By the late 1920s the U.S. stock market had built a speculative bubble disconnected from real economic growth. On Black Thursday, 24 October 1929, panicked investors dumped 13 million shares; on Black Tuesday, 29 October, the Dow lost 12% in a single day. The crash alone did not create the Depression — what made it long and global were the U.S. banking panics that followed over the next three years (1930-33). Thousands of banks failed; there was no deposit insurance; household savings were wiped out. The money supply contracted by a third.

The crisis went global fast. U.S. recall of international loans hit Europe hard; Germany was paying its war reparations only with American credit. Countries tied to the gold standard could not loosen monetary policy — which deepened deflation. The U.S. Smoot-Hawley tariff of 1930 triggered a retaliation chain; world trade fell by two-thirds between 1929 and 1933. By 1933 U.S. unemployment was 25% and Germany's exceeded 30%. The causes of the Depression are still debated: monetarists (Friedman and Schwartz) point to the Fed's failure to defend the money supply; Keynesians emphasise the collapse of aggregate demand; others highlight the structural lock of the gold standard or the fragility of the international claims architecture.

The consequences were political. In the United States, Franklin D. Roosevelt's 1933 New Deal — banking reform, social security, public employment, the Tennessee Valley Authority — permanently enlarged the role of the state in the economy. John Maynard Keynes's 1936 'General Theory of Employment, Interest and Money' rebuilt macroeconomics; counter-cyclical public spending became a legitimate tool. In Europe the crisis opened a far darker path: in Germany the social fabric of the Weimar Republic collapsed, and the Nazi Party's vote share leapt from 2.6% in 1928 to 37.3% in 1932 — the direct economic basis for Hitler's rise to power in 1933.

The Great Depression is the deepest legitimacy crisis in the history of liberal capitalism. It increased the gravitational pull of both fascism and planned-economy models (the Soviet five-year plans were producing dramatic industrialisation in the same years), and it formed the economic backdrop to the Second World War. Exit from the Depression came partly from the New Deal but primarily from the colossal public spending of the war economy — a bitter ironic proof of Keynes's thesis. The post-war Bretton Woods system and the welfare-state model were the international institutionalisation of lessons learned from the Depression.