What Caused The Great Depression?

In a world where economic doubts loom, it’s only natural to seek lessons from the past. As Forbes warns of a potential regression, the echoes of the past resurface remind us of a period as grim and deep as the Great Depression. The shadows of the past cast a light on our present, raising issues about the resilience of our savings and the effectiveness of our securities.

Can the wisdom gleaned from the tumultuous economic woes that once gripped the globe shield us from a similar catastrophe in the future? Or must we delve deeper, dissecting the very origins of the Great Depression to forge a path forward? History tends to offer both insights and cautionary tales, and the Great Depression, spanning from 1929 to 1939, stands as one of the darkest chapters in the annals of economic turmoil. It started with the disastrous stock market crash of October 1929, called “Black Tuesday.”

As Wall Street dipped into panic, millions of investors saw their adventures vanish in the blink of an eye. A cascade of economic destruction followed, where industrialism and investments dwindled, factories stopped, and joblessness soared to unparalleled heights. The aftershocks rippled far beyond the United States, affecting nations worldwide. But what were the sparks that ignited this massive conflagration of economic turmoil? Was the stock market crash the sole culprit, or were deeper forces at play?

This exploration will uncover seven fundamental causes that led to the Great Depression. From the frantic panic of investors during the market crash to the collapse of global trade and the chilling grip of bank panics, each factor intertwines to paint a haunting portrait of an era that forever changed the course of history. As we navigate a world of economic uncertainty and fluctuations, understanding the roots of the Great Depression becomes a crucial endeavor.

Join us in this insightful journey through the past to unravel the mysteries that shaped an era and to glean valuable lessons that could shape our path forward in an ever-evolving financial landscape.

Origins of the Great Depression

The Great Depression was the darkest economic event in the history of the industrialized world. It lasted from 1929 to 1939. It started after the catastrophic stock market crash of October 1929, sending Wall Street into panic, and millions of investors vanished. Over the years, consumerism and investments dropped, causing steep industrial output and employment declines as failing companies let workers go. By 1933, the Great Depression had hit rock bottom, some 15 million Americans were unemployed, and nearly half the country’s banks had failed.

How did the Great Depression start?

The set the stage, magnificently known as “the Roaring Twenties,” saw a spectacular surge in the U.S. economy. This era marked a period of quick growth, where the nation’s joint wealth more than doubled between 1920 and 1929. The stock market was at the heart of this economic fury, with the bustling New York Stock Exchange on Wall Street as the center of a vibrant wave of conjecture.

Everyone invested their savings in stocks, from millionaires to everyday workers, driving the stock market to unparalleled heights. By August 1929, the stock sale had soared to its acme. However, behind the facade of prosperity, cracks were beginning to show. The industrial sector was grappling with dwindling production and rising unemployment while consumer spending started to wane. Unsold goods piled up, causing factory production to slow down.

It, in turn, led the American economy into a mild recession during the summer of 1929. Yet, remarkably, stock prices continued their meteoric rise, creating a disconnect between their inflated values and anticipated earnings. Underlying vulnerabilities accompanied this whirlwind of apparent success. Despite the flourishing economy, wages remained low, consumer debt rose, and the agricultural sector was battling drought and plummeting food prices.

Banks were burdened with hefty loans that they needed help to convert into cash quickly. As autumn approached in 1929, it set the stage for a seismic upheaval. The euphoric heights of stock prices clashed with the sad reality of economic fundamentals. The culmination of these factors created a volatile mix, ultimately setting the scene for one of the most catastrophic events in financial history. The pivotal moment arrived on October 24, 1929—infamously known as “Black Thursday.”

On this fateful day, panic-stricken investors hastily sold a staggering 16 million shares of stock, a stark reflection of their vanishing faith in the American economy. This event began a chain reaction that would propel the United States into a profound and enduring economic crisis. The Great Depression, a tale of economic triumph turned turmoil, had begun its relentless grip on the nation, leaving lessons that continue to resonate through the annals of history.

