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Case Studies
The Enron Scandal: A Comprehensive Overview
Exploring the Events, Consequences, and Lessons of the Corporate Fraud Case
In 2001, the collapse of this energy giant sent shockwaves through the business community and
beyond, giving the world what would be forever known as the Enron Scandal. What had been
one of the most successful and innovative companies in the energy industry turned out to be a
house of cards, built on accounting fraud and insider dealing.
The Enron scandal resulted in the loss of billions of dollars for investors, the bankruptcy of the
company, and the end of many careers and reputations. The Enron scandal is often cited as
one of the most significant corporate scandals in history. And it had far-reaching consequences
for the energy industry, the accounting profession, and the regulation of corporate governance.
In this blog post, we’ll take a closer look at the rise and fall of Enron, the accounting practices
that led to the scandal, and the aftermath of the scandal. We’ll also consider the lessons that
you can learn from the Enron scandal and how companies and investors can avoid similar
disasters in the future.
The Rise Of Enron
Enron was founded in 1985 as a merger between two natural gas companies, Houston Natural
Gas and InterNorth. The rapid growth and innovation mark the company’s early years. Enron
was one of the first companies to take advantage of the newly deregulated energy market in the
United States, and it quickly became a major player in the natural gas industry. However,
Enron’s ambitions went beyond the energy sector.
The company’s founder, Kenneth Lay, had a vision of building a “new economy” based on the
trading and sale of energy and other commodities. To achieve this, Enron diversified into a wide
range of businesses, including trading in electricity, water, and broadband, as well as investing
in renewable energy and overseas projects.
The business community recognizes Enron’s growth and innovation. Fortune magazine named
it “America’s Most Innovative Company” for six consecutive years. And its stock price
soared. By the late 1990s, Enron was one of the largest and most successful companies in the
world, with a market capitalization of over $60 billion.
The Accounting Fraud
Despite its outward success, Enron was hiding a dirty secret. The company had been using a
variety of accounting tricks to inflate its profits and hide its debts. One of the key tactics used by
Enron was the creation of special purpose entities (SPEs). These were shell companies that
Enron used to transfer assets and liabilities off its balance sheet. By doing this, Enron was able
to conceal the true financial state of the company from investors and regulators.
Another accounting technique used by Enron was mark-to-market accounting. This allowed the
company to record profits on long-term contracts as if they had already been realized, even if
the contracts had not yet been completed. This had the effect of artificially inflating Enron’s
profits and making the company appear more financially healthy than it actually was. Enron’s
accounting fraud was enabled by its accounting firm, Arthur Andersen. The firm signed off on
Enron’s financial statements, despite knowing about the questionable accounting practices
being used. In 2002, Arthur Andersen was found guilty of obstruction of justice for destroying
documents related to the Enron audit.
The Consequences Of The Scandal
The Enron scandal had devastating consequences for the company’s employees and
shareholders. When the scandal broke, Enron’s stock price plummeted. And the company was
forced to file for bankruptcy. Many Enron employees, who had invested heavily in the company’s
stock, lost their life savings as a result. The legal consequences for Enron and its executives
were severe. The legal charged several top executives with fraud and insider trading.
This includes Kenneth Lay and CEO Jeffrey Skilling. Lay was convicted on all counts, but he
died before being sentenced. Skilling got a sentence of 24 years in prison, but his sentence was
later reduced to 14 years. Other Enron executives, such as CFO Andrew Fastow, also faced
criminal charges and served prison time.
In addition to the legal consequences, the Enron scandal had a significant impact on the energy
industry and the broader business world. The collapse of Enron, which had been one of the
largest and most respected companies in the industry, shook investor confidence and led to a
decline in the stock market. The scandal also raised questions about the integrity of the
accounting profession and the regulation of corporate governance.
The Aftermath Of The Enron Scandal
In the aftermath of the Enron scandal, there were calls for reforms to prevent similar corporate
malfeasance in the future. One of the most significant pieces of legislation to come out of the
scandal was the Sarbanes-Oxley Act. It was signed into law in 2002. The act established new
requirements for corporate governance and financial reporting, including creating an
independent audit committee, the requirement for CEOs and CFOs to certify the accuracy of
their company’s financial statements, and increased penalties for corporate fraud.
The Enron scandal also had a lasting impact on the energy industry. The company’s collapse
led to a decline in the market for energy trading and a shift towards more traditional forms of
energy production. The scandal also highlighted the risks of investing in complex and opaque
financial instruments, leading to increased scrutiny of such investments.
The Enron Scandal In Context
The Enron scandal was not the only corporate scandal of its time, and it was not the only
scandal to involve accounting fraud. Other notable corporate scandals of the early 21st century
include the Madoff investment scandal and the Wells Fargo fake accounts scandal. Like Enron,
both of these scandals involved using fraudulent practices to deceive investors and boost
profits.
However, the Enron scandal was unique in the sheer scale and scope of the fraud. Besides the
impact it had on the energy industry and the broader economy. It’s worth noting that the Enron
scandal took place in a specific cultural and economic context. The 1990s and early 2000s were
a time of economic boom and a focus on short-term profits and shareholder value.This cultural
and economic climate may have contributed to the actions of Enron’s executives and the
willingness of investors and analysts to overlook red flags.
Lessons From The Enron Scandal
So, what can we learn from the Enron scandal? One of the most obvious lessons is the
importance of corporate transparency and accountability. The Enron scandal shows the dangers
of hiding financial information and using questionable accounting practices to deceive
investors. Companies and their executives must be open and honest about their financial
health. Further, they must be held accountable for any fraudulent activities.
Another lesson from the Enron scandal is the importance of protecting shareholder value. The
Enron executives with fraud and insider trading have enriched themselves at the expense of the
company’s shareholders. Companies have to act in the best interests of their shareholders to
prioritize long-term value over short-term gains.
Finally, the Enron scandal highlights the need for strong regulation and oversight of the
business world. The Sarbanes-Oxley Act and other reforms put in place in the wake of the
Enron scandal have helped to improve corporate governance and financial reporting. However,
there is always room for improvement. And it is important for regulators and lawmakers to stay
vigilant to prevent future corporate scandals.
Conclusion
The Enron scandal was a major turning point in the business world, and you can still feel its
consequences. The collapse of the most successful and innovative company in the world was a
wake-up call for investors and the business community as a whole.
The Enron scandal teaches us-
 The importance of corporate transparency and accountability
 The need to protect shareholder value
 And the role of strong regulation in preventing corporate fraud
By learning from the mistakes of the past, we can work to create a more transparent and
responsible business environment in the future.
Philip Meagher
06 January 2023
5 min read
Related:

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Payment Processor
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Case Studies
The Wells Fargo Fake Accounts Scandal: A Comprehensive Overview
Learnsignal06 January 2023

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› Resources › Environment, Social, & Governance › Enron Scandal

Enron Scandal

A series of financial wrongdoings that led to the collapse of Enron Corporation in 2001

Written byCFI Team

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What is the Enron Scandal?

The Enron scandal is likely the largest, most complicated, and most notorious accounting scandal of all
time. Through deceiving accounting tricks, Enron Corporation – the US-based energy, commodities, and
services company – was able to trick its investors into thinking that the firm was doing much better than
it actually was.
Understanding the Enron Scandal

At Enron’s peak in mid-2001, the company’s shares were trading at an all-time high of $90.75. Then, as
the scandal was uncovered, the shares plummeted over several months to an all-time low of $0.26 in
November 2001.

What was particularly worrying about the scandal was how such a large-scale deception scheme was
successfully pulled off for so long, and how regulatory authorities failed to take action in order to stop it.
The Enron scandal, in conjunction with the WorldCom (MCI) fiasco, shed light upon the extent to which
companies were exploiting loopholes in legislation.

The newfound scrutiny led to the enactment of the Sarbanes-Oxley Act, which aimed to protect
shareholders by making corporate disclosures more accurate and more transparent.
Mark to Market Accounting (MTM)

The principal method that was employed by Enron to “cook its books” was an accounting method known
as mark-to-market (MTM) accounting. Under MTM accounting, assets can be recorded on a company’s
balance sheet at their fair market value (as opposed to their book values). With MTM, companies can
also list their profits as projections, rather than actual numbers.

