Causes of the Great Depression - History

Causes of the Great Depression - History

by Marc Schulman

The 1920's were a period of rapid economic growth. All Americans did not equally share that economic growth. By 1929 factory inventories were rising. Despite rising inventory(when inventory grows it means products are not being sold) and signs of an economic slowdown, stock prices continued to soar. The stock rise was fueled by easy credit that allowed people to buy stocks on margin. With easy credit, people could buy stock by putting down only 10% of the cost in cash.

The stock market continued its advance. The Dow Jones industrial average reached a peak of 381. For the next month, the market moved sideways, until Wednesday, October 23, 1929, when an avalanche of sell orders arrived. The markets lost $4 Billion that day. The next day the markets continued their downward spiral. On Friday the major bankers of the day gathered and tried to bolster the market. That held for one day. On the following Monday and Tuesday known as Black Monday and Black Tuesday, the market lost nearly 13% and 12% of its value on each of the days. An initial bottom occurred on November 13th when the Dow Jones Industrial Average closed at 198. After this fall the markets recovered for a few months. It then began a steady slide that ended in 1932 with the Dow Jones at 41.22, an 80% drop from its high.

The prevailing view in the Republican Party at the time was that government should not become involved in the world of business. President Hoover however did not subscribe to that view, instead became actively involved in the economy. He summoned the leaders of industry and convinced them to increase their investment, and not to lower wages. He also influenced the Federal Reserve to increase lending. Finally he asked Congress for $140 million for federal infrastructure projects.

The stock market crash is the moment that we look to as the beginning of the Great Depression, however it alone did not cause the depression. It was the failure of the banking system that did the most harm. There were thousands of banks in the United States at the time. Throughout the 1920's, on average 500 banks failed a year. In the year that followed the stock crash, many weak banks failed. Runs on banks happened more often. The trouble with American banks reached a new level when the Bank of United States was forced to close its doors. The Federal Reserve attempted to save the bank but failed and this failure combined with the size of the bank( it held $280 million in deposits) eliminated any remaining confidence in the American banking system. Six hundred banks failed in the last 60 days of the 1930.

The final setbacks to the American economy began with the raising of tariffs under the Hawley Smoot Act. This was followed by a series of decisions by nations to get off the gold standard. The decision of Great Britain to go off the gold standard was the final blow to International Trade- that trade plummeted from 36 Billion in 1928 to 16 Billion in 1931. It also marked the final blow to American banks, 2294 banks failed in 1931. In a final blow to the economy President Hoover proposed an increase in income taxes. By early 1930 ten million people representing 20% of the work force were out of work. The prevailing view in the Republican Party at the time was that the government should not become involved in the world of business. President Hoover, however, did not subscribe to that view, instead became actively involved in the economy. Hoover also influenced the Federal Reserve to increase lending. Finally, he asked Congress for $140 million for federal infrastructure projects.

The stock market crash is the moment that we look to as the beginning of the Great Depression; however, it alone did not cause the depression. The Federal Reserve attempted to save the bank but failed, and this failure combined with the size of the bank( it held $280 million in deposits) eliminated any remaining confidence in the American banking system. Six hundred banks failed in the last 60 days of 1930.

The final setbacks to the American economy began with the raising of tariffs under the Hawley Smoot Act. The choice of Great Britain to go off the gold standard was the final blow to International Trade- that trade plummeted from 36 Billion in 1928 to 16 Billion in 1931. In a final blow to the economy, President Hoover proposed an increase in income taxes. By early 1930 ten million people representing 20% of the workforce were out of work.

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Stock Market Crash of 1929

Remembered today as "Black Tuesday," the stock market crash of October 29, 1929 was neither the sole cause of the Great Depression nor the first crash that month, but it's typically remembered as the most obvious marker of the Depression beginning. The market, which had reached record highs that very summer, had begun to decline in September.

On Thursday, October 24, the market plunged at the opening bell, causing a panic. Though investors managed to halt the slide, just five days later on "Black Tuesday" the market crashed, losing 12% of its value and wiping out $14 billion of investments. By two months later, stockholders had lost more than $40 billion dollars. Even though the stock market regained some of its losses by the end of 1930, the economy was devastated. America truly entered what is called the Great Depression.