7 Causes of the Great Depression

1. The stock market crash of 1929

On October 24, 1929, investors started to sell overpriced shares in large numbers. The stock market crash that some had anticipated finally occurred. On “Black Thursday” day, investors traded a record 12.9 million shares. After five days, on October 29, or “Black Tuesday,” around 16 million shares were traded, following another wave of panic overwhelming Wall Street. As a result, millions of shares became worthless, and investors with stocks “on margin” (bought with borrowed money) were wiped out.

Consumer confidence vanished in the aftermath of the stock market crash. The downturn in businesses slowed down production, and began firing their employees. For people fortunate to remain employed, wages decreased, and consumption plummeted. Moreover, many Americans who had to buy on credit kept falling into debt, steadily climbing the number of foreclosures and repossessions. In addition, the global adherence to the gold standard, which joined countries worldwide in fixed exchange of currency, helped spread economic woes from the United States worldwide, especially in Europe.

Many believe the stock market crash on Black Tuesday, October 29, 1929, is the same as the Great Depression. In reality, it was one of the major causes of the Great Depression. In the two months following the original crash in October, stockholders had lost more than $40 billion. Although the stock market began regaining some losses by the end of 1930, it was far from enough, and America truly entered the Great Depression.

The stock market crash of 1929, also known as the Great Crash, was an alarming decline in U.S. stock market values that contributed to the Great Depression of the 1930s. The Great Depression lasted approximately ten years, affecting industrialized and nonindustrialized countries globally. During the mid-to-late 1920s, the stock market in the U.S. expanded rapidly, continuing for the six months following President Herbert Hoover’s inauguration.

Stock prices soared impressively during the great “Hoover bull market” as the public rushed to brokers wanting to invest their liquid assets or savings in securities. Billions of dollars were flowing from the banks into Wall Street. During the midsummer of 1929, some 300 million shares of the stock were on margin, pushing the Dow Jones Industrial Average to peak at 381 points in September. Any warnings of the crumbling foundations of this financial house of cards went unheeded.

Prices began declining in September and early October. Still, speculation continued, fueled in many cases by individuals who had borrowed money to buy shares— the practice was sustainable only as long as stock prices continued rising. Then, on October 18, the market went into free fall as the wild rush to buy stocks gave way to a frantic rush to sell. The first day of real panic came on October 24, or “Black Thursday,” when a record 12.9 million shares were traded as investors hurried to salvage the losses.

The Dow closed down only six points after some big banks and companies bought up huge stock blocks, successfully stemming the daily panic. However, their attempts to shore up the market ultimately failed. The panic erupted again on Black Monday (October 28), as the market closed down 12.8%. On Black Tuesday (October 29), more than 16 million shares were traded. The Dow lost another 12%, closing at 198—a drop of 183 points in only two months. Prime securities tumbled like issues of bogus gold mines.

General Electric went from 396 to 210. American Telephone and Telegraph dropped 100 points. DuPont fell from 217 to 80, and Radio Corporation of America (RCA) from 505 to 26. At first, political and financial leaders treated the matter as just another market spasm, giving reassurances to one another. President Hoover and his Treasury Secretary Andrew W. Mellon led with predictions of a great revival of prosperity.

However, although the Dow almost reached the 300 mark again in 1930, it dropped rapidly in May 1930. Two decades would pass before the Dow could regain enough momentum to surpass the 200-point level. Many factors contributed to the crash of the stock market. Among the prominent causes was overwhelming speculation. People who had bought stocks on margin lost the value of their investment and owed money to entities that had granted these loans for stock purchases), credit tightening by the Federal Reserve (in August 1929, they raised the discount rate from 5 – 6%).

2. The collapse of the world trade

As businesses began to crumble, the Government created the Smoot-Hawley Tariff in 1930 to help protect American companies. Unfortunately, this charged a high import tax, leading to less trade between America and foreign countries and economic retaliation. Since demand was declining and big business and agriculture, feeling the effect of cheap goods coming from abroad, lobbied for protection.

Finally, Congress obliged and introduced the United States Tariff Act of 1930, the Smoot-Hawley bill, raising tariffs on foreign products by about 20%. Multiple countries retaliated with tariffs on U.S. goods, causing a trade meltdown. In the next two years, U.S. imports fell 40%. No markets abroad, no demand at home. It is little wonder that economic activity came to a standstill.

