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Causes of the Great Depression

Herbert Hoover

Causes of the Great Depression: Republican president Herbert Hoover served in office from March 4, 1929 to March 4, 1933. The peak of the Great Depression was between 1932 and 1933. On March 4, 1933 the Democrat, Franklin D. Roosevelt, was inaugurated as the new president of the United States and the crisis slowly began to improve.  

Definition and Summary of the Causes of the Great Depression
Summary and definition:
There were many different Causes of the Great Depression which was sparked by the 1929 Wall Street Crash when $10-$15 billion was lost, due to plummeting prices on the stock market, in just one day.

Other causes of the Great Depression included the overproduction of consumer goods followed by a fall in demand, bank weaknesses and bank closures, lack of credit, bankruptcies, unequal distribution of wealth, government policies, loss of exports and failures by the Federal Reserve.

The causes and the extent of the Great Depression were exacerbated by the 1932 drought that was followed by dust storms and the Dust Bowl. The Great Depression led to Mass Unemployment which became in itself another cause of the Great Depression. The economic output in America surged and unemployment fell when America entered WW2 in 1941 and the Great depression finally came to an end.

What was the Causes of the Great Depression? There were many  causes of the Great Depression that included the following:

  • Irrational optimism and overconfidence in the 1920s

  • 1929 Stock Market Crash

  • Bank Closures and weaknesses in the banking system

  • Overproduction of consumer goods

  • Fall in demand and the purchase of consumer goods

  • Bankruptcies and High levels of debt

  • Lack of credit

  • Unequal distribution of wealth

  • US Economic Policies & Policies of Protectionism and Isolationism

  • Loss of exports

  • Failures by the Federal Reserve

  • The 1932 Drought, Dust storms and the Dust Bowl

  • Mass Unemployment caused by all of the above

Facts about Causes of the Great Depression
The following fact sheet contains interesting facts and information on Causes of the Great Depression.

 Overconfidence: For Middle Class Americans the Roaring Twenties was a time of great prosperity. Industries boomed which led to the 1920s Economic Boom. It was an era of modernism, excitement, new ideas and it was the age of the automobile. People felt invincible and became overconfident believing that the prosperous period would never end.

 Consumerism: The irrational exuberance of the Roaring Twenties led to the rise of Consumerism in 1920's America and people were encouraged to acquire new product in ever-increasing amounts through mass advertising in the newspapers and via the radio.

 Easy Credit: Once  "thrifty and prudent" Americans threw caution to the wind, careless of rising debt, and purchased consumer items on easy credit. Stock Brokers promoted the idea of "Buying on Margin" - encouraging enthusiastic investors to buy stocks with money loaned from the stock broker. Nearly 4 million Americans engaged in heavy speculation, gambling on the Stock Market.

 Overproduction: The demand for goods, massive increases in sales, modern technology, new machinery and the adoption of systems such as the Assembly Line coupled with overconfidence in industries resulted in  the overproduction of consumer goods. 

 1929 Wall Street Crash: Overconfident Americans believed the Stock Market was also invincible. Wall Street had enjoyed amazing profits from the 'Long Bull Market' in which share prices rocketed from an average of $50 per share in 1922 climbing to an enormous $350 per share in 1929. The 1929 Wall Street Crash was greeted with shock,  horror, fear and disbelief. Stock brokers began to make Margin Calls and there was widespread panic-selling of all stocks. Between $10-$15 billion was lost on Tuesday, October 29, 1929  (Black Tuesday) as the stock market completely collapsed due to the plummeting share prices. There was an 89% decline in stock prices.

 The Banks: There were virtually no federal regulations to control banks in the 1920s and small banks had recklessly invested their customer's money on the stock market, buying stocks on margin with customers’ savings and loaning money to stock market investors . When the Wall Street Crash came small banks lost money and defaulted on their loans.  There were runs on banks who did not have the assets to respond to the withdrawal requests of their customers. Small banks were forced to close. During the 2 years following the Wall Street Crash over 3000 banks went bankrupt - over 10% of the nation's total. Banks that did survive stopped lending money, making less credit available and the economy fell into recession.

 Bankruptcies: Over 20,000 companies and business went bankrupt and closed. The high levels of debt and the Wall Street crash led to the ruin of ordinary Americans who lost their life savings, their homes and then their jobs. 

 Lack of Credit: Banks were reluctant to make any new loans in the financial climate. The lack of credit meant that people were unable to recover from the economic bust. The downward spiral continued leading to foreclosures, homelessness and unemployment.

 Fall in demand: The market in consumer goods quickly dried up, too many products were being manufactured due to overproduction and there with too few people earning enough money to buy goods. Businesses closed and this had a 'domino effect' on the companies that supplied the companies who lost their orders and were also forced to close.

 Unequal distribution of wealth: The Unequal distribution of wealth in the 1920's contributed to the Great Depression. 40% of middle class Americans prospered during the economic boom but the other 60% of Americans were poor and were struggling to make a living even before the economic bust. The whole of the nation began to suffer during the Great Depression.

 US Policies: The US Government policies of the 1920s contributed to the Great Depression. The policy of Isolationism in the 1920's, following WW1, led to the passage of the1922 Fordney-McCumber Act that introduced high tariffs the (taxes) on foreign goods in American history furthering the US policy of Protectionism. The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels creating protective tariffs (taxes) and increased rates on imported goods.

 Loss of exports: It was vital to the US economy for Europeans to buy American exports and US policies backfired as angry European countries imposed a tax on American goods making them too expensive to buy in Europe, and restricting trade. The Loss of exports was due to the lack of cooperation with Europe and the global effects of the Stock Market crash. During the Great Depression U.S. exports to Europe saw a massive fall from $2,341 million in 1929 to $784 million in 1932.

 Failures by the Federal Reserve: The Federal Reserve failed in its fundamental task to act as a lender of last resort and failed to stem the decline in the supply of money. The Federal Reserve kept interest rates low throughout the 1920s which encouraged banks to make risky loans believing that the economy was expanding. The late decision to raise interest rates in 1928 and 1929 was an attempt to limit speculation in securities markets, but in effect slowed down economic activity in the US and tightened credit. The failures by the Federal Reserve included a slow response to the Great Depression. The Gold Standard Act of 1900 had been passed to prevent the country from printing too much money and running out of gold. The law restricted the Federal Reserve from enacting policies which would significantly alter the growth of the money supply and limit the inflation rate. The United States continued to retain the gold standard until April 25, 1933, when it was finally dropped as a means of combating the Great Depression.

 Drought and Dust Bowls: The majority of the nation's farmers had suffered a severe overproduction crisis during the 1920s that had resulted in low prices of agricultural crops. In 1932 a devastating drought hit the farmers and the soil turned to dust. Violent winds whipped the dry topsoil creating terrifying dust storms destroying 100 million acres of land. Crops were ruined, livestock were killed and 3 million impoverished people became unemployed and homeless due to the Dust Bowl.

 Mass Unemployment: The consequence of the Great Depression was Mass Unemployment in the United States which extended the period of the Great Depression. Over 12 million people became unemployed. At its peak, over 12,000 people being made unemployed every day.

US American History
1929-1945: Depression & WW2

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