The Causes Of The Great Depression

Since the beginning of the Industrial Revolution early in the nineteenth century the United States ad experienced recessions or panics at least every twenty years. But none was as severe or lasted as long as the Great Depression. Only as the economy shifted toward a war mobilization in the late 1930s did the grip of the depression finally ease. Stock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, with the average price of stocks rising over 40 percent. The stock market was totally unregulated. Margin buying in particular proceeded at a feverish pace as customers borrowed up to 75 percent of the purchase price of stocks. That easy credit lured more speculators and less creditworthy investors into the stock market. The Federal Reserve board warned member banks not to lend money for stock speculation because if prices dropped, many investors would not be able to pay back their debts. No one listened. The stock market began sliding in early September, but people ignored the warning.

Then on “black Thursday” (October 24, 1929) and again on “black Tuesday” (October 29, 1929) the ball dropped. More than 28 million shares changed hands in frantic trading. Overextended investors, suddenly finding themselves in heavily in debt, began selling their stocks. Many found that no one would buy anything at any price. Overnight, stock values fell from a peak value of 87 billion dollars to 55 billion dollars. The crash was felt far beyond the trading floors. Speculators who borrowed money from the banks to buy their stocks could not repay the loans because they could not sell stocks. This caused many banks to fail. Since bank deposits were uninsured before the 1930s depositors’ their money, which in many cases was all that many people had. The stock market crash intensified the course of the Great Depression in many ways. Besides wiping out the savings of thousands, it hurt commercial banks that had invested heavily in corporate stocks. It also caused a loss of confidence in the market prolonging the depression.

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The downturn began slowly and almost unnoticeably. After 1927, consumer spending declined and housing construction slowed. Inventories piled up, and in1928 and 1929 manufacturers began to cut back on production and lay off workers. Reduced income and buying power in turn reinforced the downturn. By the summer of 1929 the economy was clearly in a recession. Although the stock market crash and its immediate consequences contributed to the Great Depression, longstanding weakness in the American economy accounted for its length and severity. Agriculture, in particular, had never recovered from the recession of 1920-1921.

Farmers faced high fixed costs for equipment and mortgages incurred during the high inflationary war years. At the same time prices fell because of overproduction, forcing farmers to default on mortgage payments and risk foreclosure. Because farmers accounted for about one-forth of the nations gainfully employed workers in 1929, their difficulties weakened the general economic structure. Other industries also had experienced economic setbacks during the prosperous 1920s. The older industries such as textiles, mining, lumbering, and shipping faltered, newer and more successful consumer- based industries, such as chemicals, appliances, and food processing, proved not yet strong enough to lead the way to recovery. The nations unequal distribution of wealth also contributed to the severity of the depression. During the 1920s the share of the national income going to families in the upper and middle-income brackets increased. Tax policies contributed to this concentration of wealth by lowering personal income tax rates, eliminating the wartime excess-profits tax, and increasing deductions that favored affluent individuals and corporations.

In 1929, the poorest 40 percent of the population received only 12.5 percent of aggregate family income, whereas the wealthiest 5 percent received 30 percent. Many people would spend their entire yearly paychecks on consumer goods. When this stopped the economy was hurt. Once the depression began this unequal distribution of wealth prevented people from spending the amounts of money needed to revive the economy. President Herbert Hoover blamed the severity of the depression on the international economic situation. The war battered international economy functioned only as long as American banks exported enough capital to allow European countries to repay their debts and to continue to buy American goods. As U.S. companies began to cut back production, they also cut back their purchases of raw materials and supplies from abroad and as a result many European economies collapsed.

American financiers sharply reduced foreign investment and consumers bought less foreign goods, debt repayment became even more difficult. As European conditions worsened, demand for American exports fell drastically. Finally, when the Hawley-Smoot Tariff of 1930 raised rates to an all time high, foreign governments retaliated by imposing their own trade restrictions, further limiting the market for American goods especially agriculture products. The United States was hit the hardest during this worldwide depression. From the height of the prosperity before the stock market crash in 1929 to the depths of the depression in 1932-1933, the U.S. gross national product was cut almost in half, declining from 103.1 billion dollars to 58 billion in 1932.

Consumption expenditures dropped by 18 percent, construction fell by 78 percent, private investment plummeted by 88 percent, and farm income, already low, was more than cut in half. During this period 9,000 banks went bankrupt or failed. The consumer price index declined by 25 percent and corporate profits fell from 10 billion to 1 billion dollars. Most shocking was that unemployment rose from 3.2 percent to 24.9 percent from 1929 to 1933. While the collapse of the stock market in 1929 may have triggered economic turmoil, it alone was not responsible for the Great Depression. The depression throughout the nation and the world was a result of a combination of factors that matured during the 1920s


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