What Caused the Great Depression?: Looking Back on One of the Grimmest Periods in US History

Disclaimer: I am not a doctor nor do I claim to be one. If you are experiencing suicidal thoughts, are injured, or are feeling thoughts of depression, anxiety, or anything else, please contact a medical professional IMMEDIATELY!

National Suicide Prevention Lifeline: 1-800-273-8255

The Roaring Twenties will always be remembered as a period of glamour and prosperity, a time when leisure and consumption dominated American life. Department stores, automobiles, modern appliances and luxury goods lured American families into believing that affluence was within everyone’s reach. All they had to do was borrow and spend on consumer goods or invest in stocks, which could dramatically increase their income.

The Prosperity of the 1920s

During the optimistic 1920s, credit buying and speculation became the norm. Banks relaxed their credit policies, tax cuts increased the money supply available for speculation, stock prices rose and people rushed into the speculative tumult of the stock market. However, as the decade drew to an end, the precarious American prosperity was threatened by the serious structural problems of the country’s economy. By 1929, the U.S. was slowly pulled into the vortex of global depression.

What Went Wrong?

In the fall of 1929, stock prices began to plummet for the first time in many years. The panic-ridden traders rushed to sell all their stocks at lower prices, aggravating the plunge until, on October 29th 1929, the stock market collapsed.

For many people, including the politicians and economists of the time, the 1929 Crash and the ensuing depression came as a shock. How could the U.S. go from the glittering prosperity of the 20s to an economic disaster of national proportions? In her recent book The Forgotten Man – A New History of the Great Depression, Amity Shlaes challenges the idea that “the Crash was the honest acknowledgment of the breakdown of capitalism – and the cause of the Depression.” It was not the Crash that caused the depression, the author asserts, insisting that “American capitalism did not break in 1929.” What the economic analysts of the time were not equipped to explain was that the American economy had long been undermined by structural weaknesses hidden behind the illusion of wealth and progress. The stock market speculation and the global crisis were just the final impulse that pushed the economy downslope, toward the depression.

Under-consumption and Stagnating Wages

Beginning in 1928, the demand for new housing and implicitly for building materials had started to decrease dramatically, causing a surge in unemployment among construction workers. Regular Americans who worked in plants, mills and in the newer service industry had long battled stagnating wages, and they could no longer afford to invest in new construction. Nor could they afford to buy automobiles, electric appliances and other goods they produced themselves.

Due to sagging prices on agricultural products, the purchasing power of the farmers, who had long represented the lowest income category in the U.S., also continued to decrease. Most farm owners could no longer invest in new machinery, equipment or goods.

As a result of the general decline in demand, retailers amassed large inventories they were unable to sell and industries started to stagnate. Underconsumption, one of the main factors that triggered the inevitable depression, was tightly connected to the widening income gap in the U.S. As Mary Beth Norton and her co-authors illustrate in A People & A Nation, “between 1920 and 1929, the income of the wealthiest 1 percent rose 75 percent”, while the wages and the purchasing power of regular Americans continued to decrease. While the poor got poorer, the wealthy put their profits into the stock market, fueling the dangerous speculation.

Corporate Debt and Speculation

Individual investors were not the only ones enthralled by the stock market bubble. Corporations also invested huge amounts of money in stocks. Moreover, in their expansion fervor, they accumulated debt beyond their repaying power, usually by manipulating their assets to obtain loans. During the optimistic 1920s, many banks and lending agencies adopted relaxed credit policies and overlooked irregularities. When stock prices started to plunge, investors were unable to sell the stocks most of them had bought on margin (by paying only a fraction of the stock’s actual price) and therefore could not pay the brokers the full price they demanded. Nor could brokers and investment companies pay back their loans to the banks. Trapped in a circle of unmet obligations, most of the banks started to collapse.

Global Crisis

Beside its domestic problems, the U.S. economy was inevitably affected by the interbellic global economic crisis. European countries were drowning in post-war debt and unable to repay the money U.S. had loaned them for reconstruction. Since, by 1920, American investors had redirected their money toward the domestic stock market, the Germans could not count on American loans to pay reparations debts to the Allied nations, who found themselves increasingly cash stranded.

The trade balance also shifted to the detriment of the United States, since, as a result of high tariffs, other nations were unable to sell their goods on the American market. Consequently, they began to buy fewer American products.

Role of the Federal Government

During the 1920s, Hoover’s administration kept its intervention in the economy at a minimum and supported business expansion, further encouraging easy credit policies. The Federal Reserve also faced serious monetary and credit challenges, failing to ensure an appropriate supply of money that could sustain the goods that were being produced and the securities that were being issued.

In the aftermath of the Great Depression, the increased government intervention further hurt the economy through measures that arrested growth and affected the private sector. However, the federal government’s failure to supervise and regulate the risky stock market speculation of the 1920s may have aggravated the pre-existing illness the American economy suffered from.

Disclaimer: I am not a doctor nor do I claim to be one. If you are experiencing suicidal thoughts, are injured, or are feeling thoughts of depression, anxiety, or anything else, please contact a medical professional IMMEDIATELY!

National Suicide Prevention Lifeline: 1-800-273-8255

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