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The Great Depression of the 1930s

Chapter · January 2010

DOI: 10.1057/9780230297111_7

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6
The Great Depression of the 1930s

The Great Depression of the 1930s is the deepest crisis faced by contem-
porary economies. Sometimes, it is also referred to as the ‘Great Crash’.
Economic historians use the term ‘Great Depression’ for the prolonged
deflationary phase from the 1870s to the 1890s but we will use the
term to indicate the crisis of the 1930s, following the stock market
crash at Wall Street of 1929. Though the Great Depression hit many
countries, its epicentre was in the United States. To have an idea of the
depth of the phenomenon, suffice it to observe that from the pre-crisis
peak to the minimum touched in the course of the crisis US industrial
production collapsed by 60 per cent. Such a dip was larger than the
fall recorded in the other affected countries (Austria, Belgium, Canada,
Czechoslovakia, Denmark, Finland, Germany, Greece, Hungary, Italy,
Japan, the Netherlands, New Zealand, Poland, Romania, the United
Kingdom and several others). In addition, the USA was also the last
country to emerge from the depression with industrial production
resuming its pre-crisis level only by 1937 (Romer, 1993).
As happened in several other crises, the increase in the interest rates
controlled by the central bank was the trigger of the crisis. The Federal
Reserve was increasingly worried that major speculation was inflating
the stock market boom. Furthermore, the USA was experiencing reserve
outflows, partly due to the depreciation of the French franc. Thus, from
January 1928 the Fed started lowering its money supply. Accordingly,
the Fed’s monetary restriction determined higher interest rates. In turn,
highly leveraged companies faced increasing debt service difficulties
and curtailed their production. According to the official dates calculated
by the National Bureau of Economic Research the recession began in
August 1929. However, the recession became much deeper after the spe-
cial events the USA experienced from the end of October of that year.
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