Great Depression

Definition

The Great Depression was a severe worldwide economic downturn that lasted from 1929 to the late 1930s, characterized by massive unemployment, declining production, and significant deflation. It had profound effects on global economies and led to major changes in economic theories and policies, particularly influencing the perspectives of various economists on the role of government in stabilizing the economy.

5 Must Know Facts For Your Next Test

1. The Great Depression began after the Stock Market Crash of 1929, which saw billions lost in a matter of days and triggered a wave of bankruptcies.
2. Unemployment rates soared to around 25% in the United States during the peak of the Great Depression, leaving millions without jobs and income.
3. The economic collapse led to widespread poverty and despair, prompting many people to migrate in search of work, notably seen in the Dust Bowl phenomenon.
4. Global trade fell dramatically during the Great Depression, with countries imposing tariffs in an effort to protect their economies, exacerbating the crisis.
5. The experiences of the Great Depression significantly shaped economic theories, particularly those of Keynesian economics, advocating for increased government spending to stimulate demand.

Review Questions

• How did the Great Depression challenge existing economic theories at the time?
  • The Great Depression challenged classical economic theories that advocated for minimal government intervention in markets. The severe economic downturn revealed that economies could fail dramatically without government support. As a result, many economists began to reconsider the role of government, leading to new ideas about fiscal policy and regulation that emphasized active intervention to stabilize economic fluctuations.
• What were some key policy responses during the Great Depression and their impacts on the banking system?
  • In response to the Great Depression, various policy measures were enacted, including bank reforms such as the creation of the Federal Deposit Insurance Corporation (FDIC) to restore public confidence in banks. These policies helped stabilize the banking system by protecting depositors' savings and preventing further bank runs. This intervention marked a significant shift toward increased government oversight and regulation of financial institutions.
• Evaluate how different economists' views on government intervention were shaped by their observations during the Great Depression.
  • The observations made during the Great Depression significantly influenced economists like John Maynard Keynes and Milton Friedman. Keynes argued that during economic downturns, governments should increase spending to stimulate demand, fundamentally changing economic thought about interventionism. On the other hand, Friedman viewed monetary policy as key to managing economic cycles but also acknowledged that excessive government interference could lead to inefficiencies. This period sparked debates that shaped future economic policies and theories regarding market regulation and intervention.

Related terms

Stock Market Crash of 1929: The event that marked the beginning of the Great Depression, where stock prices plummeted, leading to widespread financial panic and bank failures.

New Deal:

A series of programs and reforms introduced by President Franklin D. Roosevelt aimed at recovering the economy during the Great Depression through government intervention.

Deflation: A decrease in the general price level of goods and services, which was a significant characteristic of the Great Depression, leading to lower consumer spending and investment.