3. Government policies

The American economic system needed to be more structurally strong. Banks worked without guarantees to their customers, creating a climate of panic during tough times. The Government placed few regulations on banks that easily lend money to those gambling in stocks. Agricultural prices had been low during the 1920s; hence, the farmers could not spark any recovery. As a result, Europeans bought fewer American products when the Depression spread across the Atlantic.

The American economy was shaking, and when President Hoover was inaugurated, he could not provide proper relief from hard times. His popularity decreased as more Americans lost jobs. His lazy approach to government intervention made a negligible impact. The economy shrank with each passing year of his Presidency. As middle-class Americans stood on the same lines previously consisting of only the Nation’s poorest, the entire social fabric of America was forever changed.

President Herbert Hoover responded to the economic crisis with incompetence. A believer in minimal government intervention, he disregarded direct public relief as character-weakening. However, he eventually started spending and launched lending and public works projects. But it was too little, too late.

4. Bank panics & failures

From 1930 to 1932, the U.S. experienced four extended waves of panic in banking, during which bank customers feared bank solvency and tried withdrawing their deposits in cash. As a result, 1/5th of the banks existing in 1930 had failed by 1933. As a result, the Franklin D. Roosevelt administration declared a four-day “bank holiday,” later extended by three days. The country’s banks remained closed until they proved their solvency to government inspection.

The consequence of widespread bank failures was decreased consumer spending and business investment because fewer banks could lend money. Also, there was less money to lend, partly because people were hoarding it in cash. According to some scholars, the problem was exacerbated by the Federal Reserve, which raised interest rates and deliberately reduced the money supply with the belief that it was necessary to maintain the gold standard for the U.S. and many other countries to associate the value of their currencies to a fixed amount of gold.

In turn, The reduced money supply reduced prices, further discouraging lending and investment (because people feared that future wages and profits would not be sufficient to cover loan payments).

5. The collapse of the money supply

Ultimately, the decrease in the money supply led to deflation. That, in turn, caused sky-high increases in actual interest rates, which choked off any chances of companies investing or expanding. As a result, the unequal distribution of wealth became one of the major causes of the Great Depression. The consequences of this unfair distribution of resources impacted the most vulnerable financially and those who had to give up on their elite status following insurmountable losses.

While corporate profits skyrocketed, wages increased incrementally, widening the distribution of wealth. The wealthiest 1% of Americans owned over a third of all American assets—such concentration of wealth in the hands of a few limited economic developments. The rich saved money that might have been put back into the economy if spread among the middle and lower classes. Middle-class Americans had already stretched their debt capacities by purchasing automobiles and household appliances on installment plans.

6. Underconsumption & overproduction

With the stock market crashing and fears of further economic woes, individuals from all classes stopped buying items, reducing the number of items produced and thus a reduction in the workforce. As people lost their jobs, they could not keep paying for things they had bought through installment plans, resulting in the repossession of these items. As a result, more inventory began to accumulate. The unemployment rate exceeded 25%, which meant even less spending to help alleviate the economic situation.

Mass production catalyzed the consumption boom in the 1920s. But unfortunately, it also resulted in overproduction on the part of many businesses. So, even before the crash, they started selling products at losses.

A similar crisis occurred in agriculture. During the First World War, farmers bought machinery to boost production — this proved to be a costly move that indebted them.

In the post-war economy, they produced far more supply than consumers needed. As a result, land and crop values plummeted, causing a drop in agricultural and industrial prices that decimated profits and hurt already over-extended enterprises.

7. World War 1

The lingering impact of World War I (1914-1918) caused economic woes in many countries. And as Europe struggled to pay war debts and reparations. Their financial problems contributed to the crisis that began the Great Depression, the worst economic disaster in American history.

What happened during the Great Depression?