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.

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.

3. The New Deal: FDR’s Interventionism

Soon after Herbert Hoover assumed the presidency in 1929, the economy began to decline, and between 1930 and 1933 the contraction assumed catastrophic proportions never experienced before or since in the United States. Disgusted by Hoover’s inability to stem the collapse, in 1932 the voters elected Franklin Delano Roosevelt, along with a heavily Democratic Congress, and set in motion the radical restructuring of government’s role in the economy known as the New Deal.

Roosevelt was undeterred by the failure of the Hoover programs to achieve their object. So far as they considered them in that light at all, the New Dealers thought the Hoover effort was too timid and much too piecemeal. In any case, they were much more convinced of the healing powers of monetary inflation than Hoover had been.

The most prominent of the New Deal programs were supposed to deal with economic problems arising from the Great Depression. Most of them were put forward as remedies for depression-related conditions, many of them in an emergency atmosphere. But rather than cure the depression, they plunged it to new depths.

The New Deal’s Central Planning: NRA and AAA

One of the great attributes of the private-property market sys­tem is its inherent ability to over­come almost any obstacle. Through price and cost readjustment, man­agerial efficiency and labor pro­ductivity, new savings and invest­ments, the market economy tends to regain its equilibrium and re­sume its service to consumers. It doubtless would have recovered in short order from the Hoover in­terventions had there been no fur­ther tampering.

However, when President Franklin Delano Roosevelt as­sumed the Presidency, he, too, fought the economy all the way. Instead of clearing away the prosperity bar­riers erected by his predecessor, he built new ones of his own. He struck in every known way at the integrity of the U.S. dollar through monetary expansion schemes. He seized the people’s gold holdings and subsequently devalued the dollar by 40%.

With some third of industrial workers unemployed, President Roosevelt embarked upon sweep­ing industrial reorganization. He persuaded Congress to pass the National Industrial Recovery Act (NIRA), which set up the Na­tional Recovery Administration (NRA).

Roosevelt persuaded Congress to pass the National Industrial Recovery Act (NIRA), which set up the Na­tional Recovery Administration (NRA).

The professed purpose of the NRA was to get business to regulate itself, ignor­ing the antitrust laws and develop­ing fair codes of prices, wages, hours, and working conditions. The President’s Re-employment Agreement called for a minimum wage of 400 an hour ($12 to $15 a week in smaller communities), a 35-hour work week for industrial workers and 40 hours for white collar workers, and a ban on all youth labor.

This was a naive attempt at "in­creasing purchasing power" by in­creasing payrolls. But, the im­mense increase in business costs through shorter hours and higher wage rates worked naturally as an anti revival measure. After passage of the Act, unemployment rose to nearly 13 million. The South, especially, suffered severely from the minimum wage provi­sions: the Act forced 500,000 Blacks out of work.

These Na­tional Recovery Administration codes were typically concerned with restricting competition within an industry, reducing hours of labor, and raising prices and wages. Employers were usually forbidden to employ children under 16 years old. A minimum wage throughout the industry and a work week of 40 hours were ordinarily specified. Further, the Cotton Textile Code, for example, forbade employers to use “productive machinery in the cotton textile industry for more than two shifts of 40 hours per week.” Planning was supposed to be accomplished by the companies and workers acting in concert with government.

Nor was it simply major industries that were governed by codes initially any and every sort of undertaking was included.

  • Code 450 regulated the Dog Food Industry
  • Code 427regulated the Curled Hair Manufacturing Industry and Horse Hair Dressing Industry
  • Code 262 regulated the Shoulder Pad Manufacturing Industry.

In New York, I. ‘Izzy’ Herk, executive secretary of Code 348, brought order to the Burlesque Theatrical Industry by insisting that no production could feature more than four strips.

President Roosevelt also attempted to address the disaster that had be­fallen American agriculture. He attacked the problem by passage of the Farm Relief and Inflation Act, popularly known as the First Agricultural Adjustment Act (AAA).

