Great Depression

Definition

The Great Depression was a severe worldwide economic downturn that lasted from 1929 until the late 1930s, marked by a dramatic decline in industrial production, widespread unemployment, and a significant drop in consumer spending. Its impact reshaped economic policies and theories, leading to various responses from economists and policymakers, highlighting the need for new approaches to stabilize economies during crises.

5 Must Know Facts For Your Next Test

1. The stock market crash of October 1929 is often cited as the beginning of the Great Depression, leading to widespread bank failures and loss of savings.
2. Unemployment reached unprecedented levels, peaking at around 25% in the United States by 1933, leaving millions without jobs and income.
3. The Great Depression had a global impact, affecting economies worldwide, leading to trade barriers and rising protectionism as countries sought to protect their own economies.
4. In response to the crisis, Keynesian economics gained prominence, advocating for increased government spending to stimulate demand and counteract economic downturns.
5. The Great Depression fundamentally changed the role of government in the economy, leading to greater intervention and the establishment of social safety nets.

Review Questions

• How did the Great Depression influence economic theories and methods of policy analysis?
  • The Great Depression prompted a reevaluation of existing economic theories, particularly classical economics that emphasized self-regulating markets. Economists began to recognize the importance of government intervention to stabilize economies during downturns. This shift led to the rise of Keynesian economics, which argued for increased government spending to stimulate demand, thus altering methods of policy analysis and emphasizing fiscal measures over monetary ones.
• Compare the responses to the Great Depression from different economic schools of thought, particularly monetarism and Keynesianism.
  • Responses to the Great Depression varied significantly between different economic schools. Keynesians advocated for active government intervention through fiscal policy to boost demand, arguing that during times of economic distress, consumers would not spend enough on their own. In contrast, monetarists like Milton Friedman emphasized controlling the money supply and argued that insufficient money growth was a key factor contributing to the Depression. These differing views shaped policy responses in subsequent economic crises.
• Evaluate how the experiences of the Great Depression influenced future economic policies and practices in both developed and developing nations.
  • The experiences of the Great Depression had lasting impacts on economic policies worldwide. In developed nations, it led to significant government intervention in the economy through programs like the New Deal, which established social safety nets and regulatory frameworks to prevent future crises. In developing nations, it highlighted vulnerabilities in reliance on exports and led many to adopt import substitution industrialization strategies. The global consensus shifted towards more active roles for governments in managing economies, influencing policies for decades after.

Related terms

Economic Contraction: A decline in national output as measured by GDP, often characterized by reduced consumer spending and investment.

New Deal: A series of programs and reforms introduced by President Franklin D. Roosevelt in response to the Great Depression, aimed at economic recovery and social reform.

Liquidity Trap: A situation where monetary policy becomes ineffective because people hoard cash rather than invest or spend it, often seen during economic downturns.