Lesson 10: The Great Depression


1.  A key to understanding people’s behavior is figuring out the incentives they face.

3.   Inflation (deflation) happens when the money supply grows more quickly (slowly) than output.

ECONOMIC CONCEPTS that support the historical analysis:

Business Cycle

Financial Crisis

Inflation and Deflation

Real Interest Rate

Supply and Demand


History Standards (from National Standards for History by the National Center for History in the Schools)

Era 8 – 1:  The student understands the causes of the Great Depression and how it affected American society

Era 8 – 2:   The student understands how the New Deal addressed the Great Depression, transformed American federalism, and initiated the welfare state

Economics Standards (from Voluntary National Content Standards in Economics)

Standard 8:  Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.

Standard 12:  Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, thus affecting the allocation of scarce resources between present and future uses.

Standard 18:  A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy.

Standard 19:  Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. By creating uncertainty about future prices, inflation can reduce the rate of growth of national living standards.

Standard 20:  Federal government budgetary policy and the Federal Reserve System’s monetary policy influence the overall levels of employment, output, and prices.


  • The Great Depression was a major economic, political and social crisis, by any reasonable measure.
  • The Great Depression was a “worldwide” depression and it was much deeper than any other depression.
  • Real economic activity and stock market indices declined dramatically; while unemployment rates increased to unprecedented levels, thousands of banks failed, and the contracting money supply brought about deflation.
  • Although the stock market crash of 1929 is often targeted as the cause of the Great Depression, the timing and depth of the crash cannot explain the onset or depth of the Depression.
  • Other leading culprits include: Policies of the Federal Reserve System; massive bank failures; a drop in aggregate demand; and international events, including the maintenance of the gold standard and/or tariff and trade disputes.
  • The New Deal is sometimes blamed for extending and slowing the recovery from the Depression.


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