An example of a company exploiting MTM accounting is if it were to report its projected cash flows that
would result from a new piece of property, plant, and equipment (PP&E) such as a factory. Naturally,
companies would be incentivized to be as optimistic as possible in their outlook since it would help
bolster their stock price and encourage more investors to invest in the company.

MTM in the Enron Scandal

Fair values are hard to determine, and even Enron CEO Jeff Skilling found it difficult to explain to financial
reporters where all the numbers on the company’s financial statements came from. Skilling stated in an
interview that the numbers provided to analysts were “black box” numbers that were difficult to pin
down due to the wholesale nature of Enron, but assured the press that they could be trusted.

In the case of Enron, the actual cash flows that resulted from their assets were substantially less than the
cash flows that they initially reported to the Securities and Exchange Commission (SEC) under the MTM
method. In an attempt to hide the losses, Enron set up a number of special shell corporations known as
Special Purpose Entities (SPEs).

The losses would be reported under more traditional cost accounting methods in the SPEs but were
almost impossible to link back to Enron. The majority of the SPEs were private corporations that only
existed on paper. Thus, financial analysts and reporters simply did not know that they existed.

Agency Conflicts

What essentially occurred with the Enron scandal was that there was a high degree of information
asymmetry between the management team and investors in the company. It likely occurred due to the
personal incentives that the management team received. For example, many C-suite executives are
compensated in company stock, as well as collect bonuses when the shares hit certain predetermined
price levels.

Thus, Skilling and his team became determined to boost the stock price of Enron in hopes that their
management incentives would translate in bigger compensation for them. Following the Enron scandal,
companies are now much warier of agency issues and the misalignment of corporate objectives versus
management incentives.

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Politics, Law & GovernmentLaw, Crime & Punishment

Downfall and bankruptcy

inEnron scandal

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Written by

Peter Bondarenko

Fact-checked by

The Editors of Encyclopaedia Britannica

Article History

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Date:

c. June 2001 - December 2, 2001

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As the boom years came to an end and as Enron faced increased competition in the energy-trading
business, the company’s profits shrank rapidly. Under pressure from shareholders, company executives
began to rely on dubious accounting practices, including a technique known as “mark-to-market
accounting,” to hide the troubles. Mark-to-market accounting allowed the company to write unrealized
future gains from some trading contracts into current income statements, thus giving the illusion of
higher current profits. Furthermore, the troubled operations of the company were transferred to so-
called special purpose entities (SPEs), which are essentially limited partnerships created with outside
parties. Although many companies distributed assets to SPEs, Enron abused the practice by using SPEs as
dump sites for its troubled assets. Transferring those assets to SPEs meant that they were kept off
Enron’s books, making its losses look less severe than they really were. Ironically, some of those SPEs
were run by Fastow himself. Throughout these years, Arthur Andersen served not only as Enron’s auditor
but also as a consultant for the company.
In February 2001 Skilling took over as Enron’s chief executive officer, while Lay stayed on as chairman. In
August, however, Skilling abruptly resigned, and Lay resumed the CEO role. By this point Lay had
received an anonymous memo from Sherron Watkins, an Enron vice president who had become worried
about the Fastow partnerships and who warned of possible accounting scandals.

The severity of the situation began to become apparent in mid-2001 as a number of analysts began to
dig into the details of Enron’s publicly released financial statements. In October Enron shocked investors
when it announced that it was going to post a $638 million loss for the third quarter and take a $1.2
billion reduction in shareholder equity owing in part to Fastow’s partnerships. Shortly thereafter
the Securities and Exchange Commission (SEC) began investigating the transactions between Enron and
Fastow’s SPEs. Some officials at Arthur Andersen then began shredding documents related to Enron
audits.

As the details of the accounting frauds emerged, Enron went into free fall. Fastow was fired, and the
company’s stock price plummeted from a high of $90 per share in mid-2000 to less than $12 by the
beginning of November 2001. That month Enron attempted to avoid disaster by agreeing to be acquired
by Dynegy. However, weeks later Dynegy backed out of the deal. The news caused Enron’s stock to drop
to under $1 per share, taking with it the value of Enron employees’ 401(k) pensions, which were mainly
tied to the company stock. On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection.

