Worldwide economic slump characterized by international tariff barriers, the breakup of former empires, and destruction wrought by the loss of life and property during World War I in Europe that began, at least symbolically, with the collapse of stock prices on the New York Stock Exchange in 1929 and ended in the United States with widespread deficit spending on public works and rearmament in the late 1930s.
Owing to its severity, scope, and duration, the Great Depression has been the object of considerable debate among economists, sociologists, and historians in the United States and Europe. Although there is no consensus on how to explain the U.S. economic crisis, which had global repercussions, the following questions figure prominently in the literature on the subject: Did the Great Depression originate in the United States? If so, how did it spread to the rest of the world? Was the Great Depression a unique event? What, if anything, did the catastrophe reveal about the structure of the capitalist system?
The Federal Reserve Board adopted restrictive monetary policies as early as February 1929 aimed at curtailing speculation on the stock exchange, leading to a recession in the middle of 1929. However, the Great Depression itself began with a dramatic plunge in stock prices on October 24, 1929 (known thereafter as Black Thursday); the Federal Reserve Board continued to raise rates after that date. The crash not only produced widespread panic among firms and individual investors, but it also placed excessive strain on banks and other financial institutions. Within three years, stocks lost 80 percent of their value and 11,000 of the country’s 25,000 banks became insolvent. In the same period, the U.S. gross domestic product declined from an index of 163 to an index of 115, while unemployment climbed to 30 percent. Owing to the status of the United States as the world’s most significant creditor and financier, the crisis soon spread to Europe (particularly Germany and Great Britain) and the rest of the world. Although the New Deal in the United States and similar public works programs in other countries reduced unemployment and increased purchasing power, the depression abated only with the preparations for war.
In retrospect, the period 1914 to 1945—which witnessed World War I, the failure to rebuild the European interstate system (a cooperative economic system that would have coordinated tariff rates and other trade issues), the Great Depression, and World War II—can be understood as the interregnum between the Pax Britannica (or British hegemony) and the Pax Americana (or U.S. hegemony). In The World in Depression, 1929-1939—an influential contribution to an ongoing debate between Keynesians (who favored deficit spending) and monetarists (who subscribed to the theory that market forces would control inflation, unemployment, and production)—Charles Kindleberger (1973) attributed the gravity, range, and length of the slump to the inability of the United States or Great Britain to achieve free market trade at a time when the international economy lacked a source of lending or a means of discounting.
After World War II, the lessons of the Great Depression were codified not only by Keynesian economics (with its emphasis on government intervention in the economy to prevent crises of underconsumption) but also by a set of new international institutions: the International Monetary Fund, the World Bank, the United Nations, and the General Agreement on Tariffs and Trade.
See also: Volume One: Keynesian Economics; Public Works Administration (PWA).
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