# The Great Depression

Business I · Economic History · https://tryals.app/learn/business-i/the-great-depression

## When Everything Broke

The **Great Depression** (1929-1939) was the deepest modern economic contraction: US GDP fell 30%, unemployment hit 25%, and world trade dropped by two-thirds.

**The Cascade**: 
- **Wall Street crash** (1929): Destroyed wealth.
- **Bank failures** (1930-1933): Panics destroyed the payments system.
- **Monetary contraction**: The Fed tightened money.
- **Fiscal austerity**: Budgets were cut.
- **Trade war**: **Smoot-Hawley tariff** (1930) choked trade.

| Stage | What Broke |
| --- | --- |
| 1929 | Stock bubble burst |
| 1930–33 | Bank panics & runs |
| Smoot-Hawley | Trade collapsed |

> **Tip:** Crashes had happened before. The catastrophe lived in the amplifiers: failing banks and golden handcuffs.

## The Lesson Machine

**Gold Standard**: Countries on gold defended reserves with high rates. **Left gold earlier recovered faster** (Britain 1931, US 1933).

**Keynesian Diagnosis**: The paradox of thrift means when all save, demand collapses.
$$Y = C + I + G + (X - M)$$
where $G$ substitutes collapsed private demand.

**Friedman-Schwartz**: The Fed turned a recession into a catastrophe by failing as lender of last resort.

| Failure | Institutional Answer |
| --- | --- |
| Bank panics | Deposit insurance |
| Trade war | Multilateral rules |
| Gold deflation | Managed rates |

> **Tip:** In 2008, Bernanke applied 1930s lessons, flooding the system with liquidity to prevent a repeat.

## Practice questions

9 of this lesson's 14 practice questions, with answers. The full set is in the app.

### 1. Order the Depression cascade.

**Answer:**

1. Wall Street crash (October 1929)
2. Bank panics wipe out deposits (1930-1933)
3. Smoot-Hawley tariff and retaliation (1930)
4. Britain leaves gold, begins recovering (1931)
5. US leaves gold, starts the New Deal (1933)

**Why:** Crash, bank failures, trade war, and finally the policy reversals that began recovery, each event a domino.

Page: https://tryals.app/practice/business-i/the-great-depression/order-the-depression-cascade

### 2. The Smoot-Hawley tariff helped the US economy by protecting domestic producers.

**Answer:** False

**Why:** It provoked retaliation that collapsed world trade by two-thirds, a beggar-thy-neighbour policy that beggared everyone, including the US.

Page: https://tryals.app/practice/business-i/the-great-depression/the-smoot-hawley-tariff-helped-the-us-economy-by-protecting-domestic

### 3. If US unemployment reached 25% in 1933 and the labour force was 52 million, how many were unemployed (in millions)?

**Answer:** 13 (within ±0.5)

**Why:** $52 \times 0.25 = 13$ million unemployed, one in four workers, in an era with no unemployment insurance for most.

Page: https://tryals.app/practice/business-i/the-great-depression/if-us-unemployment-reached-25-in-1933-and-the-labour-force-was-52

### 4. Friedman and Keynes both explain the Depression, but their accounts imply different remedies. What explains the disagreement between them?

A. On whether unemployment or deflation was the more serious symptom
B. On whether the cause was monetary contraction or failed demand
C. On whether the Depression began in the United States or in Europe
D. On the date at which the downturn became a depression

**Answer:** B. On whether the cause was monetary contraction or failed demand

**Why:** The disagreement is causal and therefore practical. Monetary failure implies a central bank remedy; demand failure implies fiscal action, because rates near zero cannot fall further.

Page: https://tryals.app/practice/business-i/the-great-depression/friedman-and-keynes-both-explain-the-depression-but-their-accounts

### 5. Sort each factor: did it deepen the Depression or help recovery?

**Answer:**

- Deepened the Depression: The Fed tightened money during the contraction, Smoot-Hawley tariff and retaliation, Governments cutting spending to balance budgets
- Helped recovery: Leaving the gold standard, Fiscal expansion and the New Deal

**Why:** Monetary tightening, tariffs, and austerity deepened the crisis. Leaving gold and fiscal expansion enabled recovery. The Depression was a policy failure as much as a market failure.

Page: https://tryals.app/practice/business-i/the-great-depression/sort-each-factor-did-it-deepen-the-depression-or-help-recovery

### 6. Match each Depression lesson to its institutional outcome.

**Answer:**

- Bank runs destroy the payments system → Deposit insurance (FDIC)
- The Fed failed as lender of last resort → Modern central banking doctrine
- Private demand can collapse catastrophically → Keynesian fiscal stimulus
- Tariffs transmit contraction globally → Postwar free-trade institutions (GATT)

**Why:** Every major postwar economic institution was designed to prevent a repeat, deposit insurance, central bank activism, counter-cyclical fiscal policy, and trade agreements.

Page: https://tryals.app/practice/business-i/the-great-depression/match-each-depression-lesson-to-its-institutional-outcome

### 7. Between 1929 and 1933 the US money supply fell by about a third while the Federal Reserve did little. Friedman and Schwartz built a case on that. What is it?

A. That the Depression was deepened by monetary policy failure
B. That the gold standard forced the Fed's inaction, so no policy error occurred
C. That the Depression was caused by excessive money creation in the 1920s
D. That monetary policy is powerless in a depression, so the Fed's inaction was irrelevant

**Answer:** A. That the Depression was deepened by monetary policy failure

**Why:** Bank failures destroyed deposits and the Fed did not act as lender of last resort, so a contraction became a collapse. Bernanke told Friedman at his ninetieth birthday 'we did it, we're very sorry, but thanks to you we won't do it again', and in 2008 the Fed did the opposite of 1931.

Page: https://tryals.app/practice/business-i/the-great-depression/between-1929-and-1933-the-us-money-supply-fell-by-about-a-third-while

### 8. Keynes argued a government should spend MORE during a demand collapse, when a household in trouble would cut back. Why does the analogy to a household fail?

A. Because governments can print money and households cannot
B. Because government debt never has to be repaid
C. Because households save while governments do not
D. Because one agent's spending is another's income

**Answer:** D. Because one agent's spending is another's income

**Why:** The paradox of thrift: individually sensible, collectively self-defeating. The household analogy fails because a household is small enough for its spending not to feed back into its own income.

Page: https://tryals.app/practice/business-i/the-great-depression/keynes-argued-a-government-should-spend-more-during-a-demand

### 9. Which are lessons modern central banks absorbed from the Depression?

A. Never allow the money supply to contract during recession
B. Act as lender of last resort during panics
C. Deposit insurance prevents bank runs
D. Always maintain the gold standard

**Answer:** A. Never allow the money supply to contract during recession; B. Act as lender of last resort during panics; C. Deposit insurance prevents bank runs

**Why:** Lender of last resort, money supply protection, and deposit insurance, all Depression lessons. Maintaining the gold standard is precisely what the Depression discredited.

Page: https://tryals.app/practice/business-i/the-great-depression/which-are-lessons-modern-central-banks-absorbed-from-the-depression