Aftermath: lawsuits and legislation

Enron scandalJoseph Berardino, then CEO of Arthur Andersen, testifying during a congressional hearing
on the Enron scandal, 2002.(more)

Many Enron executives were indicted on a variety of charges and were later sentenced to prison.
Notably, in 2006 both Skilling and Lay were convicted on various charges of conspiracy and fraud. Skilling
was initially sentenced to more than 24 years but ultimately served only 12. Lay, who was facing more
than 45 years in prison, died before he was sentenced. In addition, Fastow pleaded guilty in 2006 and
was sentenced to six years in prison; he was released in 2011.

Arthur Andersen also came under intense scrutiny, and in March 2002 the U.S. Department of
Justice indicted the firm for obstruction of justice. Clients wanting to assure investors that their financial
statements could meet the highest accounting standards abandoned Andersen for its competitors. They
were soon followed by Andersen employees and entire offices. In addition, thousands of employees
were laid off. On June 15, 2002, Arthur Andersen was found guilty of shredding evidence and lost its
license to engage in public accounting. Three years later, Andersen lawyers successfully persuaded
the U.S. Supreme Court to unanimously overturn the obstruction of justice verdict on the basis of faulty
jury instructions. But by then there was nothing left of the firm beyond 200 employees managing its
lawsuits.

In addition, hundreds of civil suits were filed by shareholders against both Enron and Andersen. While a
number of suits were successful, most investors did not recoup their money, and employees received
only a fraction of their 401(k)s.

The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of
financial reporting for publicly traded companies. The most important of those measures, the Sarbanes-
Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial records. The
act also prohibited auditing firms from doing any concurrent consulting business for the same clients.

Brian Cruver, an Enron employee, wrote Anatomy of Greed: The Unshredded Truth from an Enron
Insider (2002), which was adapted as the TV movie The Crooked E (2003). Enron: The Smartest Guys in
the Room (2005) is a documentary film about Enron’s rise and fall.

Peter BondarenkoThe Editors of Encyclopaedia Britannica

Politics, Law & GovernmentLaw, Crime & Punishment

white-collar crime

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Also known as: business crime, commercial crime

Written by

Laurie L. Levenson

Fact-checked by

The Editors of Encyclopaedia Britannica

Last Updated: Oct 14, 2024 • Article History

Table of Contents

Key People:

Marshall B. Clinard
Richard Quinney

Neal Shover

Related Topics:

commodities fraud

advertising fraud

money laundering

advance fee fraud

bid rigging

On the Web:

International Journal of Creative Research Thoughts - White Collar Crime: Unraveled (Oct. 14, 2024)

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white-collar crime, crime committed by persons who, often by virtue of their occupations, exploit social,
economic, or technological power for personal or corporate gain. The term, coined in 1939 by the
American criminologist Edwin Sutherland, drew attention to the typical attire of the perpetrators, who
were generally businesspeople, high-ranking professionals, and politicians. Since Sutherland’s time,
however, such crimes have ceased to be the exclusive domain of these groups. Moreover, developments
in commerce and technology have broadened the scope of white-collar crime to
include cybercrime (computer crime), health-care fraud, and intellectual property crimes, in addition to
more-traditional crimes involving embezzlement, bribery, conspiracy, obstruction of justice, perjury,
money laundering, antitrust violations, tax crimes, and regulatory violations.

Specific examples of activities that constitute white-collar crimes include price collusion (conspiring with
other corporations to fix the prices of goods or services as a means of obtaining artificially high profits or
driving a competitor out of the market), falsifying reports of tests on pharmaceutical products to obtain
manufacturing licenses, and substituting cheap, defective materials for costlier components specified in
the construction of roads or buildings but charging the customer for the full cost of the specified
materials. At times such activities can be attributed to individual employees or executives acting on their
own initiative, but it is often the case that they represent a collective and organized effort by a
corporation to increase its profits at any cost.

White-collar crime that is part of a collective and organized effort to serve the economic interests of
a corporation is known as corporate crime. In some cases corporate crimes are conducted by bogus
entities that pose as legal corporations or partnerships. Although corporations cannot be incarcerated,
they can be criminally punished with fines and other sanctions. Criminal liability in these cases is based
on the acts or omissions of the company’s employees and executives.