The objective was to raise farm in­come by cutting the acreages planted or destroying the crops in the field, paying the farmers not to plant anything, and organizing marketing agreements to improve distribution. The program soon covered not only cotton, but also all basic cereal and meat produc­tion as well as principal cash crops. The enormous costs of the pro­gram were to be covered by a new "processing tax" levied on an al­ready depressed industry.

The AAA was expected to do for agriculture much the same sort of thing that NRA would for industry, only more. Farmers were reckoned to be in much worse condition than manufacturers and industrial workers. The first task with them, according to the planners, was to bring farm income up to a “parity” (as it was called) with industrial income.

The AAA was expected to do for agriculture much the same sort of thing that NRA would for industry, only more.

The years 1909-1914 were chosen as a base for most farm staple products, and the aim was to raise farm prices to a level that would give them an income equivalent to the ratio between farm and industry that prevailed in the base period.

The main device for accomplishing this was reduction of production of staples. So dramatic was the need for reduction, New Dealers thought, that a considerable portion of the 1933 cotton crop was plowed up and destroyed, and many small pigs put to death.

Thereafter, farmers were induced to plant less by government subsidies for those who “cooperated.” Under the first AAA (1933–1936), the money to pay for the various benefits paid to farmers came from a tax on processors. Many farmers had long believed, of course, that the middlemen got the profits from their endeavors. The New Deal gave this spurious notion legal standing by levying the tax.

NRA codes and AAA processing taxes came in July and August of 1933. Again, economic production which had flurried briefly before the deadlines, sharply turned downward. The Federal Reserve index dropped from 100 in July to 72 in November of 1933.

The thrust of the NRA and AAA was in the opposite direction from what was needed. If people have material needs, are unemployed or underemployed, the solution for them is either to produce for themselves what they need or produce for sale in the market enough of what is wanted to be able to buy what they need. These things require more, not less, production and changes in production activities, not the freezing of them into patterns of the past.

The thrust of the NRA and AAA was in the opposite direction from what was needed.

That is not to say that government would have had greater success in planning increased production. Some things were already being produced in greater quantities than could be profitably produced for the market. Any general effort to solve the problem was doomed to failure, for the problem was one of individuals, families, and other producing units. Only they could solve it.

The Supreme Court, by unanimous decision, outlawed NRA in 1935 and AAA in 1936. The Court maintained that the Federal legislative power had been unconstitutionally delegated and states’ rights violated. These two decisions removed some fearful handicaps under which the economy was laboring.

The NRA in particular was a night­mare with continuously changing rules and regulations by a host of government bureaus. Above all, voidance of the act immediately reduced labor costs and raised productivity as it permitted labor markets to adjust. The death of AAA reduced the tax burden of agriculture and halted the shock­ing destruction of crops. Unem­ployment began to decline. In 1935 it dropped to 9.5 million, or 18.4% of the labor force, and in 1936 to only 7.6 million, or 14.5%.

Inflation and Pump-Priming Measures

When the economic planners saw their plans go wrong, they simply prescribed additional doses of Fed­eral pump priming. In his January 1934 Budget Message, Mr. Roose­velt promised expenditures of $10 billion while revenues were at $3 billion. Yet, the economy failed to revive the business index rose to 86 in May of 1934, and then turned down again to 71 by Sep­tember. Furthermore, the spend­ing program caused a panic in the bond market which cast new doubts on American money and banking.

The New Dealers held generally that the depression was caused by a shortage of purchasing power, or, at the least, a shortage in the hands of those who would spend it. In the most obvious sense, there was some sort of shortage of purchasing power by those who had great difficulty in providing for their most direct wants.

That is, there was food, clothing, shoes, and other goods available in stores. Yet, many people had to resort to charitable aid to get the wherewithal to live. Surely, they lacked the purchasing power to buy the goods.

They did not lack money—money, per se, is not purchasing power. Money is a medium of exchange. It is, then, a medium through which purchasing power is exercised.

A shortage of purchasing power is not a shortage of money—it’s a shortage of goods.