• During the peak of the Great Depression in 1933, nearly a quarter of the Nation’s total workforce, almost 13 million people, were unemployed.
• Wage income for workers fortunate to have kept their jobs fell almost 43% from 1929 to 1933. It was the worst economic disaster in S. history.
• Farm prices fell so rapidly that many farmers lost homes and land. Many went hungry.
• Families had to split up or migrate from their homes, searching for jobs. ‘Hoovervilles’ (insultingly named after President Hoover), shanty towns constructed of packing crates, abandoned cars, and other cast-off scraps spawned throughout the Nation.
• Gangs of youths rode the rails in boxcars like the many hoboes desperate to find jobs. Victims of drought and dust storms in the Great Plains left their farms and headed to California, the new land of “milk and honey,” where they believed all one had to do was reach out and pluck food from the trees.
• America’s unemployed were moving, but there was nowhere to go.
• The Depression severely shook the industry. Businesses closed, mills and mines were abandoned, and fortunes were lost. American business and labor were both in trouble.

Women’s Role in the Great Depression

Amidst the harsh grip of the Great Depression, a surprising silver lining emerged for one group of Americans: women. As the financial storm raged from 1930 to 1940, women entered the workforce at an unprecedented rate. The number of employed women in the United States surged by an impressive 24 percent during this tumultuous decade, soaring from 10.5 million to an empowering 13 million.

While the steady influx of women into the workforce had been unfolding over previous decades, the economic turmoil of the Great Depression acted as a catalyst, propelling them into employment in even greater numbers as male breadwinners faced job losses. The economic maelstrom also cast a poignant impact on marriage rates, which plummeted by 22 percent between 1929 and 1939. This seismic shift created a notable increase in single women seeking employment opportunities.

It is driven by the necessity to support themselves in a challenging economic landscape. Among the champions of women’s rights during this era stood First Lady Eleanor Roosevelt, a fierce advocate who tirelessly pushed for more excellent female representation in government. Her efforts bore fruit with the appointment of Secretary of Labor Frances Perkins, who shattered barriers as the first woman to hold a cabinet position.

A mixture of stability and disparity characterized opportunities available to women. Occupations such as nursing, teaching, and domestic work provided stability during the tumultuous banking crisis, offering a lifeline amid economic uncertainty. The rapidly expanding government under President Franklin D. Roosevelt opened doors for women in secretarial roles, a significant step forward.

However, these strides came with their challenges: over 25 percent of the National Recovery Administration’s wage codes imposed lower wages on women, a stark reminder of the gender pay gap that persisted. Yet, even in the face of such obstacles, women’s determination persevered. The Women’s Progress Administration (WPA) opened doors for women in fields such as sewing and nursing, although they were compensated less compared to roles typically reserved for men.

Additionally, the hurdles for married women were distinct. By 1940, 26 states had introduced marriage bars, constraining employment options for married women on the premise that they were taking jobs away from men. The Great Depression, in all its adversity, became a crucible for women’s resilience. Their entry into the staff, bolstered by the promotion of pioneering women like Eleanor Roosevelt, altered societal norms and laid the foundation for greater gender parity in the years to come.

As the shadows of economic uncertainty danced across the nation, the women of the Great Depression lighted a path forward, challenging stereotypes and proving that their strength and tenacity would shine through in the face of hardship.

How did the Great Depression end?

The enigmatic finale of the Great Depression, one of the darkest chapters in economic history, is a tale of multifaceted factors and scholarly debates. While conventional wisdom credits the New Deal and governmental intervention for pulling the U.S. out of the economic abyss, dissenting economists argue that the Depression’s demise might have arrived earlier with fewer government interjections.

Key contributors to the end of the Great Depression are:

The new deal: A beacon of change

As Franklin Roosevelt assumed the presidency, he ushered in a transformative era by implementing the New Deal policies. Swift actions were taken, including the enactment of pivotal laws such as the Emergency Bank Act, Emergency Farm Mortgage Act, and Agricultural Adjustment Act. These measures sought to stabilize the crumbling economy and provide a safety net for struggling farmers.

The Emergency Bank Act, for instance, aimed to return trust in the economic system by resuming sound banks. At the same time, the Agricultural Adjustment Act worked towards alleviating the plight of farmers by stabilizing crop prices. These multifaceted policies jointly injected stability into the turbulent economic landscape, heralding a new dawn.