Common characteristics

Although white-collar crimes are quite varied, most have several characteristics in common. First, they
involve the use of deceit and concealment, rather than the application of force or violence, for
the illegitimate gain of money, property, or services. A defendant convicted of making false statements in
order to obtain a government contract, for example, is considered a white-collar criminal.

Next, white-collar crimes typically involve abuse of positions of trust and power. Public officials who
solicit and accept bribes, or corporate officers who fix prices to drive competitors out of business, are
engaging in such abuse of their positions. White-collar crime is also often more difficult to detect than
other types of crime, in part because losses may not be immediately apparent to victims but also
because the crimes can involve sophisticated schemes and cover-ups. Many white-collar crimes require
concerted criminal activity by coconspirators. For example, a case of real-estate fraud may involve the
knowing participation of an escrow officer, a buyer, an appraiser, and a bank officer, all of whom were
willing to sign false documents to perpetrate a fraud for personal gain.

Fraud, the most common type of white-collar crime, involves obtaining money or services by making
false representations or promises. The key question in these cases is ordinarily whether the
defendant intended to deceive the victims or merely failed in an honest business venture. One of the
most common types of fraud involves telemarketing schemes that misrepresent the value, the terms of
sale, or the use of the goods or services being sold.

Perjury, obstruction of justice, false statements, and witness tampering are also considered white-collar
crimes. Although the goal is not necessarily to obtain money or services, these crimes are illegal because
they interfere with the proper functioning of the justice system. Bribery and extortion are more general,
in that they constitute illegal means of influencing persons in power in public or private
institutions. Bribery involves the giving of something of value in exchange for an official’s exercise of
power. Extortion is a threat made to obtain a benefit from either a public official or a private
individual. Money laundering is a relatively new type of white-collar crime that is utilized by criminals
wishing to conceal profits gained through illegal activities. Drug dealers and purveyors of counterfeit
goods and currencies will create money-laundering schemes to hide the source of their earnings.

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A wide variety of regulatory offenses are also considered to be white-collar crimes. These may include
violation of tax laws, avoidance of currency-reporting requirements, securities violations, and
environmental crimes. In addition to criminal punishment, those convicted of regulatory violations may
also be subject to civil and administrative penalties. Such violations, unlike common-law crimes, may not
require any criminal intent by the defendant. Instead, they may be seen as “strict liability” crimes for
which mere failure to comply with the legal standards is sufficient grounds to establish criminal liability.

Computer crimes represent one means by which white-collar criminals exploit technology. Common
examples cover a wide variety of criminal activity, including using a computer as a mechanism for
committing securities fraud, credit-card fraud, and identity theft. Computer crimes also may involve
illegally accessing and tampering with other users’ computer files.

Cost to society

White-collar crime represents one of the fastest-growing types of crime in the world. Nearly every
category of white-collar crime has increased in incidence in recent years. For example, over the course of
two years in the early 21st century, annual losses from fraudulent use of identity rose by more than $300
million in the United States. (See Identity theft and invasion of privacy.) Likewise, while the number of
almost every other type of civil lawsuit in the United States decreased around the turn of the 21st
century, the number of government and private lawsuits for white-collar crimes more than doubled
during the same time period.

Former Enron employees sitting with their belongings after layoffs by the bankrupt energy-trading
company.

This represented a trend, begun in the late 20th century, of a number of highly visible white-collar
prosecutions in the United States. They included the prosecution of financiers Ivan Boesky (1986)
and Michael Milken (1990) for billions of dollars in securities fraud, the convictions of banker Charles
Keating (1992 and 1993) for having looted his own savings and loan (S&L), ultimately touching off what
became known as the “S&L Crisis,” and the guilty plea entered by Enron Corp.’s chief financial
officer, Andrew Fastow (2004), on charges of having manipulated off-balance-sheet transactions (in this
case, of having concealed the company’s debt obligations by transferring them to offshore partnerships),
which led to Enron’s collapse. In an associated case, Enron’s accounting firm, Arthur Andersen LLP, was
convicted of obstruction of justice (2002; overturned in 2005), which caused the firm to go out of
business.