The idea that pumping new money stimulates the economy stems from the idea that money itself is what gives people purchasing power. The problem is that purchasing power is not merely money it is, in fact, real goods or services. Ultimately, all exchanges are of goods for goods. In a money economy, goods are exchanged for money, and money is then exchanged for other goods. A shortage of purchasing power, then, is in fact a shortage of goods.

Operating on the idea that purchasing power is money, the New Dealers simply printed more money in the hopes of restoring purchasing power to the underemployed masses. But this policy amounts to a trade in which money is exchanged not for goods, but for nothing at all.

The problem is that trading with a shortage of goods is not a normal market phenomenon at all. It occurs only as a result of a large scale intervention in the market through credit expansion fueled by debt this process is known as inflation. Monetized debt, or inflation, is based not on trading goods for goods, but on trading goods for the promise of goods that don’t exist yet, but will be produced in the future. It is nothing other than a promise of future production.

Flooding the economy with money that has not been traded for real goods introduces a whole set of temporary imbalances in the economy. There is a trade imbalance because the goods to be traded for other goods have not yet been produced. There is a price imbalance because prices are no longer in proportion to the money supply. There is a shortfall of real purchasing power (i.e., goods and services). In the wake of the credit expansion there will be an imbalance of production, for many producers will be induced to increase their production, and even their facilities for production, for there are many willing buyers with the money, it seems, to pay for their wares.

The imbalances resulting from any single monetary expansion, however large, will be only temporary. The market tends always toward balance, and if people are free to operate the market, balance will be restored. Prices will rise to compensate for the increase in the money supply. People will generally pay their debts out of production, if they can, and the trade imbalance will be restored.

However, at this stage the shortage of purchasing which was there at the outset will become obvious. Much of production must go into repaying debts. Moreover, even when the debts are repaid, there may need to be a further interval for savings to be made before many new purchases can be made. Many plants may lie idle, and there will be a depression. The adjustments that must be made to restore the balance are often difficult and unpleasant.

The impact of all these multitudinous measures – industrial, agricultural, financial, monetary, and other – upon a bewildered in­dustrial and financial community was extraordinarily heavy. We must add the effect of continuing disquieting utterances by the President. He had castigated the bankers in his inaugural speech. He had made a slurring compari­son of British and American bank­ers in a speech in the summer of 1934… That private enterprise could survive and rally in the midst of so great a disorder is an amazing demonstration of the vi­tality of private enterprise. —Benjamin Ander­son

4. The Dust Bowl

Severe drought hit the US and Canadian prairies during the 1930’s, which also fueled the Great Depression. US agricultural output was heavily affected by this drought and failure to apply dry-land farming methods forced the US market to look for other sources. At the same time, the farmers in the effected region had no idea what to make of their predicament. The situation worsened to such a level that that majority of the population of the Great Plains couldn’t pay their taxes.

These taxes, even though they made up only a nominal part of the Government’s Revenue, accounted for too much when the drought hit in three successive waves. The nickname “Dust Bowl” has been given to the damaged ecology and landscape.

A Dust Storm Approaching Texas

Historical perspectives on the Great Depression

The aim of this paper is to analyze various historical perspectives on the Great Depression. There are different account of the scope and overall significance of this event in American history as well as of its causes and implications. The Great Depression of 1929 was one of the largest economic adversities the United States had to face. The market crash led to a worldwide halt causing inflation, inability to grow economically and poverty. The discussion of the causes and consequences of Great Depression is particularly timely now, as the world has entered deep and probably lasting recession prompted by the housing market crash in the U.

S. It appears that the lessons of the Great Depression still have not been learnt.

It is of paramount importance to understand the root causes of the Great Depression. The legacy of the World War I is associated with the dramatic economic downturn in mid-1930s. World War I was not the main reason for the Great Depression, but almost all causes of this economic disaster are directly or indirectly connected with the war.

For instance, if we speak about agricultural sector, during the war the government subsidized farms and paid absurdly high prices for wheat and other agricultural commodities. When the World War I was over, the federal government abruptly stopped its policies to protect farmers. Agricultural sector has suffered greatly from such unbalanced policies.

