controlled by its parent corporation headquartered in Nashville, Tennessee. The parent got into trouble when its leaders invested too heavily in securities markets and lost substantial sums when stock prices declined. In order to cover their own losses, the leaders drained cash from the corporations that they controlled.

On November 7, one of Caldwell’s principal subsidiaries, the Bank of Tennessee (Nashville) closed its doors. On November 12 and 17, Caldwell affiliates in Knoxville, Tennessee, and Louisville, Kentucky, also failed. The failures of these institutions triggered a correspondent cascade that forced scores of commercial banks to suspend operations. In communities where these banks closed, depositors panicked and withdrew funds en masse from other banks. Panic spread from town to town. Within a few weeks, hundreds of banks suspended operations. About one-third of these organizations reopened within a few months, but the majority were liquidated (Richardson 2007).

Panic began to subside in early December. But on December 11, the fourth-largest bank in New York City, Bank of United States, ceased operations. The bank had been negotiating to merge with another institution. The New York Fed had helped with the search for a merger partner. When negotiations broke down, depositors rushed to withdraw funds, and New York’s superintendent of banking closed the institution. This event, like the collapse of Caldwell, generated newspaper headlines throughout the United States, stoking fears of financial panics and currency shortages like the panic of 1907 and inducing jittery depositors to withdraw funds from other banks.

The Federal Reserve’s reaction to this crisis varied across districts. The crisis began in the Sixth District, headquartered in Atlanta. The leaders of the Federal Reserve Bank of Atlanta believed that their responsibility as a lender of last resort extended to the broader banking system. The Atlanta Fed expedited discount lending to member banks, encouraged member banks to extend loans to their nonmember respondents, and rushed funds to cities and towns beset by banking panics. 5

The crisis also hit the Eighth District, headquartered in St. Louis. The leaders of the Federal Reserve Bank of St. Louis had a narrower view of their responsibilities and refused to rediscount loans for the purpose of accommodating nonmember banks. During the crisis, the St. Louis Fed limited discount lending and refused to assist nonmember institutions.

Outcomes differed between the districts. After the crisis, in the Sixth District, the economic contraction slowed and recovery began. In the Eighth District, hundreds of banks failed. Lending declined. Business faltered and unemployment rose (Richardson and Troost 2009; Jalil 2014; Ziebarth 2013).

The banking crisis that began with the collapse of Caldwell subsided in early 1931. A new crisis erupted in June 1931, this time in the city of Chicago. Once again, depositor runs beset networks of nonmember banks, some of which had invested in assets that had declined in value. In Chicago, the problem particularly involved real estate.

These regional banking crises harmed the national economy in several ways. The crises disrupted the process of credit creation, increasing the prices that firms paid for working capital and preventing some firms from acquiring credit at any price (Bernanke 1983). This process was particularly pronounced in regions, like the Eighth Federal Reserve District, where large numbers of banks failed, and the information that those banks possessed about who in their community was a good and a bad credit risk disappeared.

The crises also generated deflation because they convinced bankers to accumulate reserves and the public to hoard cash (Friedman and Schwartz 1964). Hoarding reduced the proportion of the monetary base deposited in banks. Accumulating reserves reduced the proportion of deposits that banks loaned out. Together, hoarding and accumulating reduced the supply of money, particularly the amount of money in checking accounts, which at the time were the principal means of payment for goods and services. As the stock of money declined, the prices of goods necessarily followed.

Deflation harmed the economy in many ways. Deflation forced banks, firms, and debtors into bankruptcy; distorted economic decision-making; reduced consumption; and increased unemployment. The gold standard transmitted deflation to other industrial nations, which contributed to financial crises in those countries, and reflected back onto the United States, exacerbating a deflationary feedback loop.

The deflation ended with the  Bank Holiday of 1933  and the Roosevelt administration’s recovery programs. These programs included the suspension of the gold standard and the reflation of prices, discussed in essays on  Roosevelt’s Gold Program  and the  Gold Reserve Act of 1934 , as well as the reform of financial regulation, creation of deposit insurance, and recapitalization of commercial banks, discussed in essays on the  Emergency Banking Act ,  Banking Act of 1933 , and  Banking Act of 1935 .

• 1  The contraction of 1920 lasted nineteen months. 1923 lasted fourteen months. 1926 lasted thirteen months. These business cycle dates come from the National Bureau of Economic Research .
• 2  Checks in the process of collection could appear on the balance sheet of multiple banks if the checks passed through one (or more) correspondents as they wound their way through the clearing process.
• 3  A country bank was the official designation for a bank that operated outside of a reserve or central reserve city.
• 4  It is worth noting that at the time, the flaws of the dual banking system were widely recognized. Both of the flaws discussed in this essay were identified by the National Monetary Commission and addressed in the Federal Reserve Act. The act, however, only attempted to solve these problems for the banks that voluntarily joined the Federal Reserve System.
• 5  A respondent was a bank that deposited its reserve and transaction balances in a correspondent bank.

Bibliography

Bernanke, Ben. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” American Economic Review 73, no. 3 (June 1983): 257-276.

Calomiris, Charles W., and Joseph R. Mason. "Fundamentals, Panics, and Bank Distress During the Depression." American Economic Review 93, no. 5(2003): 1615-1647.

Chandler, Lester V. America’s Greatest Depression , 1929-1941. New York: Harper and Row, 1970.