The unforeseen catalyst: World War II

Some economists propose an intriguing twist to the narrative—the advent of World War II as a silent savior. The entry of the United States into the global conflict brought about a surge in government expenditure, a vital ingredient to rekindling economic vigor. The war effort demanded increased production, translating into more jobs for the workforce.

A crucial facet of this period was the notable reduction in taxes and regulations. As World War II drew to a close, the U.S. experienced a palpable shift in economic dynamics, with these reductions playing a pivotal role in kindling the economy’s revival.

The culmination: Roosevelt’s strategic support

In the backdrop of international turmoil, Franklin Roosevelt’s strategic decisions proved instrumental. Extending support to Britain and France against the Axis Powers was a watershed moment. This pivot fostered a surge in defense manufacturing, a driving force behind creating private-sector jobs.

The pivotal rotation point occurred with the Japanese attack on Pearl Harbor in December 1941, shoving the United States into World War II. Consequently, the nation’s factories shifted into overdrive, escalating industrial production. This surge, coupled with widespread conscription starting in 1942, charted a path towards plummeting unemployment rates, reclaiming levels pre-Depression.

A historical transition: Great depression’s epilogue

And thus, the cryptic chronicles of the Great Depression reached their closure. The intertwined factors of the New Deal, the unforeseen catalyst of World War II, and Roosevelt’s strategic acumen formed a mosaic of revival, lifting the nation from its economic nadir. The profound legacy of the Great Depression’s conclusion reverberates through history, underscoring the intricate dance between government intervention, global conflicts, and economic resurgence.

As this chapter closes, we must reflect on the intricate web of events that shape economies, societies, and the human spirit. In the continuum of economic evolution, the Great Depression remains a poignant reminder of the power of collective action and strategic foresight, driving transformation even in the darkest of times. As we step into the present and the future, the echoes of the past’s economic odyssey remind us that the complexities of economic resurgence are a tapestry woven with threads of innovation, resilience, and hope.

Effects of the Great Depression

The Great Depression, a haunting chapter etched in the annals of history, cast its somber shadow over the world for nearly a decade, spanning from the late 1920s to about 1939. This global economic catastrophe reverberated far and wide, inducing a symphony of consequences that would resonate through time.

The unfolding devastation

A gradual erosion of industrial production and the ominous specter of deflation marked the onset of the Great Depression. As the storm raged, the precursors of mass unemployment and a banking panic emerged, triggering an unsettling surge in rates of poverty and homelessness. The United States, a pulsating hub of economic activity, witnessed industrial production plummeting by a staggering 47% from 1929 to 1933, with GDP enduring a harrowing descent of 30%. A stark juxtaposition to the modern era’s Great Recession of 2007–09, which witnessed a comparatively milder 4.3% decline in GDP.

Roosevelt’s ambitious gamble: The new deal

The meteoric rise of Franklin D. Roosevelt to the presidency in 1933 heralded an era of transformative change. Swiftly, he orchestrated a whirlwind of legislative initiatives collectively known as the New Deal. The impact of this ambitious gambit, aimed at alleviating the suffering of the masses, remains a matter of spirited discourse. The following decade saw a landscape of sluggish production and persistent unemployment, casting a shadow of skepticism over the New Deal’s efficacy.

The multi-phased legacy of the New Deal

Beyond its instant economic implications, the New Deal’s importance was far-reaching. It transcended its role as a mere stabilizer of the economy and a lifeline for the jobless. In its wake, it sculpted a novel governmental role, weaving a tapestry of enduring programs that would become integral to the very fabric of American society.

Guardianship of labor: Worker protections

The New Deal legitimized unions and labor rights through the National Labor Relations Act. This pivotal act conferred legitimacy upon collective bargaining, paving the way for enhanced employee rights. The echoes of this monumental stride continue to resonate today, underscoring the value of worker protection in a dynamic economy.

Pioneering progress: Public works programs

Crafting a unique win-win, the New Deal’s public works programs aimed at employing extensive construction projects, resulting in a society fortified by vital infrastructure and individuals empowered by gainful employment, a model that still evokes admiration and emulation. These initiatives are aimed at providing work through extensive construction projects. The dual outcome was a society fortified by vital infrastructure and individuals empowered by gainful employment, a model that still evokes admiration and emulation.