Moreover, foreign trade suffered greatly during that period. Fordney-McCumber Act of 1922, Hawley-Smoot Tariff of 1930 and a number of other laws increased import tariffs for no good reason. The result of the abovementioned tariffs was that European businesses, devastated by the war, could not sell their products on the U.S. market in necessary quantities. American citizens were deprived of a vast variety of imported goods, and transatlantic relations soured.

Another important reason behind the Depression was striking economic inequality in the American society during the decade that preceded the economic collapse. The 1920’s were the first prosperous decade for many Americans. Referred to as the Jazz Age or The Roaring Twenties, the decade introduced new music, new lifestyle and new attitude to life. It is exactly because of this prosperity and optimistic expectations that the Depression was a great psychological stress for a great number of citizens (Gusmorino, 1996). The contrast between the beautiful life of the 1920’s and the hardships of the 1930’s was very dramatic.

In fact, optimistic expectations were the root cause of the Great Depression: “The 1920’s saw a stock market boom in the U.S. as the result of general optimism: businessmen and economists believed that the newly-born Federal Reserve would stabilize the economy, and that the pace of technological progress guaranteed rapidly rising living standards and expanding markets” (DeLong, 1997, “The Great Depression in Outline”, para. 1).

On the so-called Black Tuesday – October 29, 1929 – the U.S. stock market collapsed and started the downward spiral of deflation, cutbacks in production, and unemployment. While too many investors were attracted to the stock market in the lure of quick profits and prices were going up too quickly because of poor valuation techniques, the U.S. Federal Reserve decided to raise interest rates to ‘cool off’ the market (DeLong, 1997). Eventually, however, this policy led to the collapse of stock prices and contraction in the real economy. But much like today, it was the pervasiveness of debt that eventually resulted in a very painful correction: in the 1920s banks started to loan money to investors to buy stocks using the stocks themselves as collateral (Wilkison, 2008). The “great bull market” on the New York Stock Exchange consisted from overvalued stocks because of excessive demand and limited supply.

The social consequences of the Depression were long-lasting. For the first time in history, women started to massively enter paid employment to support their families. For example, Black women found it easier than their husbands to find employment as domestic servants, clerks, or textiles workers (EyeWitness to History, 2000).

Many businesses were liquidated, banks failed, and the already vulnerable populations had to grapple not only with unemployment but also homelessness. Urban settlements consisting of tents and shacks – called Hoovervilles after President Hoover – emerged around soup kitchens operated by charities (Schultz & Tishler, 2004).

It can be argued that the U.S. entry into World War II actually ended the Great Depression. Large sums of defense spending pulled the US economy out of the Depression for the ample reason that such fields as defense and security are fairly labor-intensive. The necessity to manufacture war supplies had given rise to a powerful military-industrial complex. War machine demanded scientific innovations, so the war stimulated important research. The military-industrial complex came to play a significant role in the overall structure of the economy.

Debates still go on as to who was accountable for the Great Depression. Some believe it was Federal Reserve with its “easy money” policy. Others argue it was President Hoover who allowed for imbalanced economy and inequality. Speculators and bankers are often blamed as well, especially those who initiated the practice of buying stocks with borrowed money (much like naked short selling nowadays). The most productive view would be that a combination of all the aforementioned factors brought about the Great Depression.

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Causes of The Great Depression – History Research Outline (200 Level Course)

1) The world- wide economic disorder following world war I
a) WWI had caused vast destruction of property, loss of millions of lives, disruption of trade
b) Thus U.S. Depression was part of a world-wide depression

2) High Tariff policies of Twenties Republican Presidents
a) Protected US industries from foreign competition, but hurt the economies of nations trying to recover from WWI

b) These countries struck by passing high tariffs of there own, thus cutting down on demand for U.S. goods overseas.