Friedman, Milton and Anna Schwartz. The Great Contraction, 1929-1933 . Princeton: Princeton University Press, 1964.

Jalil, Andrew. “Monetary Intervention Really Did Mitigate Banking Panics During the Great Depression: Evidence Along the Atlanta Federal Reserve District Border.” Forthcoming in the Journal of Economic History , 2014.

Kemmerer, Edwin Walter. The A B C of the Federal Reserve System: Why the Federal Reserve System Was Called into Being, the Main Features of its Organization, and How it Works . Princeton: Princeton University Press, 1918.

McFerrin, James B. Caldwell and Company . Chapel Hill: University of North Carolina Press, 1939.

Richardson, Gary. “The Check is in the Mail: Correspondent Clearing and the Collapse of the Banking System, 1930 to 1933.” Journal of Economic History 67, no. 3 (September 2007): 643-671.

Richardson, Gary. “Categories and Causes of Bank Distress during the Great Depression, 1929—1933: The Illiquidity versus Insolvency Debate Revisited.” Explorations in Economic History 44, no. 4 (October 2007): 586-607.

Richardson, Gary and William Troost. “Monetary Intervention Mitigated Banking Panics During the Great Depression: Quasi-Experimental Evidence from the Federal Reserve District Border, 1929 to 1933.” Journal of Political Economy 117, no. 6 (December 2009): 1031-1073.

Richardson, Gary and Patrick Van Horn. “Intensified Regulatory Scrutiny and Bank Distress in New York City during the Great Depression.” Journal of Economic History 69, no. 2 (June 2009).

Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W. W. Norton, 1976.

White, Eugene. “A Reinterpretation of the Banking Crisis of 1930.” Journal of Economic History 44, no. 1 (March 1984): 119-138.

Wicker, Elmus. “A Reconsideration of the Causes of the Banking Panic of 1930.” Journal of Economic History 40, no. 3 (September 1980): 571-583.

Ziebarth, Nicolas L. “Identifying the Effects of Bank Failures from a Natural Experiment in Mississippi during the Great Depression.” American Economic Journal: Macroeconomics 5, no. 1 (2013): 81-101.

Written as of November 22, 2013. See disclaimer .

Related Essays

• Banking Panics of 1931-33
• The Great Depression
• Bank Holiday of 1933
• Banking Acts of 1932

Federal Reserve History

124 Great Depression Topics to Write about & Examples

Welcome to our list of the Great Depression topics! Here, you will find writing ideas about the causes and effects of the Great Depression. You can also pick plenty of related issues to debate.

🔝 Top 10 Great Depression Topics to Write About

🏆 best great depression topic ideas & essay examples, 💡 good great depression essay topics, ⭐ interesting topics to write about great depression, ❓ great depression essay questions, 🔎 great depression research topics.

• The Stock Market Crash of 1929
• What Triggered the Great Depression?
• Lessons Learned from the Great Depression
• The Dust Bowl Disaster and Its Role in the Depression
• How Banks Caused the Collapse of the Economy
• Government’s Response to the Great Depression
• The Great Depression and International Relations
• Unemployment and Poverty During the Depression
• Hardship and Resilience in Literature of the Great Depression
• The Impact of the Great Depression on Population Movements
• Cause and Effects of The Great Depression The economic devastation of the 1920s led to the Great Depression and brought a tragedy for the whole society. Crash of stock market The crash of the stock market in 1929 ushered in the Great […]
• The Impact of the Great Depression on Canada Some of the measures that Bennett put in place included camps to support the old and sick as well as the distribution of aid to the unemployed and disadvantaged in the country.
• The Reality of the Great Depression in Steinbeck’s “The Grapes of Wrath” The journey of the Joad family and other significant characters in the story who played the roles in building the whole context take the path of meeting miserable economic situations.
• Great Depression and Cold War: Making of Modern America This paper will explore the causes of the Great Depression, the measures implemented within the New Deal, Cold War tensions, and the changes to the American society by the civil rights movement.
• John Steinbeck’s “The Grapes of Wrath” and the Great Depression The Grapes of Wrath begins by describing an occurrence of soil erosion in Dust Bowl Oklahoma that led to the destruction of crops, a decline in farming and farm produce and the migration of farmers […]
• The Three Main Causes of Great Depression This paper sheds light on the causes that led to the great depression in America According to Bordo and White, the great depression begun in 1929 and many people suffered because all the businesses had […]
• The Great Depression in Canada Before the onset of the Great Depression from the years 1919-1929, Canada had the fastest growing economy amongst the developing nations and the only blip to this record was the slight recession they suffered during […]
• Great Depression: Annotated Bibliography This is a secondary source, written in 2020, and its main idea is that shocks of uncertainty had the main effect on the changes during the Great Depression, which contributed to the fall in production.
• President Hoover’s Role During the Great Depression Although a significant percentage of the causative constituents emanated from the previous government’s economic strategies, President Hoover elevated the conditional outlier.
• Impact of the Great Depression and the New Deal on Minorities However, despite the intention to promote democracy and equality in the United States, the impact of the Great Depression was devastating, and the New Deal did not solve most problems among minorities.
• Social Work During the Great Depression and COVID-19 Pandemic Social workers during the COVID-19 pandemic were faced with a series of novice challenges similar to their counterparts in the Great Depression.
• The Great Depression: Prerequisites, Essence, and Consequences As a result of the crisis and the rise of protectionism, according to the League of Nations, world trade fell threefold from 1929 to 1933.
• How New Deal Represented Minorities and Ended the Great Depression The Civilian Conservation Corps and the Works Progress Administration were some of the many programs representing minorities in the New Deal.
• Public Enemies During the Great Depression In the 1930’s most people in America were feeling the impact of the Great Depression due to the crashed economy. During the great depression, most people were facing the challenges of starving and losing their […]
• The Concepts of Freedom and the Great Depression Furthermore, blacks were elected to construct the constitution, and black delegates fought for the rights of freedpeople and all Americans. African-Americans gained the freedom to vote, work, and be elected to government offices during Black […]
• Economic History of the US: The Great Depression The government’s immediate and unprecedented action brought the state out of the crisis and preserved the system of capitalism. In order to restore the security of Americans in the new deal, Congress and the President […]
• The Contribution of Former U.S. Presidents in Overcoming the Great Depression The Great Depression presents an event in which the U.S.developed progressive leadership policies to improve living standards. Modern politics in the U.S.has caused social divisions similar to the period of Unravelling.
• American History: Great Depression and Other Issues One of the causes of the Great Depression was the international economic woes of the United States of America. One of the actions taken by the Hoover administration to combat the depression was urging the […]
• The History of Great Depression The Great Depression was the most severe recession of the past centuries. It affected the whole world and lasted for approximately 12 years.
• The Great Depression, Volatility and Employee Morale A?” The purpose of the present investigation study is to understand the morale of employees in corporate America on how it affects the way the economy functions in the United States.
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IvyPanda. (2024, February 27). 124 Great Depression Topics to Write about & Examples. https://ivypanda.com/essays/topic/great-depression-essay-examples/

