Micah McLaughlin
Davis 6th
The causes of the Great Depression
5 February 2013
What caused the Great Depression, the worst economic depression in US history? It was not just
one factor, but instead a combination of domestic and worldwide conditions that led to the Great
Depression. As such, there is no agreed upon list of all its causes. Here instead is a list of the top
reasons that historians and economists have cited as causing the Great Depression.
The effects of the Great Depression was huge across the world. Not only did it lead to the New
Deal in America but more significantly, it was a direct cause of the rise of extremism in
Germany leading to World War II.
1. Stock Market Crash of 1929
Many believe erroneously that the stock market crash that occurred on Black Tuesday, October
29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes
that led to the Great Depression. Two months after the original crash in October, stockholders
had lost more than $40 billion dollars. Even though the stock market began to regain some of its
losses, by the end of 1930, it just was not enough and America truly entered what is called the
Great Depression.
2. Bank Failures
Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks
failed people simply lost their savings. Surviving banks, unsure of the economic situation and
concerned for their own survival, stopped being as willing to create new loans. This exacerbated
the situation leading to less and less expenditures.
3. Reduction in Purchasing Across the Board
With the stock market crash and the fears of further economic woes, individuals from all classes
stopped purchasing items. This then led to a reduction in the number of items produced and thus
a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying
for items they had bought through installment plans and their items were repossessed. More and
more inventory began to accumulate. The unemployment rate rose above 25% which meant, of
course, even less spending to help alleviate the economic situation.
4. American Economic Policy with Europe
As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help
protect American companies. This charged a high tax for imports thereby leading to less trade
between America and foreign countries along with some economic retaliation.
5. Drought Conditions
While not a direct cause of the Great Depression, the drought that occurred in the Mississippi
Valley in 1930 was of such proportions that many could not even pay their taxes or other debts
and had to sell their farms for no profit to themselves. The area was nicknamed "The Dust
Bowl." This was the topic of John Steinbeck's The Grapes of Wrath.
Causes of the Great Depression
By:David Howarth and Megan Becker .
The Great Depression didn’t happen overnight, It was caused by a whole
bunch of factors including deflation where money is not worth as much as
it used to be, A decline in trade this is important because if no one is
buying our goods then we cannot make money, Also not helping trade was
the Smoot-Hawley Tariff Act which added a huge tariff or tax on all
imported goods. These events will be the focus for this research.
This is a picture of a bank run. All
these people are lining up to get money
out of their accounts
Debt Deflation- This happens when
banks lend out more money than they
have to lend. Brokerage firms on average
would lend $9 for every $1 an investor
had deposited. When the market fell, brokers called in these loans, which
could not be paid back. Banks began to fail as debtors defaulted on debt
and depositors attempted to withdraw their deposits, this happened with
masses of people. These events where people would rush to the bank are
called Bank Runs. Back in that time there was so FIDC and the government
guarantees and Federal Reserve banking regulations to prevent such panics
were ineffective or not used. Bank failures led to the loss of billions of
dollars in assets. This became a problem because as people were losing
their jobs and the value of the dollar was going d own the debt that people
had accumulated stayed the same. With the Bank Run and falling value of
the dollar, the first ten months of 1930 744 US banks failed. The bank
failures became worse when the banks tried collecting on the loans but the
people could not pay them back in time. This caused banks not to want to
give out as many loans or even have loans at all. This reall y slowed down
the econom y.
Here is a list of the chain of events that caused the Deflation:
· Debt liquidation and distress selling
· Contraction of the money suppl y as bank loans are paid off

A fall in the level of asset prices
· A still greater fall in the net worth of business, precipitating
bankruptcies
· A fall in profits
· A reduction in output, in trade and in employment.
· Pessimism and loss of confidence
· Hoarding of money
· A fall in nominal interest rates and a rise in deflation adjusted interest
rates.
Without jobs and loans the US econom y was having a reall y hard time
selling their own goods this made people t hink what could be done to help
jobs and money. One thing to do would be make it so people would want to
buy US products more than imported ones. This brings us to our next focus
point.
Smoot-Hawley Tariff Act- This was a very controversial act that was
signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000
imported goods to record levels. After it was passed, many countries
retaliated with their own increased tariffs on U.S. goods, and American
exports and imports plunged by more than ha lf. At first the tariff appeared
to be a success. According to historian Robert Sobel, "Factory payrolls,
construction contracts, and industrial production all increased sharpl y."
However, larger economic problems emerged in the form of weak banks.
