Great Depression

Definition

The Great Depression was a severe and prolonged economic downturn that occurred in the 1930s, primarily in the United States and Western countries. It was characterized by a dramatic decline in industrial production, widespread unemployment, and a significant drop in stock prices and consumer spending.

5 Must Know Facts For Your Next Test

1. The Great Depression was the longest and most severe economic downturn in the modern history of the Western industrialized world, lasting from 1929 to the early 1940s.
2. The stock market crash of 1929 is widely considered the trigger that initiated the Great Depression, leading to a collapse in consumer confidence and a significant decline in economic activity.
3. During the Great Depression, the unemployment rate in the United States reached a peak of nearly 25%, with millions of people losing their jobs and struggling to find work.
4. The deflationary environment of the Great Depression led to a significant drop in consumer spending, as people delayed purchases in anticipation of further price declines.
5. The Great Depression had a profound impact on the global economy, leading to a decline in international trade and a rise in protectionist policies, which further exacerbated the economic crisis.

Review Questions

• Explain how the stock market crash of 1929 contributed to the onset of the Great Depression.
  • The stock market crash of 1929 marked the beginning of the Great Depression. The crash led to a significant decline in stock prices and investor confidence, which in turn caused a collapse in consumer spending and a slowdown in economic activity. As businesses struggled to maintain profitability, they were forced to cut jobs and reduce production, leading to a vicious cycle of rising unemployment, falling incomes, and further declines in consumer spending. This self-reinforcing cycle was a key factor in the prolonged nature of the Great Depression.
• Describe the role of deflation in shaping the economic landscape during the Great Depression.
  • Deflation, a sustained decrease in the general price level, was a defining characteristic of the Great Depression. As prices fell, consumers and businesses delayed purchases in anticipation of further price declines, leading to a further contraction in economic activity. Deflation also increased the real value of debt, making it more difficult for individuals and businesses to repay their loans. This, in turn, led to a wave of bankruptcies and foreclosures, further exacerbating the economic crisis. The deflationary environment of the Great Depression made it challenging for policymakers to stimulate the economy, as traditional monetary policies were less effective in a deflationary environment.
• Analyze the impact of the Great Depression on the global economy and the subsequent shift towards Keynesian economic policies.
  • The Great Depression had a profound impact on the global economy, leading to a decline in international trade and the rise of protectionist policies. As countries sought to shield their domestic industries from foreign competition, they implemented trade barriers and tariffs, which further exacerbated the economic crisis. This global economic downturn highlighted the limitations of the prevailing economic theories and policies at the time, which were largely based on the principles of laissez-faire capitalism. In response, the economist John Maynard Keynes developed a new economic theory, known as Keynesian economics, which advocated for government intervention and fiscal policies to stimulate the economy and address the challenges of the Great Depression. This shift towards Keynesian policies, which emphasized the role of government in managing the economy, had a lasting impact on economic policymaking and the way governments approached economic crises in the decades that followed.

Related terms

Stock Market Crash of 1929: The stock market crash in October 1929, which marked the beginning of the Great Depression and led to a significant decline in stock prices and investor confidence.

Deflation: A sustained decrease in the general price level of goods and services, which was a key characteristic of the Great Depression and led to falling incomes, reduced investment, and increased unemployment.

Keynesian Economics: An economic theory developed by John Maynard Keynes, which advocated for government intervention and fiscal policies to stimulate the economy and address the challenges of the Great Depression.