3) Lack Of Prosperity among certain groups in the economy
a) Not all Americans were sharing in the prosperity of 1922-29
i) African Americans, Mexican Americans, Native Americans not sharing in the prosperity
b) Many Factory workers not doing well economically
i) Some lost jobs to new machinery
ii) Conservative government hostile to labor unions, unions generally ineffective during 1920s
iii) Some industries (e.g. coal, textiles, leather) never recovered from post-war depression of early 1920s
c) Farmers
i) Demand for farm products was falling while farm production was rising, result, falling farm prices, less income for farmers
ii) At same time, farmers were going into debt
(1) High costs of new farm equipment
(2) Mortgage payments for their farms
iii) By the time of the Crash of 1929, U.S. agriculture already in a depression

4) Unequal distribution of income
a) Wealth was concentrated hand of a relatively few wealthy people tax cuts favored the wealthy
b) Farmers & workers in bad shape economically worked longer hours for not much higher income
c) If farmers had received fair prices and if workers had had decent wages, they would have been able to buy businesses’ surplus products. This could have kept businesses from failing and from having to lay off workers

5) Overproduction by industry during 1920s
a) Businesses produced more goods than they could sell at a profit they had surplus inventories
b) Thus when Depression began, businesses already had more goods on hand than they could sell. As noted above, they then had to lay off millions of workers.

6) Excessive borrowing of money during 1920s due to easy credit
a) People borrowed huge amounts of money to buy goods and services, installment buying was prevalent buy now pay later
b) Business borrowed too much.

7) The Stock Market Crash of 1929
a) Overspeculation in stocks caused stock prices to rise higher and higher during 1927-1929
b) Then in late October 1929 investors panicked and began to sell stock in huge quantities, thus causing stock prices to fall sharply. The value of stocks fell so fast that banks, businesses and private investors lost fortunes by mid-November 1929, stockholders had lost $30 billion.
c) Causes of the Stock Market Crash
i) Overspeculation drove stock prices to ridiculously high levels stock were overvalued
ii) Fraudulent stocks: many stocks were sold by companies that existed in name only.
iii) Due to lassiez faire, the stock market was largely unregulated by the government
iv) Buying stocks on the margin:
(1) many people had only paid part of the price of the stocks they were bu8ing, promising to pay the rest later
(2) When the market crashed and the value of their stock fell, stockholders still had to pay back the balance of what they owed o the stocks they had purchased.
d) Stockholders panicked, and millions tried to sell their stocks at once, this drove prices down even further
e) Results of the Stock Market Crash of 1929
i) Businesses lost fortunes, many went bankrupt businesses laid off millions of workers
f) Banks lost fortunes and many failed many banks could not repay the money businesses and savers had deposited in the bank
g) Millions of workers lost their jobs savings, home, etc., and were reduced to a life of poverty and unemployment
i) by 1930, 6-7 million unemployed
ii) by end of 1933, 12.5 million unemployed

Entangling European Alliances

People thought times were good in the U.S., but much of Europe was still reeling from the negative effects of World War I and fell into a period of economic decline in the 1920s. To help European countries, the American federal government provided loans to Germany whose economy was floundering because of reparations it was required to pay for the destruction caused during the war.

The U.S. had also loaned 17 countries $10 billion during the war, and repayment terms became an issue as the allies wanted the debt forgiven. With much of Europe&rsquos economy in shambles, American exports to these nations also declined, which was another of the causes of the depression.

Ironically, George Washington warned of these entangling alliances in his farewell address. While this was a different world and it would be necessary for America to participate on a global scale it did not serve them well in the end to fund Germany.

Causes of the Great Depression

The Great Depression was a global financial crisis that consumed most of the developed world throughout the 1930s. While the first real indications of its onset can be seen at the end of 1929, most countries did not feel its true effects until 1930 or later. When it ended also varied from country to country but signs of recovery were seen in the late 1930s, with things looking up for most economies by 1940.

Importantly, although the Wall Street Crash – which took place in October 1929 – is often seen as an interchangeable term for the Great Depression, this event is simply one of the causes emanating from the US, which led to the longest and deepest worldwide recession of the 20th century. The Great Depression may have come soon after the collapse of the stock market but this does not mean it happened because of it there are many other factors at play that resulted in a more far-reaching economic crisis.


