The Great Depression: What Are Causes and Effects?

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According to Pillai, the Great Depression started in the United States (US) and quickly spread to the rest of the world. The collapse of the stock market in 1929 marked the beginning of the worst recession the modern world has ever experienced (Romer). Surprisingly, the Great Depression lasted for nearly a decade before the war economy brought it to an end (Pillai). Romer reaffirms that a combination of factors brought about this drastic economic downfall. These factors included the 1929 stock market crash, the gold standard, bank failures, and international lending and trading policies (Romer). Additionally, the effects of the Great Depression were diverse and cut across all spheres of the world economy. For instance, there were clear economic, social, and political implications worldwide (Pillai). This essay provides an insight into the causes and effects of the Great depression.

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Causes of the Great depression

The Great Depression was principally caused by a decline in spending (aggregate demand) (Romer). As a result, production declined, and people were laid off (2). Several factors brought about this contraction in aggregate demand. The first and the most key factor was the collapse of the US stock market in 1929. Interestingly, in 1929, the stock prices appreciated more than four folds (Romer). However, an array of small events culminated into a steady drop in share prices around October 1929 (3). As a result, traders panicked and sold shares at extremely low prices (3). For instance, between September and November 1929, the U.S stock market prices declined by 33 percent (3). Because of the drastic decline, this happening is referred to as the Great Crash (3). In addition, people were made poorer due to the depreciation of shares in the stock market (3). Consequently, consumers and firms decreased their spending leading to low production and job losses (3). What followed was a period of reduced economic activities.

The second factor that brought about a decline in aggregate demand was a panic in the banking sector (Romer). Many customers lost confidence in banks and, therefore, demanded their deposits (4). Previously solvent banks collapsed as they had to liquidate loans to raise money for these refunds (4). According to Kelly, more than 9,000 banks collapsed prompting people to lose savings. Additionally, most people avoided loans as they were not sure of adequate incomes in the future (4). For that reason, consumer and business spending reduced while some industries collapsed (4).

The third cause of the decline in aggregate demand was the use of the gold standard (Romer). Many historians believe that a bid to preserve the gold standard aggravated the Great Depression (4). In this case, countries valued their currency in terms of gold and placed strict measures to preserve its value (4). In most cases, these currencies were overvalued leading to deficits in trade and increased gold outflows (5). To counter the gold outflows, central banks, in most countries, increased interests rates. Subsequently, the high interests’ rates discouraged spending leading to low production by manufacturers (5). These job losses that followed the low productions were clear indications of an economic crisis.

Lastly, international lending and trading policies may have also contributed to low demand aggregate and, eventually, the Great depression (Romer). A decline in lending led to reduced output in countries requiring credit (5). Protectionist trade policies such as the Smooth-Hawley tariff, practiced by the US, also brought about imbalances in world trade. In a bid to protect local industries, countries raised tariffs on imported goods bringing about these trade imbalances (Pillai). For instance, the prices of raw materials declined due to reductions in exports (Romer). This led to declined economic growth and subsequent economic hardships in export-dependent countries (5). Since the world is a global village; these hardships were later shared worldwide through the Great Depression.

Effects of the Great Depression

The outcomes of the Great Depression could not go unnoticed. Firstly, its economic effect was felt worldwide. Following this, there was a drastic decline in international commerce (Pillai). For instance, in the US, industrial production fell by 47 % and real GDP declined by 30 % (Romer). Additionally, revenues from tax, profits, and personal incomes abruptly fell (Pillai). These situations, coupled with increased unemployment reduced people’s purchasing power. Therefore, fewer items were purchased leading to a limited number being produced. This resulted in the collapse and loss of revenues by the mainstream industries. Consequently, industries were compelled to lay off workers (Kelly). For instance, in the US, the unemployment rate rose to above 25% in the 1930s (Kelly).

The Great depression also had profound political implications (Pillai). Many nations changed their leaders and government as they tried to counter these tough economic times (Pillai). For instance, in Germany, this turbulent period saw Hitler rise to power (Pillai). The aggressive policies of Germany and Japanese leaders, afterward, led to the Second World War. This placed the Great Depression in the list of factors that greatly contributed to the Second World War (Pillai). Furthermore, the Great depression expanded the role of governments in the lives of people (Pillai). For instance, in Great Britain and the US welfare systems were created as these governments tried to intervene (Pillai). Pillai also adds that some Governments were forced to come up with creative ways of alleviating the effects of this economic crisis. One such way was the “New Deal” promised by Franklin D. Roosevelt when he became the US president (Pillai).

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According to Romer, the social effects of the Great Depression were no less severe. He affirms that only the Civil War surpasses the Great Depression as the worst social crisis in the US. Pillai also adds that conditions such as the Dust Bowl, experienced during this period, increased migration. Consequently, farmers and other rural dwellers left their fields and houses and moved to the urban areas (Pillai). This presented fresh social challenges to cities as they had to deal with an increased number of unemployed immigrants. According to, social evils such as crime and prostitution increased as people tried to make ends meet. In addition, as people tried to escape from the harsh reality, alcohol and other forms of drug’s abuse rose drastically. The website continues to state that student numbers shrunk as higher education became too expensive for the majority. Furthermore, health care was removed from the list of priorities by most governments ( It was, indeed, a preserve of the few during the Great Depression (


In conclusion, it is agreeable that the Great Depression is the worst economic downturn experienced by the modern world. Its main causes included the collapse of the stock market in 1929, international trade imbalances, panic in the banking sector, and the use of the gold standard (Romer). Additionally, the Great Depression’s economic, social, and political effects will always remain fresh in people’s minds. Lastly, we should draw lessons from events leading to the Great Depression to avoid such happenings in the future.

Works cited

Kelly, Martin. Top 5 Causes of the Great Depression. 2012. Web.

Romer, Christina.” Great Depression”. Encyclopedia Britannica. 2003. Web.

Pillai, Prabhakar. Effects of the Great Depression. 2012. Web.

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Us Social and Cultural Effects of the Great Depression. 2012. Web.

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