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By: History.com Editors

Updated: April 24, 2023 | Original: October 27, 2009

The Dust Bowl was the name given to the drought-stricken southern plains region of the United States, which suffered severe dust storms during a drought in the 1930s. As high winds and choking dust swept the region from Texas to Nebraska, people and livestock were killed and crops failed across the entire region. The Dust Bowl intensified the crushing economic impacts of the Great Depression and drove many farming families on a desperate migration in search of work and better living conditions.

What Caused the Dust Bowl?

The Dust Bowl was caused by several economic and agricultural factors, including federal land policies, changes in regional weather, farm economics and other cultural factors. After the Civil War , a series of federal land acts coaxed pioneers westward by incentivizing farming in the Great Plains.

The Homestead Act of 1862, which provided settlers with 160 acres of public land, was followed by the Kinkaid Act of 1904 and the Enlarged Homestead Act of 1909. These acts led to a massive influx of new and inexperienced farmers across the Great Plains.

Many of these late 19th and early 20th-century settlers lived by the superstition “rain follows the plow.” Emigrants, land speculators, politicians and even some scientists believed that homesteading and agriculture would permanently affect the climate of the semi-arid Great Plains region, making it more conducive to farming.

Manifest Destiny 

This false belief was linked to Manifest Destiny —an attitude that Americans had a sacred duty to expand west. A series of wet years during the period created a further misunderstanding of the region’s ecology and led to the intensive cultivation of increasingly marginal lands that couldn’t be reached by irrigation.

Rising wheat prices in the 1910s and 1920s and increased demand for wheat from Europe during World War I encouraged farmers to plow up millions of acres of native grassland to plant wheat, corn and other row crops. But as the United States entered the Great Depression , wheat prices plummeted. In desperation, farmers tore up even more grassland in an attempt to harvest a bumper crop and break even.

Crops began to fail with the onset of drought in 1931, exposing the bare, over-plowed farmland. Without deep-rooted prairie grasses to hold the soil in place, it began to blow away. Eroding soil led to massive dust storms and economic devastation—especially in the Southern Plains.

When Was the Dust Bowl?

The Dust Bowl, also known as “the Dirty Thirties,” started in 1930 and lasted for about a decade, but its long-term economic impacts on the region lingered much longer.

Severe drought hit the Midwest and southern Great Plains in 1930. Massive dust storms began in 1931. A series of drought years followed, further exacerbating the environmental disaster.

By 1934, an estimated 35 million acres of formerly cultivated land had been rendered useless for farming, while another 125 million acres—an area roughly three-quarters the size of Texas—was rapidly losing its topsoil.

Regular rainfall returned to the region by the end of 1939, bringing the Dust Bowl years to a close. The economic effects, however, persisted. Population declines in the worst-hit counties—where the agricultural value of the land failed to recover—continued well into the 1950s.

How the Dust Bowl Made Americans Refugees in Their Own Country

As they traveled west from the drought‑ravaged Midwest, American‑born migrants were viewed as disease‑ridden intruders who would sponge off the government.

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To justify the need for New Deal projects, the government employed photographers to document the suffering of those affected, producing some of the most iconic photographs of the Great Depression.

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The Hoover Dam, LaGuardia Airport and the Bay Bridge were all part of FDR's New Deal investment.

‘Black Blizzards’ Strike America

During the Dust Bowl period, severe dust storms, often called “black blizzards,” swept the Great Plains. Some of these carried topsoil from Texas and Oklahoma as far east as Washington, D.C. and New York City , and coated ships in the Atlantic Ocean with dust.

Billowing clouds of dust would darken the sky, sometimes for days at a time. In many places, the dust drifted like snow and residents had to clear it with shovels. Dust worked its way through the cracks of even well-sealed homes, leaving a coating on food, skin and furniture.