One of the critical faults that led to the Great Depression was overproduction. This was not just a problem in industrial manufacturing, but also an agricultural issue. From as early as the middle of the 1920s, American farmers were producing far more food than the population was consuming. As farmers expanded their production to aid the war effort during WWI they also mechanised their techniques, a process which both improved their output but also cost a lot of money, putting farmers into debt. Furthermore, land prices for many farmers dropped by as much as 40 per cent – as a result, the agricultural system began to fail throughout the 20s, leaving large sections of the population with little money and no work. Thus, as demand dropped with increasing supply, the price of products fell, in turn leaving the over-expanded farmers short-changed and farms often foreclosed. This saw unemployment rise and food production fall by the end of the 1920s.

While agriculture struggled, industry soared in the decade preceding the Wall Street Crash. In the ‘boom’ period before the ‘bust’, a lot of people were buying things like cars, household appliances and consumer products. Importantly, however, these purchases were often made on credit. And as production continued apace the market quickly dried up too many products were being produced with too few people earning enough money to buy them – the factory workers themselves, for example, could not afford the goods coming out of the factories they worked in. The economic crisis that soon would engulf Europe for reasons to be explained, meant that goods could not be sold across the Atlantic either, leaving America’s industries to create an unsustainable surplus of products.

Uneven incomes

As already suggested, in America there was a widening disparity between those earning lots of money and those still struggling in relative poverty. The top one per cent of workers in 1929 saw their income rise by 75 per cent the bottom 99 per cent meanwhile only enjoyed a 9 per cent rise in wages. So while industrial production rose by 50 per cent at the end of the 1920s, wages did not keep pace meaning the expendable income was not available to purchase what was being created. While often said to have been the ‘Roaring Twenties’, this was not common to the entire population and this gap between the wealthy and the poor – the latter making up the vast majority of the country – was an underlying factor in why the US economy collapsed in on itself.

The Great Depression is characterised by the fact it incorporated almost all of the population, most of which were the working classes. The poor were unable to cope with the economic downturn and widespread unemployment that came in 1931 and 1932, meaning they required aid from the cash-strapped authorities, something which deepened the financial problems even further and was at the heart of the lasting depression.

Wall Street Crash

Black Tuesday – 29 October 1929 – was the day the US stock market crashed, an event which profoundly resonated not just in America but around the developed world. The boom of the stock market, one of the first real examples of modern capitalist economy, was largely built around speculation investors would typically buy stock that they believed was going to rise quickly and when it did they would sell their stocks. Furthermore, many people bought stocks on credit – the investor only required to have five per cent of the value of the stocks they bought, with the rest being supplied by a loan – this buying on credit is otherwise known as ‘buying on margin’.

A market built on speculation coupled with the short-term outlook of the investors was not a manageable way to run a stock market and did not afford the consistency and stability required for the system to yield benefits for the wider economy. In March 1929, when many of the middle classes who had a lot invested in the market, suddenly became nervous and sold their stock, there was a mini-crash. This highlighted the weak foundations of Wall Street.

While the market recovered to record highs in early September 1929, it was not to last – on 20 September the London Stock Exchange crashed again and this truly tested the nerve of investors. A month later, on 24 October, mass panic saw the market lose 11 per cent of its value before trading had even begun. This resulted in a perpetuating state of panic and in the following five days until Black Tuesday (29 October) people sold their stock en masse – on Black Monday and Black Tuesday alone the market lost $30 billion, triggering a collapse of the stock market and with it much of America’s economic structure.

Importantly, while the Wall Street Crash meant that many of the middle and upper classes lost money – and this was certainly a factor in causing the Great Depression – it is not solely responsible for the economic crisis that engulfed all levels of society across developed countries.

Weak banking system

A major issue with America’s economic system, above and beyond speculative margin buying, was its weak banking system. The country had too many small banks, which did not have the resources to cope with the high demand of people wanting to take their money out when they got nervous about the state of the stock market. In 1930 a wave of banking closures swept through the mid-eastern states of the US for this reason. With banks having to sell assets, borrow off other banks or shut down, lending and credit dried up – as this was a large part of fuelling America’s ‘boom’ period, when it came to an end so too did the rush of consumer purchasing.

