What was the Great Depression?
An economic depression is a long, deep fall in how much a country makes, sells and earns. Prices fall. Jobs disappear. It lasts years, not months.
The Great Depression began in 1929 and lasted, in most places, until the late 1930s. It hit almost every country that traded with others.
In the USA industrial output fell by nearly half between 1929 and 1932. About 9,000 banks closed between 1930 and 1933.
Causes: why did it happen?
- Too much production: farms and factories made more than people could buy. Farm prices were already falling in the late 1920s.
- Buying shares on credit: people bought shares with borrowed money ("on margin"). When prices dipped, lenders asked for their money back, so people had to sell. Selling pushed prices down further.
- Weak banks: thousands of small banks had no protection. When people panicked (a bank run), the banks collapsed and savings vanished.
- Uneven wealth: a small group earned a large share of income, so ordinary families could not keep buying.
- Linked world money: after World War I, Europe depended on American loans. When the loans stopped in 1929–1931, European banks also failed (for example, in Austria and Germany in 1931).
- The gold standard tied money to gold, so governments felt unable to lower interest rates or spend more.
Effects around the world
In the USA
Families lost homes and farms. Many lived in shanty towns. In the Great Plains, drought and dust storms (the "Dust Bowl") forced farmers to move west.
Trade walls
In 1930 the USA raised import taxes (tariffs). Other countries hit back. World trade fell by about two-thirds in value from 1929 to 1933.
Europe
Germany had about 6 million unemployed by 1932. Anger and fear helped the Nazi party win votes. Britain left the gold standard in 1931.
Colonies and India
Colonies sold crops and raw materials. Their prices collapsed. In India, farm prices roughly halved, but the colonial government did not cut land revenue. Peasants sank into debt and sold gold, and this anger fed the Civil Disobedience Movement (1930).
How governments responded: the New Deal and others
The New Deal (USA, 1933–1939): President Franklin D. Roosevelt promised "relief, recovery and reform".
- Relief: jobs on public works (roads, dams, schools) through programmes like the Civilian Conservation Corps and the Works Progress Administration.
- Recovery: help for farmers and industry to raise prices and wages.
- Reform: bank deposit insurance (FDIC, 1933), stock market rules (SEC, 1934), old-age pensions (Social Security Act, 1935).
Economist John Maynard Keynes argued that in a slump the government should spend more to create demand. This idea shaped economics for decades.
Other paths: Britain and Sweden used cheaper money and welfare. Germany and Japan chose rearmament and expansion. So the Depression is one of the causes of World War II.
Try it: the domino chain
Stand 8 dominoes (or cards) in a line. Label them: shares, banks, loans, factories, jobs, spending, trade, other countries. Push the first. Now try again but "insure" the banks by removing that domino. How far does the fall go? That is what deposit insurance does.
Exam tips
- Always link a cause to an effect with "so" or "because".
- Learn 4 numbers: 1929 crash, 25% US unemployment (1933), trade down about 2/3, New Deal from 1933.
- For India: falling crop prices + unchanged revenue → rural distress → Civil Disobedience.
Key formulas and definitions
- Depression: a long, deep fall in output, jobs and prices
- Stock market crash: a sudden, big fall in share prices
- Bank run: many savers withdraw money at once
- Tariff: a tax on imported goods
- Protectionism: shielding home industry with tariffs and quotas
- New Deal: relief, recovery, reform (USA, 1933–39)
- Gold standard: money tied to a fixed amount of gold
Worked examples
1. Explain how the stock market crash led to bank failures.
Banks had lent money to people buying shares and had also bought shares themselves. When share prices fell, borrowers could not repay and the banks lost money. Savers feared losses and rushed to withdraw, so the banks ran out of cash and closed.
2. Why did the crisis spread from the USA to Europe?
After World War I, Germany and Austria depended on American loans. After the crash, American banks called back their loans. European banks failed in 1931, factories closed, and US tariffs cut European exports further.
3. How did the Great Depression affect Indian farmers?
India exported wheat, jute and cotton. World prices of these fell by about half, so farmers earned much less. The colonial government still demanded the same land revenue. Farmers borrowed, fell into debt and sold their savings in gold. This anger supported the Civil Disobedience Movement.
Common mistakes
- Saying the crash alone caused the Depression. It was the trigger; weak banks, over-production and falling demand turned it into a depression.
- Thinking the Depression only hit the USA. It hit nearly every trading country, including colonies.
- Mixing up relief, recovery and reform in the New Deal. Relief = help now, recovery = restart the economy, reform = stop it happening again.
- Believing tariffs helped. They protected some jobs for a short time but shrank world trade and made things worse for everyone.