U.S. Imports plunged 66% from $4.4 billion in 1929 to $1.5 billion in
1933, and exports fell 61% from $5.4 billion to $2.1 billion, both drops far
more than the 50% fall in the GDP. The Smoot -Hawley Tariff Act
"imposed an effective tax rate of 60% on more than 3, 200 products and
materials imported into the United States", quadrupling previous tariff
rates. This Act help to bring about m y next focus point, breakdown of
international trade. It seems that most every countries economy relies on
other countries trading and buying their good when this slows down it has
very dramatic effects on the econom y.
Breakdown of international trade – At the end of World War I in 1918 all
European nations that had been allied with the United States owed large
amounts of money to Am erican banks. But with the treasuries in those
nations being drained from the war the amount owed was too much for
them to pay back. Those nations wanted reparation payments from
Germany and Austria –Hungary because they believed that it would give
them a way to pay off the debts they owed. But Germany and Austria Hungary were themselves in deep economic trouble after the war and were
in no shape economicall y to pay reparations. Nations that owed the US
money wanted forgiveness on the debits but the American government
refuses. Instead US banks were loaning money to the European Nations to
pay off the debts they already owed. But after the US economy weakened
in 1929 it was hard for European Nations to get loans for US banks. At the
same time, high U.S. tari ffs were making it much more difficult for them to
sell their goods in U.S. markets. Without any source of revenue from
foreign exchange with which to repay their loans, they began to default. In
the 1920’s the demand for US goods began to decline this was because
European Nations were becoming more productive in industry and
agriculture again, while others suffering economic hardship could not
afford to buy good from overseas. The Hawley -Smoot Tariff was especiall y
harmful to agriculture because it caused farmers to default on their loans.
This event may have worsened or even caused the ensuing bank runs in the
Midwest and West that caused the collapse of the banking system. During
the 1920s, the former allies paid the war -debt installments to the United
States chiefl y with funds obtained from German reparations payments, and
Germany was able to make those payments onl y because of large private
loans from the United States and Britain. Similarl y, U.S. investments
abroad provided the dollars, which alone made it possible for foreign
nations to buy U.S. exports. After the stock market crash of 1929 funds
went from Europe to America and this caused the already weakened
European econom y to crumble.
Problems with the Federal Reserve – Some people credit the Great
Depression to problems at the Federal Reserve. According to Ben
Bernanke, the current Chairman of the Federal Reserve, he said that these
events caused the Great Depression:
- The Federal Reserve began raising the Federal Reserve Funds rate in the
spring of 1928, and kept raising it through a recession that began in August
1929. This led to the stock market crash in October 1929.
- When the stock market crashed, investors turned to the currency markets.
At that time, dollars were backed by gold held by the U.S. Government.
Speculators began selling dollars for gold in September 1931, which
caused a run on the dollar.
- The Fed raised interest rates again to try and preserve the value of the
dollar. This further restricted the availabilit y of money for busin esses,
causing more bankruptcies.
- The Federal Reserve did not increase the suppl y of money to combat
deflation.
- As investors withdrew all their dollars from banks, the banks failed,
causing more panic. The Federal Reserve ignored the banks' plight, thu s
destroying any remaining consumers’ confidence in banks. Most people
withdrew their cash and put it under the mattress, which further decreased
the money suppl y.
He said this “Bottom line...thanks to the Fed, there was just not enough
money in circulatio n to get the econom y going again. Instead of pumping
money into the econom y, and increasing the money suppl y, the Fed allowed
the money suppl y to fall 30%.”
Causes of the Great Depression
By: Megan Becker
The great depression was the worst economic depress ion in US History. It
was a huge financial decline that started in 1929 that lasted into earl y
1940s. Many “businesses and banks closed their doors, people lost their
jobs, homes, and savings and many depended on charit y to survive.” It
occurred in North America and Europe but affected countries around the
world. Times became very hard in many countries where unemployed and
homelessness rose tremendousl y. Even construction stopped in many areas.
The Great Depression was the most severe and lasted the longe st in the
United States. Many people wondered what caused it to happen. However
there was a combination of domestic and worldwide conditions that caused
it. Some of the top reasons that historians and economists said why the
Great Depression occurred are S tock Market Crash of 1929, Bank Failures,
Reduction in Purchasing Across the board, American Economic Policy with
Europe, and Drought Conditions.
The Stock market crash in 1929 was referred to as the spark that started the
Great Depression. But many question if the crash actuall y caused the
Great Depression to occur. But most sources say it was the leading cause
of it. “The 1929 stock market crash is conventionall y said to have
occurred on Thursday the 24th and Tuesday the 29th of October. These two
dates have been dubbed "Black Thursday" and "Black Tuesday,"
respectivel y. On September 3, 1929, the Dow Jones Industrial Average
reached a record high of 381.2. At the end of the market day on Thursday,
October 24, the market was at 299.5 — a 21 percent decline from the high.
