Impacts of the Great Depression

Impacts of the Great Depression

The Great Depression or the Depression of the 1930s that started in the United States in 1929 and affected most countries of the world emerged from a myriad of factors. The actual origins or causes of this massive economic slump are still highly debated based on different and competing schools of thought and theories. Nonetheless, its effects or impacts revolve around catastrophic socioeconomic losses and a change in paradigm that influenced how the world perceives the global economy, as well as the social and political dynamics within and among affected nations.

Consequences and Legacy: The Impacts of the Great Depression

1. Massive Unemployment

There is an abundance of report and studies that documented and discussed the situation of the labor market during the Great Depression. The collated data from the study of Nicholas Crafts and Peter Fearon revealed that the average industrial unemployment for 11 countries reached an all-time high of 29.8 percent in 1933. Specific unemployment rate peaked at 22.9 percent in the United States and 17.0 percent in the United Kingdom in 1932. Countries such as Sweden, Denmark, and Norway suffered double-digit unemployment rates from the 1920s to the 1930s.

Unemployment immediately lowered consumer confidence due to a decrease in purchasing power. The prevalence of massive unemployment in industrial and agricultural sectors eventual resulted in homelessness, starvation, and the emergence of mental health problems. Those who managed to secure their employment worked on short time while some had their wages reduced as companies tried to maximize cost and production as much as they could. In Germany, unemployment led to political unrest.

2. International Trade War

The impairment of the international trade system was also one of the immediate effects of the Great Depression. Protectionist economic policies emerged during this period as part of efforts to protect the country from imports by promoting the local consumption of domestically-produced goods and services. U.S. President Herbert Hoover signed into law the Smoot-Hawley Tariff Act or the Tariff Act of 1930 that raised tariffs on more than 20,000 imported goods. Other countries passed retaliatory tariffs as well.

The study of Robert Whaples concluded that there is a consensus that protectionist policies or the imposition of high tariffs across the international trade was instrumental in worsening the global economic crisis. The trade war reduced world trade levels by more than 33 percent in 1933. Essentially, low exports further distressed domestic production activities, thus further affecting the local labor markets of involved countries.

3. Abandonment of the Gold Standard

Several countries abandoned the gold standard system during World War I to introduce a system based on a notion that inflation and the value of a local currency should be determined by the quantity of new money introduced. Hence, they created money without gold or more specifically, through thin air at the expense of inflation. They needed to do this to create a supply of money for wartime expenditures.

However, after the war, the U.S. and other European countries went back to the gold standard. Some economists such as such as Ben S. Bernanke and Barry Eichengreen have argued that this standard was one of the driving causes of the Great Depression simply because affected countries were unable to create a new supply of money to stimulate their economies. Nonetheless, Great Britain and countries in the Scandinavia dropped the standard in 1931 while others followed suit. This decision proved beneficial. The study of Bernanke revealed that the earliness by which a country abandoned the gold standard reliably predicted its economic recovery.

4. Rise of Keynesian Economics

Another remarkable impact of the Great Depression was the emergence and propagation of Keynesian economics. During a time when classical economics failed to explain the causes of this global economic downturn and provide a workable policy framework for overturning the dire situation, British economist John Maynard Keynes spearheaded the introduction of a new school of thought in economics that outclassed classical economics. Government leaders, notably U.S. President Franklin D. Roosevelt rolled out economic policies partly based on the principles of Keynes. These policies marked the expanding role of the federal government in the economy.

The 1936 book “The General Theory of Employment, Interest, and Money” explained that aggregate demand determines economic growth and market economies naturally undergo a boom-and-bust cycle because the free market is not self-regulating. During economic downturns, the government should offset the decreases in demand caused by lackluster consumption by the public and investment by capitalists through spending. Under Keynesian economics, government spending will not only promote demand but also encourage production and employment. Government-induced production and employment will eventually lead to business-induced production and employment due to its positive impact on purchasing power.

5. Nationalism and World War II

Perhaps, another one of the dire consequences of the Great Depression was the emergence of radical nationalism that was partly responsible in igniting World War II. Historians and economic analysts such as N. Crafts and P. Fearon noted how the global economic slump caused social and political unrest in other countries that fueled the extremes of right and left political movements. In Germany, for example, massive unemployment led to sociopolitical distress that played a critical part in the rise of the Nazi German Party and the election of Adolf Hitler as Chancellor in 1933. The brand of nationalism introduced by Hitler also led to the rise of anti-semitism based on Nazism. Left-wing movements emerged in other parts of Europe, including in Russia where socialism and communism took a stronghold.

Author Francis S. Pierce explained that the Great Depression was a time of massive insecurity that affected the ordinary people as well as the governments. This insecurity contributed to the tension that eventually led to the World War II. However, Pierce also noted that the dawn of war and the following wartime events involved massive military expenditures that stimulated different economies, thus leading to the end of the Great Depression.


  • Bernanke, B. S. with James, H. 2000. “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison.” In B. S. Bernanke, Essays on the Great Depression. New Jersey: Princeton University Press. ISBN: 0-691-01698-4
  • Crafts, N. and Fearon, P. 2010. “Lessons From the 1930s Great Depression.” Oxford Review of Economic Policy. 26(3): 285-317. DOI: 10.1093/oxrep/grq030
  • Eichengreen, B. 1995. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press. ISBN: 0-19-506431-3
  • Pierce, F. S. 1991. “Depression of the 1930s.” In Lexicon Universal Encyclopedia. New York: Lexicon Publications, Inc.
  • Whaples, R. 1995. “Where is there Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions.” The Journal of Economic History. 55(1): 139-154. DOI: 10.1017/S0022050700040602