Similar cases have occurred throughout the world. In February 1995, Barings Bank in London collapsed
as a result of deceptions practiced over three years by one of its futures traders. In Canada, two people
pleaded guilty in 2001 to having bilked financial institutions, including the Royal Bank, out of $92 million
by creating 52 fake leases for nonexistent medical equipment.

Although white-collar crime has traditionally been viewed as less serious than other types of crime
(largely because it does not involve physical violence), by the late 20th century there was a growing
recognition of the significant harm it causes. In a single year, for example, nearly $500 million in
restitution was awarded to victims of white-collar crimes.
The cost of corporate crime to society is many times that of organized crime or the more common
street crime. Moreover, it cannot be measured in monetary damages alone, because corporate crimes
can also pose health risks, compromise safety, cause injuries or fatalities, bring harm to wildlife and
the environment, and lead to organizational failures and associated job losses. Owing to the concealed
nature of many frauds and the fact that few are reported even when discovered, their cost is impossible
to estimate precisely, but in the United States it is thought to be at least 10 times the combined cost of
thefts, burglaries, and robberies. When compared with crimes committed by juveniles or the poor,
corporate crimes are very rarely prosecuted in the criminal courts, and, despite many well-publicized
convictions of corporate leaders found guilty of wrongdoing, executives rarely go to jail, though some
companies may pay large fines.

Laurie L. Levenson

ContentsAsk the Chatbot a Question

Politics, Law & GovernmentBanking & Business

business ethics

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Written and fact-checked by

The Editors of Encyclopaedia Britannica

Last Updated: Oct 5, 2024 • Article History

Table of Contents

Related Topics:

business organization

corporate crime

corporate code of conduct

corporation

On the Web:
CORE - Relationship between Business Ethics and Corporate Social Responsibility (Oct. 05, 2024)

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business ethics, branch of applied ethics that studies the moral dimensions of commercial activity,
frequently but not exclusively with respect to corporations. It encompasses an extremely broad range of
issues, including whether and how corporations—as distinct from their officers or shareholders—are
moral agents; whether corporations have moral obligations or responsibilities (e.g., to
local communities, to national governments, or to the natural environment) beyond the
legal imperative of making money for their shareholders; the employment relation and employee
rights; fair corporate governance; the ethical implications of advertising and marketing (especially to
children and other vulnerable audiences); the limits of fair competition between businesses; how to
resolve conflicting obligations to stakeholders (persons or groups who bear a substantial interest in or
are substantially affected by a business’s activities); and even the morality of the profit motive and
of capitalism itself. As an academic discipline, business ethics informs various practically oriented
approaches to understanding and improving business behaviour and management, including corporate
social responsibility, corporate citizenship, and stakeholder management.

(Read Peter Singer’s Britannica entry on ethics.)

Much academic scholarship in business ethics involves application of historically significant ethical
theories to problems perceived to be characteristic of business environments. Such theories include
consequentialism—a popular specific version of which is utilitarianism; deontology, or rule-
based morality, based in the thought of the German Enlightenment philosopher Immanuel Kant;
and virtue theory, which has its basis in Aristotelian ethics.

This article was most recently revised and updated by Brian Duignan.

Politics, Law & GovernmentEconomics & Economic Systems

Great Depression: soup kitchen Unemployed men standing in line outside a soup kitchen, Chicago.

Great Depression

economy

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Also known as: Depression of 1929, Slump of 1929

Written by

Richard H. Pells,

Christina D. Romer•All

Fact-checked by

The Editors of Encyclopaedia Britannica

Article History

Table of Contents

Date:

1929 - c. 1939

Location:

Europe

United States

Context:

gold standard
international trade

macroeconomics

protectionism

stock market crash of 1929

Key People:

Herbert Hoover

Franklin D. Roosevelt

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How did the Great Depression affect the American economy?

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Great Depression, worldwide economic downturn that began in 1929 and lasted until about 1939. It was
the longest and most severe depression ever experienced by the industrialized Western world, sparking
fundamental changes in economic institutions, macroeconomic policy, and economic theory. Although it
originated in the United States, the Great Depression caused drastic declines in output,
severe unemployment, and acute deflation in almost every country of the world. Its social and cultural
effects were no less staggering, especially in the United States, where the Great Depression represented
the harshest adversity faced by Americans since the Civil War.