On this day the market fell 33 points — a drop of 9 percent — on trading
that was approximately three times the normal dail y volume for the first
nine months of the year. By all accounts, there was a selling panic. By
November 13, 1929, the market had fallen to 199. By the time the crash
was completed in 1932, following an unprecedented large economic
depression, stocks had lost nearl y 90 percent of their value.” When the
October crash occurred two months after stockholders had lost more than
$40 billion dollars. Although after this the stock market began to recover
some its losses by the end of 1930. But unfortunatel y it was not enough for
America to avoid what became the Great Depression.
The next biggest factor was Bank Failures. Throughout the 1930’s over
9,000 banks failed. Many people lost their savings and bank deposits were
uninsured. So as banks failed people continued to lose their savings. The
few surviving banks were very concerned with being able to continue.
Since the econom y was in such a bad economic situation many banks
hesitated creating new loans whether it was home or personal loans. This
made the situation more severe because it led to less and less expenditures.
The reduction in purchasing across the board was an other cause of the
Great Depression. Due to the stock market crash and peoples fears of
future economic problems many people stop purchasing items. This wasn’t
onl y lower class either it was all classes of people. Due to the lack of
purchasing it led to the reduction in number of items being produced. So
the decreased production then led to the reduction of the workforce. As
people continued to become unemployed they were not able to keep up with
paying for items they had bought and many of their items were
repossessed. So inventory increased in many businesses and continued to
accumulate in time. The unemployment rate rose above 25% which in turn
meant even less spending to help the econom y. “The unemployment rate
rose higher and remained higher long er than in any other western country.
As it expanded, the depression, for many Americans, was a hard time.”
When things began to get even more difficult and businesses begin to fail
the government created an American economic policy with Europe. They
then called this the Smoot -Hawley Tariff in 1930 to help protect American
companies. This “charged a high tax for imports thereby leading to less
trade between America and foreign countries along with some economic
retaliation.” We will go into more detail ab out the Smoot-Hawley Tariff
and its affect on the cause of the Great Depression.
The next factor was not a direct cause of the Great Depression but occurred
heavil y due to it was Drought Conditions. In Mississippi Valley a large
drought occurred that de stroyed many farmers’ crops. It was such large
proportions that many could not even pay their taxes on the land or even
any debts. So many had no choice but to sell their farms for no profit to
help themselves get out of other debts.
As stated throughout the paper there are many reasons as mentioned as to
why the great depression occurred. It was caused by a numerous amount of
serious weaknesses in the econom y. Wealthy people at the time made large
profits, and many Americans spend m ore money then what they were
earning. Many farmers suffered and had to sell items at low prices but had
to consume heavy debt and sell their land at such low cost that they
wouldn’t consume any profit. The great depression destroyed confidence in
the econom y and ruined thousands of investors. This depression had lasting
effects on the United States for more then a century after it ended. Then
President Roosevelt was then elected and created programs to overcome the
problems occurred by the Great Depressio n.
Throughout the 1920’s, new industries and new
methods of production led to prosperity in America.
America was able to use its great supply of raw
materials to produce steel, chemicals, glass, and
machinery that became the foundation of an enormo us
boom in consumer goods (Samuelson, 2). Many US
citizens invested on the stock market, speculating to
make a quick profit. This great prosperity ended in
October 1929. People began to fear that the boom was
going to end, the stock market crashed, the eco nomy
collapsed and the United States entered a long
depression.
The Great Depression of the thirties remains the most
important economic event in American history. It
caused enormous hardship for tens of millions of people
and the failure of a large frac tion of the nation’s banks,
businesses, and farms. The stock market crash in
October 1929 is believed to be the immediate cause of
the Great Depression, but there were many other
factors and long -term causes that developed in the
years prior to the depress ion.
The 1920’s may have been prosperous for some
Americans, but the growing prosperity was actually
weakening the economy. Many US citizens were never
participating in the boom from the start. There were
some wealthy individuals, but 60% of people were
living below the poverty line. The coal mining industry
had expanded greatly, creating many jobs, but with the
introduction of oil and gas, the production of coal was
decreased along with the amount of jobs. The United
Mine Workers Union’s membership fell f rom 500,000 in
1920 to 75,000 in 1928 (Temin, 33). The cotton industry
experienced similar unemployment problems. In the
agricultural industry, an increase in production was
met with a decrease in demand, so farmers also became
unemployed. The American far ms and factories
produced large amounts of goods and products during
the prosperity before the Depression.