Some people developed “dust pneumonia” and experienced chest pain and difficulty breathing. It’s unclear exactly how many people may have died from the condition. Estimates range from hundreds to several thousand people.

On May 11, 1934, a massive dust storm two miles high traveled 2,000 miles to the East Coast, blotting out monuments such as the Statue of Liberty and the U.S. Capitol.

The worst dust storm occurred on April 14, 1935. News reports called the event Black Sunday. A wall of blowing sand and dust started in the Oklahoma Panhandle and spread east. As many as three million tons of topsoil are estimated to have blown off the Great Plains during Black Sunday.

An Associated Press news report coined the term “Dust Bowl” after the Black Sunday dust storm.

New Deal Programs

President Franklin D. Roosevelt established a number of measures to help alleviate the plight of poor and displaced farmers. He also addressed the environmental degradation that had led to the Dust Bowl in the first place.

As part of Roosevelt’s New Deal , Congress established the Soil Erosion Service and the Prairie States Forestry Project in 1935. These programs put local farmers to work planting trees as windbreaks on farms across the Great Plains. The Soil Erosion Service, now called the Natural Resources Conservation Service (NRCS) developed and promoted new farming techniques to combat the problem of soil erosion.

Okie Migration

Roughly 2.5 million people left the Dust Bowl states— Texas , New Mexico , Colorado , Nebraska , Kansas and Oklahoma—during the 1930s. It was one of the largest migrations in American history.

Oklahoma alone lost 440,000 people to migration. Many of them, poverty-stricken, traveled west looking for work. From 1935 to 1940, roughly 250,000 Oklahoma migrants moved to California . A third settled in the state’s agriculturally rich San Joaquin Valley.

These Dust Bowl refugees were called “Okies.” Okies faced discrimination, menial labor and pitiable wages upon reaching California. Many of them lived in shantytowns and tents along irrigation ditches. “Okie” soon became a term of disdain used to refer to any poor Dust Bowl migrant, regardless of their state of origin.

Dust Bowl in Arts and Culture

The Dust Bowl, and the suffering endured by those who survived it, captured the hearts and imaginations of the nation’s artists, musicians and writers.

John Steinbeck memorialized the plight of the Okies in his 1939 novel The Grapes of Wrath . Photographer Dorothea Lange documented rural poverty with a series of photographs for FDR’s Farm Securities Administration, and artist Alexandre Hogue achieved renown with his Dust Bowl landscapes.

Folk musician Woody Guthrie , and his semi-autobiographical first album Dust Bowl Ballads of 1940, told stories of economic hardship faced by Okies in California. Guthrie, an Oklahoma native, left his home state with thousands of others looking for work during the Dust Bowl.

FDR and the New Deal Response to an Environmental Catastrophe. Roosevelt Institute . About The Dust Bowl. English Department; University of Illinois . Dust Bowl Migration. University of California at Davis . The Great Okie Migration. Smithsonian American Art Museum . Okie Migrations. Oklahoma Historical Society . What we learned from the Dust Bowl: lessons in science, policy, and adaptation. Population and Environment . The Dust Bowl. Library of Congress . Dust Bowl Ballads: Woody Guthrie. Smithsonian Folkways Recordings . The Dust Bowl. Ken Burns; PBS .

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Aside from the Civil War, the Great Depression was the gravest crisis in American history. Just as in the Civil War, the United States appeared—at least at the start of the 1930s—to be falling apart. But for all the turbulence and the panic , the ultimate effects of the Great Depression were less revolutionary than reassuring.

This was undeniably an era of extraordinary political innovation , much of it expressed in the reforms enacted by Franklin D. Roosevelt ’s New Deal and his administration’s attempts to cope with the problems of poverty, unemployment , and the disintegration of the American economy. It was also a time when a significant number of Americans flirted with Marxist movements and ideas, as well as with the notion that the model for a more humane society could be found in the Soviet Union . Above all, it was a decade of cultural ferment, in which American writers, artists, and intellectuals experimented with new, more socially oriented forms of literature, painting, theater, music, and mass entertainment.

Yet, paradoxically, the turmoil of the 1930s turned out to be predominantly conservative in its impact on American society. The Great Depression taught people of all social classes the value of economic security and the need to endure and survive hard times rather than to take risks with one’s life or money . Moreover, faced with the specter of totalitarian ideologies in Europe and Japan, Americans rediscovered the virtues of democracy and the essential decency of the ordinary citizen—the near-mythical “common man” who was celebrated in Roosevelt’s speeches, Frank Capra ’s movies, and Norman Rockwell ’s paintings. Thus, a decade marked by fundamental—even radical—social change ended for most with a reaffirmation of America’s cultural past and its traditional political ideals.

By contrast, many American intellectuals in the 1920s, disillusioned by what they considered the pointless carnage of World War I , had shown little interest in politics or social movements. Nor did they display much affection for life in the United States. Indeed, most American novelists, poets, artists, composers, and scientists continued to believe, as they had since the 19th century, that the United States was culturally inferior to Europe. So, to learn the latest modernist techniques in literature, painting, or music, or to study the most advanced theories in physics or psychoanalysis, they assumed they had to go to London, Paris, Berlin, Vienna, or Copenhagen.

