The Great Depression was a worldwide economic downturn which started in 1929 (although its effects were not fully felt until late 1930) and lasted through most of the 1930s. It centered in North America and Europe, but had devastating effects around the world. The most industrialized countries were affected much more than others, including the United States, Germany, Britain, France, Canada, and Australia. Cities all around the world were hit hard, especially those based on heavy industry. Unemployment and homelessness soared. Construction virtually halted in many countries. Farmers and rural areas suffered as prices for crops fell by 40–60%. Mining and logging areas had perhaps the most striking blow because the demand fell sharply and there were hardly any other alternatives. The Great Depression ended at different times in different countries; for subsequent history see Home front during World War II.

A more recent theory based on institutional analysis focuses on the terms of employment for the labor force. For example, in the American agricultural sector farm prices fell about 50% as did farmer income while farm employment and output both rose by about 6% between 1929 and 1933. That outcome was more in line with the predictions of Say's Law that states that supply and demand balance at full employment provided that labor (and other costs) remain flexible.

Since farmers have only a residual claim on the revenue they receive, the unit cost of a farmer's labor is automatically flexible. Prices were thus free to fall, and they fell far enough to match the roughly 50% drop in national income. Thus, agricultural markets cleared at full employment.

Industry, however, depended on hired labor paid contractually agreed pay rates. Any hired factor, land, labor, or capital has a prior claim on enterprise revenue which makes for rigid costs and hence limits the flexibility of prices. Thus, industrial prices were flexible only to the extent of profits, which were free to fall. They did, to the extent that corporate profits vanished by 1933.

At the time this difference in the behavior of farm and industrial prices was attributed to the fact that farmers were subject to auction markets of perfect competition while the industrial sector was dominated by large oligopolies. They thus had some control over prices. Gardiner Means argued that corporations could "administer prices", "to protect profit margins".

That argument, however, fails to explain why corporate profits vanished. It also raises the question of why, wherever input prices such as oil, wheat, or cotton fell sharply, output prices reflected the drop in costs, and final output fell correspondingly less. Moreover, despite the 50% drop in national income, thanks to better technology, airline traffic shot up by 500% as travel became faster, more comfortable, and more reliable on top of a 50% reduction in airline fares.

But a more compelling rebuttal comes from Japan, which did not suffer from the Great Depression. Japan's real economy grew by about 6% from 1929 to 1933 and Japan's industrial economy was far more concentrated than was America's. In fact just four firms controlled Japan's industrial sector: Mitsui, Mitsubishi Heavy Industries, Sumitomo, and Yasuda. Japan was hit by a serious recession in 1930 but quickly recovered by the tactic of slashing prices (by about 40%). They could cut prices because Japan did not depend on "hired labor" except for part timers and seasonal overload work. The bulk of the industrial labor force were regarded as "members of an extended family". As such, workers got about 30% of their income from a semi-annual bonus that would rise or fall with enterprise performance. In addition, the Japanese government devalued the yen by about 50%. Therefore, while world trade in total went into a sharp slump, Japanese exports boomed and Japanese industry prospered. At the same time Say's Law appeared inoperable in the United States to explain unemployment where labor sought work at any wage, including in exchange for only food, but with little effect. In the American case it was only government created demand, begun with New Deal programs, and extended with World War II, that brought the nation out of the Great Depression.

The conclusion of this institutional school of thought with the case of Japan is that Say's Law worked as advertised during the Great Depression. Where costs were rigid, prices fell little and so output plunged. Where costs were flexible, prices plunged and output held stable. Yet, the conclusion from the historical example of American labor, is to suggest Say's Law was not in effect.

Many people found investment in the stock market attractive during the economic boom. There are multiple issues—what set off the first downturn in 1929, what were the structural weaknesses and specific events that turned it into a major depression, and how did the downturn spread from country to country.

In terms of the 1929 small downturn, historians emphasize structural factors and the stock market crash, while economists point to Britain's decision to return to the Gold Standard at pre-World War I parities ($4.86 Pound) (Peter Temin, Barry Eichengreen).

Although some believe the Wall Street Crash of 1929 was the immediate cause triggering the Great Depression, there are other, deeper causes that explain the crisis. The vast economic cost of World War I weakened the ability of the world to respond to a major crisis.