On average, people’s wages stayed the same even as
prices for these goods soared. The factories and farms
still continued to produce at the same rate, but demand
for their products was decreasing. As a result, more
and more workers became unemployed, until 25% of
the population was out of work. The American
Federation of Labor fell from 5.1 million in 1920 to 3.4
million in 1929 (Temin, 68). All of these groups, being
poorer than the rest of the country, could not afford to
participate in the boom of the 1920’s. There was a
major unequal distribution of income that led to the
richest 1% of Americans owning approximately 40% of
the country’s wealth ( Matthews, 2). The country
entered the 1920’s with Warren G. Harding as
president. Harding was a Republican as well as a
laissez-faire capitalist who advocated policies which
reduced taxes and regulation, allowed monopolies to
form, and allowed the inequali ty of wealth and income
to reach record levels (Tanner, 3). Harding died in 1923
and Calvin Coolidge continued Harding’s policies of
minimal government intervention in the economy and
in business. Under Coolidge, the stock market began its
“artificial” fiv e year rise, the top tax rate was lowered
to 25%, and the Supreme Court made an important
ruling which further limited government control over
monopolies (Tanner, 8).
In the 1920’s more people invested in the stock market
than ever before. Between May 1928 and September
1929, the average prices of stocks rose 40 percent.
Stock prices rose so quickly that at the end of the
decade, some people became rich overnight by b uying
and selling stocks (Matthews, 3). People could buy
stocks for only a 10% down payment. Between 1920 and
1929 the number of shareowners rose from 4 million to
20 million (Temin, 45). With artificially low interest
rates and a booming economy, people a nd companies
invested in over-priced stocks. During 1928 and 1929,
the prices of many stocks went up faster than the value
of the companies the stocks represented. “It was like
pouring gasoline onto a fire -the flames rose up, no
lasting fuel was added, but the economy sure looked
great” (Matthews, 3).
Buying on credit was huge problem in the 1920’s. Since
the 20’s was a period of great economic boom, not many
people took the future into consideration. Many people
bought expensive luxury items using mone y they did
not have. Installment buying allowed people to make a
monthly, weekly, or yearly payment on an item that
they wanted or needed. Buying on credit and
installment buying left millions of people in debt.
Installment buying allowed lenders to reposs ess an item
if the borrower missed just one payment. People may
have stopped making new purchases to reduce the risk
of losing things they already had bought on credit.
There was a big drop in consumer spending, which
lowered prices, which meant that farme rs, businesses,
and nations could not repay their debts.
Rising debt led to restrictions on new loans, which led
to scarce credit, less borrowing, lower prices, more
bankruptcies, and so on (Samuelson, 1). The spiral
downward of trade, investment, peopl e’s confidence,
and the economy began. Many economists agree that
the Great Depression began with the Stock Market
Crash in October of 1929. Stock values plummeted,
stockholders were wiped out, banks and factories shut
down, and millions of Americans were left jobless and
penniless. Although the Stock Market Crash in October
of 1929 certainly began the Great Depression, there
were many events that led to the gradual decline of the
economy. During the prosperous 1920’s, bank failures,
together with low incom es among farmers and factory
workers, helped set the stage for the depression.
Uneven distribution of income among workers also
contributed to the slump.
The 1920’s were a prosperous period for business, but
most farmers did not prosper. Prices of farm product
fell about 40 % in 1920 and 1921, and they remained
low through the 1920’s (Tanner, 3). Some farmers lost
so much money they could not pay the mortgage on
their farm and were forced to rent their land or move.
Bank failures in the agricultural area s became more
frequent. About 550 banks went out of business from
July 1, 1928 to June 30, 1929, the period of greatest
prosperity in the 1920’s (Temin, 58). Workers in the
coal, railroad, and textile industry did not share in the
prosperity either. Indust rial production increased 50
%, but workers could not buy goods as fast as the
industry produced them because their wages were low.
Workers reduced their spending to hold down their
debts, the amount of money in circulation decreased,
and business became even worse. The Stock Market
Crash was an immediate cause of the Great Depression,
but there were many long -term causes that gradually
weakened the economy.
Bibliography
Matthews, Layth. “What Caused the Great Depression
of the 1930’s?” Internet. http://www.shambhala.org .
2002.
Samuelson, Robert. J. “Great Depression.” The Concise
Encyclopedia of economics. Internet.
http://www.econlib.org . 2002.