But the stock market crash in 1929, the factory closures and spiraling unemployment of the early 1930s, and Hitler’s takeover of the German government in 1933 forced many “expatriates” not only to return to the United States but to become politically engaged in their home country. During the worst years of the Great Depression, between 1930 and 1935, this engagement often took the form of an attraction to Marxism , the Soviet Union, and the American Communist Party .

Marxism seemed to explain persuasively the causes of capitalism ’s collapse, while also providing a vision of an alternative social order. The Soviet Union , the site of the first successful Marxist-inspired revolution, appeared by the 1930s to be a concrete embodiment of what many writers called (in characteristically pragmatic American terms) the socialist “experiment.” In addition, from 1934 to 1939, the Soviet Union was the most uncompromising opponent of Nazi Germany, seeking alliances with Britain , France, and the United States and promoting a “ popular front ” partnership of liberals and socialists within the Western democracies to halt the spread of fascism in Europe and throughout the world. Nowhere did Moscow’s desire for a broad antifascist coalition appear more genuine than in the Spanish Civil War (1936–39), when the Soviet Union was the only country besides Mexico to aid in any serious way the Spanish Republicans against the armies of Francisco Franco (supported by Hitler and Benito Mussolini ).

Meanwhile, the communist parties in the United States and in western Europe gave intellectuals—as well as teachers, lawyers, architects, and other middle-class professionals—a feeling that they were no longer solitary individuals suffering from the failures of capitalism but belonged instead to a vibrant community of like-minded souls, in that they were participants in an international movement larger than themselves and that they were literally making history. For all these reasons Marxism, the Soviet Union, and the various national communist parties enjoyed a prestige and a popularity through much of the 1930s that they had never possessed in the 1920s and would never again enjoy after the Great Depression.

In 1932 the appeal of Marxism led 53 prominent American writers—including the novelists Sherwood Anderson and John Dos Passos , poet Langston Hughes , literary critics Edmund Wilson and Malcolm Cowley , philosopher Sidney Hook , and journalist Lincoln Steffens —to announce their support for William Z. Foster , the Communist Party’s candidate for president. Although Dos Passos, Wilson, and Hook later became bitter critics of the Soviet Union’s Stalinist regime, their initial enthusiasm for a socialist revolution indicated how compelling for intellectuals were the values and ideas of the left.

Perhaps no writer better reflected this new sense of social commitment than Ernest Hemingway . In 1929 Hemingway published A Farewell to Arms . The novel’s Lieutenant Henry, like Hemingway himself a volunteer American ambulance driver in Italy during World War I, decides to flee the madness of the war and make a “separate peace.” Here, desertion is seen as an act of sanity, even of heroism. Eleven years later, in 1940, Hemingway published another novel about war—in this case, the Spanish Civil War —called For Whom the Bell Tolls (the title was taken from John Donne ’s poem, which is itself a hymn to human fellowship). In this novel, Robert Jordan, another Hemingwayesque volunteer, serving with a band of anti-Franco guerrillas, is badly wounded but stays behind to defend a bridge, thereby protecting his comrades as they retreat. Jordan—unlike Lieutenant Henry—has found a cause worth fighting and dying for. And Hemingway’s own strong identification with the Spanish Republicans, for whom he raised money and helped make a documentary film called The Spanish Earth (1937), was symptomatic of a political involvement that neither he nor his fictional characters would have undertaken a decade earlier.

Of course, not every Depression-era American writer was entranced by communism or the Soviet Union. The majority of intellectuals and artists, like their fellow citizens, were much more comfortable voting for Roosevelt than idolizing Joseph Stalin . Indeed, by the middle and late 1930s, a growing number of American intellectuals—many of them clustered around the literary and political journal Partisan Review —had become militantly anti-Stalinist even as they retained their sympathy for socialism , their new stance having formed as Stalin launched a series of show trials that sent his former Bolshevik colleagues to Siberian labor camps (or more frequently to their death in the cellars of prisons), as terror spread throughout the Soviet Union, and as stories began to circulate about the communists murdering Trotskyists and anarchists behind the Republican lines in Spain. Still, it was not until August 1939, when Stalin shocked the world by signing a nonaggression pact with his archenemy Hitler, that the Soviet Union and the Communist Party in the United States lost what was left of their moral authority with all but a few American intellectuals.

New forms of cultural expression

Novelists, poets, painters, and playwrights of the 1930s did not need to be Marxists to create works that dealt with the problems of the Great Depression or the dangers of fascism. Indeed, even many who were sympathetic to Marxism acted as “fellow travelers” without joining the Communist Party. Most writers and artists in the prosperous 1920s thought of themselves as members of a transatlantic avant-garde and as stylistic disciples of Pablo Picasso , James Joyce , or Igor Stravinsky . In the impoverished and desperate 1930s, they repudiated—as did Malcolm Cowley in his literary memoir of the 1920s, Exile’s Return (1934)—what they now regarded as the escapism and self-indulgence of their modernist mentors. Given the political and economic calamities at home and abroad, they sought to focus on the plight of workers, sharecroppers, African Americans , the poor, and the dispossessed. Further, they wanted to communicate their insights in a language—whether literary, visual, or musical—that their audiences could easily comprehend.

