The great economic depression which began in the United States in 1929 reached New Zealand a year later in the form of a collapse in farm-commodity prices, a disaster for a country virtually dependent on these exports. The number of unemployed, hitherto a few thousands, snowballed with alarming speed from the end of 1930; by June 1931, 50,000 were receiving assistance from the Employment Promotion Fund set up in December 1930; the peak of nearly 80,000 was reached in September 1933. The fund, financed by a levy of £1 per annum on all employed males and a flat-rate tax, first on salaries and wages, then all income (the peak was 1d. in each 1s. 8d.), subsidised a variety of employment, provided chiefly by the State or local bodies. The inability of many unemployed to do hard manual work and the lack of enough suitable projects led to extensive sustenance payments from 1934 until employment improved as the depression faded. Total expenditure developed to about £4 million per annum in 1932–33, with a peak of £6.5 million in 1938–39, when a special effort was made to place all fit men in full-time work. The fund was abolished in 1939, when its operations were absorbed by the new Social Security Fund.

The collapse in prices, loss of business confidence, and unemployment sharply reduced the revenue of Government at the very time when the need for relief expenditure greatly increased. There was then no central bank, nor an appreciation of Keynesian economics: financial orthodoxy demanded a balanced budget in circumstances when a bold policy of deficit financing was essential. (“Deficit financing,” here and later, is used in the restricted sense of meaning recourse to Reserve Bank credits or the depletion of a cash balance at the Bank.) But New Zealand was by no means alone in awaking too late to an understanding of counter-cyclical policy. Salaries of Government employees were cut twice, the intake of staff into Government employment became negligible, and the Arbitration Court was given power to reduce wages, which it did in 1931. Pensions were reduced, all Government securities bearing over 4 per cent interest were virtually compulsorily converted to that rate (the alternative for dissenters being penal tax on the interest), a similar reduction took place in interest payable by local bodies, and elaborate machinery was set up to give relief to mortgagors and tenants. Restoration of cuts in Government salaries and pensions commenced in 1934–35, when revenue started to recover.

Until 1930 the New Zealand pound has been on parity with sterling, but by early 1931 had depreciated to £110: 100. Two years later the Government depreciated the currency to £125:100, where it remained until parity was restored in 1948. The 1933 depreciation was designed to provide some offset to the severe decline in farm incomes, but of course there were contra effects on the cost of imports and service of the overseas debt. It was a highly controversial move that led to the resignation of the Minister of Finance, Downie Stewart. Whatever its beneficial effect on the economy as a whole, the main lift out of the trough of depression was provided externally by an improvement in export prices in 1934.

In August 1934 the Reserve Bank was created, but its ideas on advances to the Government did not, for a time, differ materially from those of the trading banks. This situation changed in 1936 when the Bank became subject to Government policy, but by this time the depression was lifting. The availability of cheap bank credit was, however, a major influence in accelerating recovery.

Despite the collapse in prices, overseas exchange reserves did not drop to a critical level, as they did after the depression was over. This was in part a measure of the lower demand for imports, in part a reflection of increased production by farmers in an endeavour to offset low prices.