AP UNITED STATES HISTORY
WHAT CAUSED THE GREAT DEPRESSION?
INTRODUCTION
We have reached a point in our study when we run up against an amazing moment in 20th Century
history. President Hoover had been in office for about six months when the nation’s prosperity
bubble burst. The American economic structure, the envy of the world, collapsed. No President in
American history had ever faced an economic crisis of this magnitude. Why did this happen?
1. FIRST, SOME PERSPECTIVE: HOW DID THE DEPRESSION IMPACT THE NATION?
It is difficult for us to understand what people were going through during this time period. My
parents were born in 1924 and therefore spent their formative years in the midst of this event.
From them I have learned that the depression was a TRAUMATIC experience for millions and
millions of people. As historians we need to start with that realization – this was truly a lifechanging experience for people of that generation. Hoover is an interesting case because of that.
He went from being a respected – almost revered – public figure to being perceived as a villain,
almost overnight. Between the crash of 1929 and the election of Franklin Roosevelt in 1932, the
business activity of the nation fell by 50%, property income dropped by 31%, farm income was cut
in half, and 12-15 million people became unemployed. This left the nation paralyzed and
searching for leadership, direction, and action. Perhaps this gives you a better sense of why and
how FDR “met the moment.”
We have defined history in this class as the interpretation of past events with an eye on the present
and a vision of the future. If we hold to that definition, it should be emphasized at the outset that
the Great Depression, as it came to be known, has been interpreted in a variety of ways. In many
respects we are still living with questions about this time period. There are no clear-cut or easy
explanations of why it occurred. What follows is my somewhat simplistic analysis of why this
happened. If someone stopped me on the street and said, “What caused the Depression?” this is
how I would respond.
2. WHAT CAUSED THIS TO HAPPEN?
Picture the description I am giving you right now as a number of objects placed into a blender and
mixed together in such a way that it would be impossible to separate the ingredients again – in
other words, realize the complex combination of factors that came together to put the nation into
the economic deep freeze. For the sake of understanding what happened, however, we will treat
the various ingredients as SEPARATE entities. Here they are:
Cause #1: OVER-EXPANSION OF AGRICULTURE LEADING TO AN AGRICULTURAL DEPRESSION
During the war farmers had been encouraged to produce and produce big. When the demand
dropped off (dramatically) at the conclusion of the war, farmers continued over-producing, thereby
having surplus crops, causing the market prices to fall. A significant sector of our economy, the
farmers, lost purchasing power. That’s bad.
Cause #2: SICK INDUSTRIES
Capitalist economies go through major period of adjustment from time to time – a certain amount
of chaos is simply built in to a free market economy. In the 1920s various industries became
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“sick” causing widespread unemployment. Two examples are helpful here. The coal industry, long
a stable one, was suddenly facing immense competition from petroleum and natural gas (i.e. for
home heating). This transition impacted millions of people. Another such example was the cotton
textile industry. Changing clothing styles and competition from new materials (such as rayon) were
changing this industry. Also, competition from cheap textiles being made in Japan, China, Latin
America, and India were challenging American cotton textile producers. Does this sound familiar?
Cause #3: TECHNOLOGICAL UNEMPLOYMENT
Ah yes, the industrial-age problem of man being replaced by machine. This was really starting to
be noticeable during the 1920s, although the process had started much earlier. When coupled
with the heretofore mentioned problems, this EXACERBATED the economic downturn – more
unemployment, you see.
Cause #4: OVER-PRODUCTION IN INDUSTRY AND/OR UNDER-CONSUMPTION BY THE PUBLIC
Which came first? The chicken or the egg? This is the operative question here. Overproduction
obviously leads to under-consumption (or is it the other way around?). Again, capitalist economies
must maintain a balance between these two forces and in the 1920s this got all out of whack. But,
let’s explore that a bit further . . . .
Cause #5: OVER-EXTENSION OF CREDIT (aka Installment Buying)
You’ve heard this before, but the 1920s was an era when “time-buying” became an accepted
practice in America. Certainly our economy, yet today, is dependent on people partaking in this
time-honored practice. The problem with time-buying and extending credit beyond “reasonable
bounds” is that people easily get in over their head. Not only that, but such an extension of credit
creates an “artificial” sense among producers that they can continue production at present or
greater levels.
Cause #6: TARIFF BARRIERS
OK, this one is one of those “hindsight is 20/20” situations. Does it make sense to you that we
went into a period of trade protectionism during the 1920s? Does it seem logical that we would do
this in a period of ISOLATIONIST REACTION after World War 1? In other words, did PROTECTIONISM
match the mood of the country? It certainly did and, of course, the problem with that is that other
nations RETALIATED against US tariff increases and ultimately GLOBAL TRADE dramatically
CONTRACTED (aka shrank). Something like a thousand (yes, 1000!) economists encouraged
President Hoover NOT to sign the Smoot-Hawley Tariff of 1930, but he did it anyway. Life is hard.
Cause #7: OVER-SPECULATION IN LAND AND STOCKS
Well, a whole lot of people got swept up during the 1920s with this situation. Between 1927 and
1929 Americans invested heavily in the GREAT BULL MARKET. MARGIN BUYING was the common
practice of the day – that is, purchasing stocks for as little as 10% of their actual value with the
CERTAINTY (aka gamble!) that prices would go up thereby allowing one to sell and MAKE BIG
BUCKS. Due to this practice, millions of people went in over their head and when stock values
began to plummet, people wanted out AND FAST! This led to panic selling and I guess we’ve all
heard about BLACK TUESDAY – that’s the day the roof fell in!
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Was the CRASH of the Market, therefore, a CAUSE of the Depression? Or, is it better understood as
a SYMPTOM of an economy that was teetering on the brink of disaster? I would say the latter.
STUDY THE DIAGRAM HERE AS YOU REFLECT ON WHAT YOU HAVE JUST READ . . . . .
OVER-EXTENSION OF CREDIT
OVER-PRODUCTION
AG DEPRESSION
SICK
INDUSTRIES
UNDER-CONSUMPTION
TECHNOLOGICAL
UNEMPLOYMENT
OVER-SPECULATION IN THE
MARKET
TARIFF BARRIERS
So, if you are Roosevelt, how do you deal with the situation?
"It is to be hoped that the normal balance of Executive and legislative authority may be
wholly adequate to meet the unprecedented task before us. But it may be that an
unprecedented demand and need for undelayed action may call for temporary departure
from that normal balance of public procedure.
I am prepared under my constitutional duty to recommend the measures that a stricken
Nation in the midst of a stricken world may require. These measures, or such other measures
as the Congress may build out of its experience and wisdom, I shall seek, within my
constitutional authority, to bring to speedy adoption.
But in the event that the Congress shall fail to take one of these two courses, and in the event
that the national emergency is still critical, I shall not evade the clear course of duty that will
then confront me. I shall ask the Congress for the one remaining instrument to meet the
crisis—broad Executive power to wage a war against the emergency, as great as the power
that would be given to me if we were in fact invaded by a foreign foe."
From the First Inaugural: March 1933
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