This impulse led, in a variety of genres , to an aesthetic of documentary-style realism and of social protest. For writers such as Edmund Wilson , Sherwood Anderson , John Dos Passos, Erskine Caldwell , Richard Wright , and James Agee , fiction seemed inadequate in describing the disastrous effects of the Great Depression on political institutions, the natural environment , and human lives. So they joined with photographers and turned to journalism, as if their eyewitness portraits of desolate factories and American shantytowns, interviews with migrant workers and tenant farmers, and ubiquitous cameras could capture the “feel” and the essential truth of the Great Depression. Their yearning to record the pure, unadorned facts of daily existence, to listen to what Americans said about their plight, and to refrain from abstract theories or artistic embellishment was reflected in the titles of some of the books they wrote about their travels throughout the country: Wilson’s The American Jitters (1932), Anderson’s Puzzled America (1935), Nathan Asch’s The Road—In Search of America (1937), Caldwell’s You Have Seen Their Faces (1937), and Wright’s Twelve Million Black Voices (1941).

The most lyrical, and certainly the most eccentric , of these documentaries was Let Us Now Praise Famous Men (1941), with a text by Agee and pictures by Walker Evans . In order to illuminate the suffering but also the dignity of three sharecropper families in Alabama, Evans tried to photograph his subjects as objectively and as unobtrusively as possible. Meanwhile, Agee employed a variety of journalistic and artistic techniques: naturalistic description and dialogue , an almost anthropological itemization of clothing and household furniture, erudite discussions of agricultural problems in the deep South, autobiographical ruminations, religious symbolism, and intimate expressions of love for the families and rage at their misery. Though the book’s prose was perhaps too convoluted for readers in 1941, Let Us Now Praise Famous Men was the precursor of what would later be called the “ New Journalism ,” a highly personal style of reporting that influenced writers as diverse as George Orwell, Truman Capote , Tom Wolfe , and Norman Mailer .

Increasingly, Americans expected to be transported—through photographs, newsreels , or radio —to the scene of the latest calamity . The urge to convey the sights and sounds of the 1930s was also reflected in the emergence of public-opinion polling as a major (if still primitive) industry; in the “living newspaper” productions of the Works Progress Administration (WPA) Federal Theatre Project , which dramatized the headlines of the day; in government-sponsored documentary films such as Pare Lorentz ’s The River (1938) and The Plow That Broke the Plains (1936); in newsreels such as 20th Century-Fox’s Movietone News and Henry Luce ’s March of Time ; in the photography of Dorothea Lange and Margaret Bourke-White ; and in Life magazine’s reliance on photographs even more than on traditional print journalism to tell the authentic story of what Americans were enduring at the time.

This sensation of being present, at least vicariously, at a crisis may explain why Orson Welles ’s radio adaptation on October 30, 1938, of H.G. Wells ’s The War of the Worlds (1898) terrified so many listeners into believing that Martians had actually landed in New Jersey . The broadcast was done not as a play but in the style of a news story, with “announcers” breaking in for special bulletins, “reporters” delivering on-the-spot descriptions of the invasion, and “government spokesmen” (including one who sounded like FDR) issuing orders to troops and police. It was an event shared by millions of Americans, which is why it remains one of the most remembered events of the 1930s.

By the end of the decade, as Europe erupted into war, dramatic radio broadcasts took their cue from Welles’s drama, and audiences grew to depend on a new type of foreign correspondent, such as Edward R. Murrow , who broadcast from Berlin, Paris, and the rooftops of London and brought the sounds of falling bombs and air-raid sirens directly into people’s living rooms, documenting a global struggle more cataclysmic than even Welles could have imagined.

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Explore the lives of little-known changemakers who left their mark on the country

How the Great Depression Fueled a Grassroots Movement to Create a New State Called Absaroka

In the 1930s, disillusioned farmers and ranchers fought to carve a 49th state out of northern Wyoming, southeastern Montana and western South Dakota

Eli Wizevich

It was early 1935, and things were miserable in the United States. The soil was dry , the banks had crashed , and jobs were few and far between. Things were miserable in the proposed state of Absaroka , too. In fact, that’s how Absaroka (pronounced ab-SOR-ka) got its start in the first place.

Talk of carving out a 49th state (Alaska and Hawaii had yet to join the Union) from northern Wyoming, southeastern Montana and western South Dakota first made the front page on March 2, 1935, the same day that neighboring headlines in the Montana-based Daily Inter Lake announced a litany of bad news: “Relief Bill Deadlock Is Unbroken,” “Struggling Factions in Wage Tilt Await ‘Real’ Concessions’” and “Insurgent Forces Are on the Run in Greece.”

The world was going wrong, it seemed. Although politicians in the would-be secessionist states had begrudgingly accepted the New Deal funds that promised material improvements, this money barely made it to the sparsely populated, isolated corners of the three states.

Discontent flared in Sheridan, Wyoming, a city roughly halfway between Yellowstone National Park and Mount Rushmore , and nearly 300 miles from Cheyenne, the state capital.

“A person living in Sheridan or any other northeastern Wyoming town must enter other states to reach his own state capital by train,” a local told the Daily Inter Lake . “For many years, this portion of the state was regarded as an orphan or stepchild.”

Feeling helpless and ignored by their state government, frustrated farmers, ranchers and other Sheridan residents coalesced around the idea of secession: leaving Wyoming and allying with nearby communities to start their own state.

The state would be called Absaroka, and Sheridan would be its capital. Supporters of the grassroots movement went about roping other disaffected citizens into their project, attracting varying levels of support in the years leading up to World War II.

In the end, however, Absaroka failed. Early commentators predicted correctly that the effort would “never get beyond the realm of conversation.”