The knock-on effect of people not buying products because they had no money or no credit was that factories had to close or sack workers, leading to mass unemployed, perpetuating the problem into a downward spiral. By 1932 many businesses were out of work, banks were closed and 20 per cent of the American workforce were unemployed.

European recession

As America witnessed a turbulent decade of boom and bust in the 1920s and early 30s, Europe too suffered from its own economic problems.

Most of the economies were left crippled by the effects of WWI, which had seen the workforces depleted and large amounts of debt incurred, mainly owed to the US. When America’s economy faltered and it needed money to prevent its ongoing deflation, it called on Britain and France (among other countries) to repay their debts while also making Germany pay the war reparations it had been left with as a result of the Treaty of Versailles.

The fragile economies of Western Europe were not able to survive without the money they had relied on from the US. As lending from across the Atlantic stopped and President Herbert Hoover requested the debts to be repaid, these European economies suffered a similar fate as their wartime allies. None of these countries were able to buy America’s consumer goods, a problem exacerbated by the fact that America raised tariffs on imports to an all-time high, which all but ended world trade at a time when trade and economic stimulus was needed the most.

European economies collapsed when they were already struggling to rebuild themselves unemployment levels rose, products became overproduced with fewer people able to buy them, the value fell, and deflation ensued as the economic structure collapsed in on itself. This pattern, first seen in America, spread to much of the developed world.

Hoover’s failures

As has been established, the Great Depression was the result of a multitude of socio-economic factors over a number of years, not one single event. As such, the finger of blame has often been pointed at Herbert Hoover, President of the US from 1929-1933 his term as President coincided with the period in which action needed to be taken to prevent deflation from escalating and government needed to stabilise a shaky economy. Instead Hoover’s policies and actions – and he did work hard to try find a solution to the economic problems – are often argued to have worsened the issue around the world, with not enough being done to prevent the crisis in America getting to the scale it did. Moreover, his decisions then impacted on other Western countries, which is what brought the depression to a truly ‘great’ level.

Although he did try launching initiatives and investing money back into schemes to encourage lending and unemployment –something he often is not credited with enough – these tend to be seen as being too little, too late. His decision to increase tariffs on imports through the Smoot-Hawley tariff stifled trade with other countries and shrank the size of the market American manufacturers could sell to. Furthermore, under Hoover the federal government raised its discount rate, making credit even harder to come by. Other actions he took also came too late – plans made in 1932 could not do enough to bail out banks and put people back in work as the depression had fully taken effect.

Hoover’s lack of a proactive approach was exposed by the more substantial action taken by Franklin D Roosevelt, who succeeded him as President. Initiatives like the New Deal put large numbers back in work and stopped the downward spiral of unemployment and deflation.

The gold standard

The decision to return to and then stick with the gold standard after WWI by Western nations is often cited as a key factor in the outbreak of the Great Depression. The gold standard is a system in which money is fixed against an actual amount of gold. In order for it to work, countries need to maintain high interest rates to attract international investors who bought foreign assets with gold. When this stops, as it did at the start of the 1930s, governments often must abandon the gold standard to prevent deflation from worsening – but when this decision had to be made by all countries in order to maintain fixed exchange rates it wasn’t, and the delay in abandoning the gold standard let economic problems worsen and the size and scale of the Great Depression increase.

What caused the Great Depression is a subject still keenly contested by historians and economists today. It shaped much of the period between the two world wars for most of the developed world and still serves as a lesson on various economic practices.

The temptation to view the Great Depression as an event centred around the US stock market must be avoided though it was a global depression that had many of its roots in 1920s and early 30s America but the impacts were felt throughout Europe as well. The reasons above outline many of the most important factors that first triggered and then exacerbated the economic crisis. It is vital that the wider picture of overproducing industry, stifled trade, rising unemployment, failing banks and ineffective government policy is taken into consideration in order to gain a holistic and accurate understanding of why the Great Depression took place.