Safety nets of solidarity: Individual Welfare

A beacon of empathy in times of despair, the Social Security Act of 1935 remains a testament to the New Deal’s enduring legacy. This far-reaching act introduced the pension system, a lifeline for countless individuals as they journey through the passages of life. The echoes of this pivotal creation resound, reminding us of the power of compassionate governance.

A global ripple: Seeds of extremism and World War II

The feelers of the Great Depression extended beyond national limits, their impact wavelet through the tides of history. A famous victory in the 1932 election and the appearance of the New Deal in the U.S. marked crucial junctures. Yet, the explosive effect of the Great Depression was not restricted to the home realm; its influence prolonged across oceans and continents.

The rise of extremism in Germany, fueled by economic disorder, sowed the seeds for the cataclysmic upheaval of the Second World War. The dark course carved by the Depression’s influence shaped history, highlighting the far-reaching consequences of economic commotion.

In the hanging of time,

As we see through the prism of the past, the Great Depression is evidence of the flexibility of the human spirit in the face of misfortune. The enduring legacy of the New Deal, a testament to the audacity of change, endures as a beacon of hope. In the expansive tapestry of time, these chapters remain intertwined, reminders that from the crucible of calamity emerge the sparks of transformation, resilience, and the pursuit of a better tomorrow.

FAQs

What factors contributed to the onset of the Great Depression?

The Great Depression was activated by a mixture of factors, making it hard to pinpoint a single cause. However, economists and historians usually agree that critical factors include the stock market crash of 1929, the gold standard, reduced lending, high tariffs, banking panics, and the Federal Reserve’s austerity financial policies.

What event marked the outset of the Great Depression?

The Great Depression began after the disastrous stock market crash of 1929. This crash wiped out personal and company wealth, sending global shockwaves that resonated with the U.S. economy.

When did the Great Depression come to an end?

The Great Depression is usually considered to have ended approximately in 1941. It concurred with the United States’ entry into World War II. Economists often point to this period as a rotation point, as it marked a decline in unemployment and a rise in GDP.

Were there other important contributing factors beyond the stock market crash?

The stock market crash was a vital catalyst but intertwined with diverse other factors. The gold standard, trade tariffs, banking panics, and the Federal Reserve’s financial policies played roles in aggravating the economic turmoil of the Great Depression.

How did the Great Depression affect other countries beyond the United States?

It did not limit the effects of the Great Depression to the United States. The economic downturn spread across borders, impacting Europe and other parts of the world. The interconnectedness of the global economy at that time meant that financial fights in one region could quickly affect others.

What lessons can we learn from the Great Depression to prevent similar crises?

The Great Depression teaches us the importance of prudent financial regulation, stable monetary policies, and global cooperation to prevent and mitigate economic emergencies. It also underscores the significance of addressing income disparity and ensuring a safety net for citizens during challenging times.

Conclusion

In the grand tapestry of history, few chapters are as haunting and impactful as the Great Depression. Its somber shadow casts over the world for nearly a decade, leaving an indelible mark that continues to resonate through time. The echoes of this economic catastrophe remind us that the complexities of resilience, innovation, and hope shape the course of nations and the trajectory of human progress. As we navigate an ever-evolving financial landscape, the lessons etched in the history of the Great Depression offer a guiding light.

With its audacious vision and transformative initiatives, the New Deal changed American society’s economic landscape and fabric. Its enduring legacy, from worker protections to public works programs and safety nets of solidarity, underscores the power of compassionate governance and forward-looking policies. But the impact of the Great Depression transcended borders.

It reverberated across oceans, shaping the rise of extremism in Germany and setting the stage for the Second World War. The interconnectedness of these historical events reminds us of the delicate balance between economic stability and global harmony. It is a reminder that pursuing a better tomorrow remains a beacon of hope even in the darkest times.

As we stand at the intersection of history and progress, the Great Depression’s legacy urges us to foster innovation, embody compassion, and work tirelessly toward a world where the echoes of economic turmoil are replaced with the symphony of prosperity and unity.