But the view shared in 2022 by Wyoming newspaper columnist Brian Beauvais, that Absaroka might be remembered (when it’s remembered at all) as “just an outlet for jaded cowboys to blow off steam and perform cheap political theater during tough economic times,” ignores the depth of the hard times and the people who found escape and purpose, albeit misplaced, in the promises of the movement.

“[They] weren’t fooling around,” Alan Simpson , a former Wyoming senator whose relatives were involved in the Absaroka campaign, told the New York Times in 2008. “A lot of people thought it was silliness, but to them, it wasn’t.”

Absaroka and the politics of resentment

The secession plan, drafted by local citizens in town meetings and reprinted in syndicated newspapers nationwide, stated that Absaroka would be composed of approximately 27 counties across Wyoming, Montana and South Dakota. These were the ancestral homelands of the Crow people—also known by the autonym Absaroka, or “children of the long-beaked bird”—until they were forced onto reservations after the Plains Wars of the 1870s. (Effectively no thought, voice or notice was given to Indigenous people in the debates over Absaroka, which would have encompassed the Crow and Northern Cheyenne reservations in southern Montana.)

Under the Absaroka proposal, Wyoming would be practically split in half. The northern portion of the state—including Yellowstone, Devils Tower, the Bighorn Mountains, and the deep canyons and wide plains in between—had been cut off since 1869, when the transcontinental railroad clustered power, influence and money in the southern cities of Cheyenne, Laramie and Green River. As the state struggled through the Great Depression , towns with state institutions like prisons, universities and mental hospitals seemed to fare much better.

Eastern Montana faced practically the same issues. “Its interests have been pretty thoroughly dominated, in a political way, by the western counties,” reported the Picket-Journal , a newspaper based in Red Lodge, a town north of Yellowstone. “No eastern Montana man has ever occupied the office of governor of Montana, or indeed any of the other principal offices.”

South Dakota was no different. “Resentment has been smoldering in the Black Hills for years against supposed discrimination on the part of the South Dakota legislature,” Indiana’s Hammond Times explained. The Dust Bowl had dried out the agricultural eastern portion of the state. In 1935, the only consistent tax revenue came from the tourism, lumber and mining industries in the Black Hills, where Mount Rushmore, an even bigger boon, was still six years away from completion .

“Legislators from eastern counties have turned toward the Black Hills industries as sources of revenue,” the Hammond Times said. “This has fanned the resentment of Black Hills residents who have struggled for years for a decent highway system that would bring tourists from the [Midwest] to enjoy the mountain scenery, fishing and hunting.”

Resentment was nearly synonymous with Absaroka. But mobilizing resentment into a viable political campaign for secession from three states was challenging.

At the time, breaking off part of one state to form a different one was nearly unprecedented. The success stories were generally more than a century old. Maine separated from Massachusetts in 1820, and Virginia lost Kentucky and West Virginia in 1792 and 1863, respectively. Taking sections of three separate states to form a new one was completely unheard of.

In mid-March, a constitutional law expert reasoned that Absaroka would need “to gain the consent, not only of the people of the section, but of the legislatures of South Dakota, Wyoming and Montana, and of the United States Congress,” the Associated Press reported.

But none of these three states would want to lose “their choicest portions,” as Montana’s Sweet Grass News put it—land rich with aesthetic, mineral and tourist value—to a small-town separatist movement made up mainly of ranchers and miners. 

The Absaroka plan was impractical, but it gained national media coverage and forced state governments to pay greater attention to the infrastructural and political demands of their hinterlands.

“It was in 1935 that more infrastructure was added than at any time since the ‘ hell-on-wheels ’ days of the transcontinental railroad,” writes historian Phil Roberts in his Wyoming Almanac . “New schools, courthouses, city halls [and] post offices went up in towns all over Wyoming.”

By 1936, the indignation had subsided, and coverage of the movement declined with it. Absaroka, the “ dreadful name ” chosen for the proposed state, in the view of journalist Arthur Brisbane, mostly returned to its other meanings: the Crow, Montana’s Absaroka National Forest , and a ship called the Absaroka that passed through the Panama Canal en route from New York to San Francisco every few months.

Absaroka’s revival

In 1908, A.R. Swickard left his home state of Illinois to play minor league baseball in Sheridan. He worked as a contractor for his day job, unsuccessfully ran for mayor in 1927, and became a city commissioner in charge of municipal water and roads in 1931.

Although he passed through Sheridan’s world of local politics for a few years, handling contracts with the Civilian Conservation Corps and other New Deal relief programs that the 1935 Absaroka movement had helped bring to the region, Swickard only gained significant attention when, in early 1939, he circulated a petition to have Sheridan County join Montana because it had been “forgotten by Wyoming” once again.

Resentment flared back up. Early support for Swickard’s idea was “so wide and sincere,” he said , that local businessmen approached him and offered to finance a revival of the 1935 plan to create an entirely new state. The promise of Absaroka was born again, and Swickard was the one who would try to see it through.

Just like four years earlier, however, no realistic legislative path forward existed for Absaroka. News of Swickard’s proposal for a 49th state made it to Capitol Hill, where a legislator declared it “too preposterous to even consider.”

Unfazed, Swickard decided to prove that Absaroka was a state despite its lack of official approval or recognition. He appointed himself governor, set up a capital and cabinet in Sheridan, held a Miss Absaroka pageant, and printed 1,000 license plates that called Absaroka the “Playground of the Nation.” (His car had both Absaroka and Wyoming plates. Only one set wouldn’t get him pulled over.)

