The Great Depression refers to a severe worldwide economic depression that occurred in the years before World War II. The specific timing varies depending on what part of the world is in question. In most countries it began in 1930 and was the longest and deepest depression of the 20th century.
The depression has its roots in the United States when the stock prices began to fall around September 4th, 1929. This led to the the stock market crash of October 29, 1929, known as Black Tuesday.
The Great Depression was socially, politically and economically devastating to every country it touched, regardless of how rich or poor they were. Everyone in these countries felt the depression on every level. Personal incomes decreased and international trade plunged by more than 50% while unemployment rose to 25%.¹The cities hit hardest were those who depend on heavy industries.
Most economists and historians believe that the Great Depression was caused by the 1929 crash of the stock market. Historians do not necessarily agree though on the causal relationship between various events and the government policy in causing or helping the Depression.
This graph illustrates USA annual real GDP from 1910-1960.
There are two main points of view on what caused the Great Depression¹:
1. Demand-driven theories
Demand-driven theorists believe that there was initially a recession caused by underconsumption and over-investment, causing an economic bubble. A loss of confidence then led to a very sudden and drastic reduction in consumption and investment. Once the panic and deflation set in, many believed the smartest thing to do was keep clear of the markets.
Monetarists believed that the Great Depression started as an ordinary recession, but that important policy mistakes by monetary institutions such as the Federal Reserve caused a shrinking of the money supply. This greatly exacerbated the economic situation, causing the descent This graph illustrates the USA unemployment rate from 1910 - 1960. into Great Depression.