Economic history
The impact of the Great Depression on AmericansLearn three facts about the economic devastation of
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The timing and severity of the Great Depression varied substantially across countries. The Depression
was particularly long and severe in the United States and Europe; it was milder in Japan and much of
Latin America. Perhaps not surprisingly, the worst depression ever experienced by the world economy
stemmed from a multitude of causes. Declines in consumer demand, financial panics, and misguided
government policies caused economic output to fall in the United States, while the gold standard, which
linked nearly all the countries of the world in a network of fixed currency exchange rates, played a key
role in transmitting the American downturn to other countries. The recovery from the Great Depression
was spurred largely by the abandonment of the gold standard and the ensuing monetary expansion. The
economic impact of the Great Depression was enormous, including both extreme human suffering and
profound changes in economic policy.

Timing and severity

The Great Depression began in the United States as an ordinary recession in the summer of 1929. The
downturn became markedly worse, however, in late 1929 and continued until early 1933. Real output
and prices fell precipitously. Between the peak and the trough of the downturn, industrial production in
the United States declined 47 percent and real gross domestic product (GDP) fell 30 percent. The
wholesale price index declined 33 percent (such declines in the price level are referred to as deflation).
Although there is some debate about the reliability of the statistics, it is widely agreed that
the unemployment rate exceeded 20 percent at its highest point. The severity of the Great Depression in
the United States becomes especially clear when it is compared with America’s next worst recession,
the Great Recession of 2007–09, during which the country’s real GDP declined just 4.3 percent and
the unemployment rate peaked at less than 10 percent.

The Depression affected virtually every country of the world. However, the dates and magnitude of the
downturn varied substantially across countries. Great Britain struggled with low growth and recession
during most of the second half of the 1920s. The country did not slip into severe depression, however,
until early 1930, and its peak-to-trough decline in industrial production was roughly one-third that of the
United States. France also experienced a relatively short downturn in the early 1930s. The French
recovery in 1932 and 1933, however, was short-lived. French industrial production and prices both fell
substantially between 1933 and 1936. Germany’s economy slipped into a downturn early in 1928 and
then stabilized before turning down again in the third quarter of 1929. The decline in German industrial
production was roughly equal to that in the United States. A number of countries in Latin America fell
into depression in late 1928 and early 1929, slightly before the U.S. decline in output. While some less-
developed countries experienced severe depressions, others, such as Argentina and Brazil, experienced
comparatively mild downturns. Japan also experienced a mild depression, which began relatively late
and ended relatively early.

The general price deflation evident in the United States was also present in other countries. Virtually
every industrialized country endured declines in wholesale prices of 30 percent or more between 1929
and 1933. Because of the greater flexibility of the Japanese price structure, deflation in Japan was
unusually rapid in 1930 and 1931. This rapid deflation may have helped to keep the decline in Japanese
production relatively mild. The prices of primary commodities traded in world markets declined even
more dramatically during this period. For example, the prices of coffee, cotton, silk, and rubber were
reduced by roughly half just between September 1929 and December 1930. As a result, the terms of
trade declined precipitously for producers of primary commodities.

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SharecroppersEvicted sharecroppers along a road in southeastern Missouri, U.S., January 1939.

The U.S. recovery began in the spring of 1933. Output grew rapidly in the mid-1930s: real GDP rose at an
average rate of 9 percent per year between 1933 and 1937. Output had fallen so deeply in the early
years of the 1930s, however, that it remained substantially below its long-run trend path throughout this
period. In 1937–38 the United States suffered another severe downturn, but after mid-1938 the
American economy grew even more rapidly than in the mid-1930s. The country’s output finally returned
to its long-run trend path in 1942.

Recovery in the rest of the world varied greatly. The British economy stopped declining soon after
Great Britain abandoned the gold standard in September 1931, although genuine recovery did not begin
until the end of 1932. The economies of a number of Latin American countries began to strengthen in
late 1931 and early 1932. Germany and Japan both began to recover in the fall of 1932. Canada and
many smaller European countries started to revive at about the same time as the United States, early in
1933. On the other hand, France, which experienced severe depression later than most countries, did
not firmly enter the recovery phase until 1938.

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