Swickard and his supporters took every chance to prove Absaroka’s legitimacy. That June, he passed along his regrets that “official duties of my great state” prevented his attendance at a roundtable meeting of the nation’s governors. When the nephew of the governor of California visited Big Timber, Montana, local papers made much ado about his connections in Hollywood, his offhand comment about making a movie called Absaroka , and his promise to “come back to Big Timber and run for the governorship at the first election,” though he reassured Swickard that he didn’t mean to step on the incumbent’s toes. In June, the crown prince of Norway visited the region, and Swickard claimed the occasion as Absaroka’s first official state visit.

These examples come off as humorous. The Wyoming newspapers, which referred to Absaroka’s “governor” as “his excellency,” didn’t seem to take Swickard’s secession proposal too seriously.

But the people did. “It was 90 miles of dirt road to the county seat,” Helen Graham, who grew up in the Black Hills in the 1930s, told the New York Times in 2008. “There was just nothing there. What Swickard did was exciting.”

The state government, now making national headlines for neglecting a large swath of its own territory, was willing to negotiate.

Eventually, Swickard met with Nels H. Smith , the governor of “our sister state to the south,” as he called Wyoming. “We Absarokans are a peace-loving lot,” he assured Smith, “and while we think that we really need the state of Absaroka, we are not inclined to revolution.”

According to a 1941 Works Projects Administration book called Wyoming: A Guide to Its History, Highways and People , “The ensuing publicity was generally regarded as bad for the state government, and most claims were adjusted to the satisfaction of the Absarokians.”

Absaroka’s legacies

For supporters of the movement, attention from the state was tantamount to statehood, and, in the tense two years before the U.S. entered World War II in December 1941, the Absaroka dream all but ended.

Swickard kept his post as a city commissioner of Sheridan, and he ran for governor of Wyoming in 1942. He couldn’t create his own state, so he pledged to “help the common man by taking over the governorship.” If elected, he declared, “I will take the oath of office in overalls and will keep them on until the great state of Wyoming is put back on the map and something is done for the common people.”

Swickard dropped out of the race after a month and a half, endorsing the incumbent governor, Smith, who had given Absaroka concessions several years prior. He still clung onto his “overalls” populism. “I am going to get right in and help to re-elect you as governor of this state,” Swickard said , “and I am going to wear my overalls while I am doing it.”

But scandals dogged the failed gubernatorial candidate. He didn’t even make it to Election Day. In September, a Sheridan civic group called on Swickard to resign his city post for “neglect of duty, financial irresponsibility and unbecoming conduct,” including frequent trips out of state.

A few months earlier, state officials had scolded Swickard for profiling and accosting Frank Ikuno, a Wyoming-born Japanese American radio engineer who had been assigned to a government project in Sheridan.

Swickard “acted on his own initiative” and called the governor’s office “to protest against sending a man of Japanese ancestry into Sheridan on such a mission” so soon after the attack on Pearl Harbor, Montana’s Great Falls Leader reported.

State officials could only sing Ikuno’s praises for his years of expert service and express their regret over the incident.

By mid-October 1942, Swickard had handed his resignation to the mayor and “left Sheridan for southern Arizona to enter government construction work,” the Casper Star-Tribune reported.

Little else was heard of the disgraced governor of Absaroka, at least in Wyoming. Down in Arizona, he made local news now and then. After some petty thieves took his carpentry tools at a worksite in March 1945, for instance, Swickard complained that he was “fighting the same kind of enemy” as his wife and son, both of whom were serving in the American armed forces in the recently liberated Philippines.

Swickard died of a stroke in Arizona in 1947. The Montana Billings Gazette remembered the 67-year-old as “a colorful character in Sheridan politics.” Still, he’d never broken out of the minor leagues, either in baseball or life.

Absaroka lived on only in scraps of information and memory. In 1977, a commemorative “Absaroka dollar” coin sold for 25 cents at a Denver curiosity shop, and several residents of Decker, Montana, made the Gazette by trying to revive the Absaroka proposal.

One proponent first put the odds of secession at 1 in 500. After collecting 50 signatures on a petition, he improved the odds to one in seven or eight. “I think we’ll at least get it to Congress,” the Decker man said .

Marie Sanchez, a chief judge on the Northern Cheyenne reservation, which would have been within the bounds of the new Absaroka, disagreed. “I can’t see their reasoning—in fact, it’s a very elementary mentality,” she said. “I guess I don’t have to talk about 200 years of infringements on [Indigenous] rights.”

Ultimately, the Absaroka revival went nowhere.

“The Absaroka dream has no better chance of becoming reality today than it did decades ago,” a Gazette columnist wrote in 1984. “But the proposal still appeals to many ‘orphans’”—all those who feel left behind.

“The Absaroka movement fell along the wayside,” wrote Craig Johnson , author of the Walt Longmire mystery books, which are set in a fictional Absaroka County, Wyoming, in a 2014 essay for Cowboys & Indians magazine. “But the allure of escape still permeates the region today.”

Out in the Black Hills, on long plains and gray peaks, and in all the small towns that harbor the ancestral memory of secession, Absaroka is still just a state of mind.

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Eli Wizevich is a reporting intern for Smithsonian . He studied history at the University of Chicago and previously wrote for the El Paso Times .