Causes of the Great
Depression
T
he crash of the stock market on October 29, 1929 – “Black Thursday”
was just the most obvious of the reasons for the Great Depression
that lasted throughout the 1930s.
In fact, even before Hoover’s
election in 1928, there were already signs that the nation was in economic
trouble. The problem was that no one was really looking for signs of
trouble. They were too caught up in the fun and frolic of the moment.
There’s a saying that says “Hindsight is
20/20.” If you have 20/20 vision, that means
your eyesight is perfect. And hindsight means
looking backwards. That means that it’s easy to
look back and see the problems. Things
become clear when you’re not right in the
middle of the situation. It’s often harder to
judge things when they’re going on right around you. Your judgment is
clouded by the way you feel or the way you wish things were. And that’s
the way it was for the thirties-era people.
So, looking back at the things that were going on, what do
historians say caused the Great Depression?
O
verproduction in Industry and Agriculture –
Farmers did not share in the prosperity of the
1920s. During World War I, life was grand for the farmers. In
war-torn Europe there was a need for food. And since it
couldn’t be grown on the devastated land where the war was taking
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place, it had to come from outside the country. Where better than the big
prosperous land of America? And seeing the need, and a chance to
make money, farmers took out loans. While other people were buying
cars and stock on installment plans, farmers were taking out loans to buy
more land and newer equipment, even money for the seeds for the next
year’s crop.
This was all fine during the years of the war.
But
when
the
war
ended,
and
the
countries of Europe began to heal, they
didn’t need so much food and help from
America. That mean the farmers were no
longer making big money – but they had
big debts to pay off. They had large farms
that were producing large amounts of
crops, but they could not sell all that they
grew.
There
wasn’t
a
high
enough
demand. The farm income fell and the
farm debts grew.
But it wasn’t just on the farms that there were difficulties. Factories
and businesses began to have the same problems. They were
overproducing. Remember how the assembly line had made it so quick
and easy to make products? Well, during the 1920s,
so many people had bought and bought, and then
bought some more, that by this point, the already
had the things they needed. The demand wasn’t as
high. There were now more goods than buyers. As
factories lost buyers for their goods, they began to close down. More and
more workers lost their jobs.
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H
igh Taxes and War Debts – During the 1920s, America raised
taxes on imports. The hope with that is to
get
people
to
buy
American-made
products. Imagine that you go to the store and see two
very similar items. In fact, maybe the contents are
exactly the same, just the labels are different. One of the
items is higher in price than the other. Since they are
basically the same thing, which would you buy?
Well, that’s what the government was hoping would happen, too. If
you want your country to grow and prosper, then you need the businesses
in your country to grow and prosper, too. And that only happens when
American industry is supported. The government was trying to help this
happen even more.
But in a way, it backfired. Other countries fought back by raising
their own taxes. Sure, American-made products were cheaper in
America, but we don’t just sell our goods in America. We ship them to
other countries and sell them there, too. And when American products
cost more in other countries, do you think people in that country are
going to buy them? Did you buy the foreign-made product that cost
more? No on both counts.
As taxes went up all over the world, this meant fewer places that
Americans could sell their products – and that meant less money. We had
debts from
the war we needed to pay off.
Remember, it’s not cheap to run a war. There are all
those supplies and weapons and men that need to
paid for. Where were we going to get the money
now? The Germans owed us money. They could pay us back. It would
have been nice if it had worked, but the Germans were in a depression of
their own. They had no money to pay anyone back.
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U
nequal Distribution of Wealth – It wasn’t rich people everywhere in
the 1920s, despite what it may have sounded like. Yes, people
were buying a lot, but it gave a false sense of prosperity.
Remember, a lot of those people couldn’t afford to pay the full price on
the goods they bought.
In fact, the top 5% of the nation earned 33% of the nation’s income.
Wages only increased by 11% during the 1920s.
And as wages increased, so did the price of
manufactured goods. That meant a lot of the
workers were still too poor to buy the very
products they were making.
Remember those farmers? They
were in debt. So were a lot of the people who had been buying on credit.
This was another reason factories and businesses were losing buyers. When
there’s not enough money to go around, it’s eventually going to catch up
to you.
S
tock Market Crash and Financial Panic – This was just the final straw
that set the depression into full swing. Stock brokers tried to sell
thousands of shares before their value dropped even further, but
there were few buyers. Prices kept dropping. In one day, $3 billion dollars
were lost in the stock market. The more stock that was sold, the lower the
prices went. And the people continued to panic.
They rushed to the banks to get their money out. But banks
don’t have all their money right there; it’s invested in other things.
And so, when people came to get their money out, there wasn’t
enough to give to everyone. So many banks simply closed their doors. You
know things are bad when the banks are going out of business. Within the
next four years, 5,500 banks would go out of business all over the country.
And all those people who had put their life’s savings into the bank were all
of a sudden out of luck. Their money had simply vanished.
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