Tanner, Neal. “The Easy Life of the ‘20’s Contributed
to Great Depression.” Overview: The Great Depression.
Internet. http://www.marist.edu/summerscholars . 2002.
Temin, Peter. Lessons from the Great Depression.
1989
“No Job, No Hope”
Why was the Great Depression a disaster waiting to happen?
While we have spoken about the 20's as a time of great prosperity, it was a tad deceptive.
Problems lie under the surface that would not be dealt with by the conservative administrations
of Harding, Coolidge and Hoover.
The Great Depression did not begin in 1929 with the fall of the over inflated stock market. In
fact the Depression began ten years earlier in Europe. As the depression raged on in Europe
American's believed they would be immune to its effects. Isolationist sentiments and
conservative doctrine held that the less we had to do with Europe the better. As a result
American polices never addressed the possibility of the United States entering a depression as
well. Actually American policies actually contributed to our entry into the depression.
The early warning signs first came in the agricultural sector. Farmers continued to produce more
and more food due to technological advances like the tractor. As production grew farm prices
dropped. It was simply a matter of supply and demand. Framers reacted in the traditional manner
and boosted production even further. Prices plummeted. Farmers began to default on their loans
and the banks foreclosed. To make matters worse the central part of the nation was hit with a
terrible drought. Farmers were devastated. The drought turned that portion of America into what
was called "The Dustbowl."
In the 1920's American economic policy was laissez faire. Businesses were left alone and for
sometime things appeared to fine. American businesses reported record profits, production was
at an all time high. The problem was that while earnings rose and the rich got richer, the working
class received a disproportionally lower percentage of the wealth. This uneven distribution of
wealth got so bad that 5% of America earned 33% of the income. What this meant was that there
was less and less real spending. Despite the fact that the working class had less money to spend
businesses continued to increase production levels.
Purchasing dropped internationally as well. Since Europe was in a depression people there
weren't buying as much as businesses had estimated. Then the Fordney McCumber Tariff and the
Hawley Smoot Tariff raised tariff levels to as much as 40%. Europe which was already angered
at US foreign actions responded with high tariffs of their own. International trade was at a
standstill.
At this point you should be asking the question "If no one buying and companies were increasing
production levels, wasn't there going to be a problem?" BINGO!!! The problem is known as
overproduction. American businesses were producing far more than could be consumed. The
result was lost profits and eventually debts. After a while many companies went out of business.
Why would these companies continue to overproduce? There are several reasons. Some were
managed poorly. Others were part of holding companies that placed layers and layers of
companies, each relying on the others production levels like a pyramid. If one company in the
pyramid reported lower production levels the others fell off and it looked bad. In many cases
however crooked company owners reported earnings that were higher than they were actually
were in order to drive up the stock price.
As a result of World War I America had emerged as the worlds leading creditor nation. Foreign
powers owed the United States and its companies about a billion dollars annually. With declining
trade in America, a demand for reparation from the United States and the continuing European
depression this debt went unpaid.
Throughout this period of time Americans (and it seems this included Harding, Coolidge and
Hoover.) Truly felt they would be prosperous forever. They didn't see or were unwilling to see
the warning signs. With this confidence Americans began to increasingly invest in the stock
market. The market began an unprecedented rise in 1928. By September 3rd 1929 the market
reached a record high of 381. Then the decline began. Many didn't think it would last but on
October 24th panic selling began as 12.8 million shares changed hands. Then came Black
Tuesday, October 29th 1929. The market plummeted. By July the Dow reached a low of 41.22.
Millions upon millions of dollars had been lost. Many who had bought on margin (credit) had to
pay back debts with money they didn't have. Some opened up the windows and jumped to their
deaths. The depression had arrived.
Banks that had invested heavily in the stock market and real estate lost their depositors money. A
panic ensued as people lined up at the banks to get their money. unfortunately for many the
money just wasn't there. As the amount of money in circulation dropped deflation hit. Money
was worth more but there was little money to be had. The fed which had the power to put more
money into circulation did nothing (laissez faire). Workers were fired as thousands of businesses
closed down. Unemployment rose to 25-35%. In Toledo Ohio fully 80% of the workers were
unemployed! Real estate investments flopped because with deflation a building that was once
worth ten million was now worth five. The mortgage and debt stayed the same but the income
was gone. Banks foreclosed on loans and took possession of worthless properties that nobody
could afford to buy. Between 1930 and 1932 over 9000 banks failed.
With all of this there Hoover announced to Americans that they should "stay the course" that the
ship would right itself. After all, Hoover was a self made man, a rugged individualist. By the
time Hoover recognized he had to do something it was too little and much too late.