The Causes of the Great Depression

This section explores the causes of the Great Depression. The Great Depression was the most severe economic downturn in the history of the United States, resulting in widespread unemployment, poverty, and hardship. Although the U.S. economy had experienced economic downturns in the past, the scale and impact of the Great Depression were unprecedented. The following factors contributed to the collapse of the economy in 1929, creating a crisis that affected not just the United States but much of the world.

Underlying Weaknesses in the US Economy

Although the 1920s were often seen as a period of economic prosperity in the United States, there were several fundamental weaknesses in the economy that contributed to the Great Depression.

Income Inequality

One of the key issues that contributed to the economic instability was the unequal distribution of wealth. By the end of the 1920s, approximately 60% of American families were earning less than the minimum amount required to maintain a decent standard of living, which was around $2,000 per year. This meant that a significant portion of the population lacked purchasing power, despite the overall prosperity of the era.

Policies enacted by the Republican Party, particularly under Presidents Harding, Coolidge, and Hoover, favoured the wealthiest individuals, further exacerbating the inequality. Tax cuts for the rich and reduced government intervention in the economy allowed the wealthy to accumulate vast fortunes, while working-class Americans, including many women, African Americans, Native Americans, and the elderly, continued to live in poverty.

Struggles in Traditional Industries

Another contributing factor to the Great Depression was the decline of old industries. For example, the coal mining industry faced increased competition from newer energy sources like oil and electricity. Workers in these industries were not benefiting from the economic boom of the 1920s, and many experienced wage cuts and poor working conditions. At the same time, many workers in newer industries found themselves without job security, further contributing to growing social inequality.

Farmers, in particular, were among the hardest hit during this period. Despite improvements in farming technology, farmers overproduced crops, causing prices to fall. Moreover, the demand for agricultural products had already begun to stagnate. This created a crisis in rural areas, where many farmers were unable to sell their produce at a profit. To make matters worse, the Tariff Wars—which involved countries imposing tariffs on imported goods—made it even more difficult for American farmers to sell their surplus crops abroad.

Overproduction and Excessive Debt

As American industries ramped up production during the 1920s, they began to overproduce consumer goods. While the growing middle class in urban areas could afford to buy these products, a large portion of the population, especially in rural areas, could not. As more products were made than could be sold, the demand for goods started to decline. By 1927, approximately 63% of American homes had electricity, but this left nearly 40% of homes, particularly in rural areas, without access to electricity—making many modern electrical goods useless to these consumers.

This overproduction, coupled with the increasing use of credit, led to an unsustainable level of debt. Many consumers purchased goods on credit during the boom years, which led to an increase in consumer debt. As demand began to decline, businesses struggled to make a profit, which in turn led to widespread unemployment. Meanwhile, those who had purchased goods on credit found themselves unable to pay off their debts, leading to a further economic downturn.

International Economic Problems

The global economic situation also played a significant role in exacerbating the Great Depression. Tariffs imposed by the U.S. government, such as the Smoot-Hawley Tariff of 1930, resulted in foreign governments retaliating by imposing tariffs on American goods. This led to a decline in international trade and made it harder for U.S. businesses, particularly in agriculture, to sell their surplus goods abroad. With few foreign markets to sell to, U.S. industries were left with unsold products and suffered financially.

Laissez-Faire Economic Policies

The economic policies of the Republican Party under Presidents Harding, Coolidge, and Hoover promoted a laissez-faire approach to government intervention in the economy. This policy meant that businesses operated with little government regulation, and there were insufficient safeguards in place to protect the economy from instability.

For instance, the banking system was underregulated, and many banks engaged in risky practices, such as lending large amounts of money to stock market speculators. This excessive lending and speculative behaviour created a financial bubble in the stock market, which ultimately led to the collapse of the banking system when stock prices fell.

Many banks used savings from ordinary citizens to finance speculative investments. As the stock market crashed and many companies went bankrupt, banks found themselves unable to recover the loans they had made. As a result, numerous banks went bankrupt, and millions of people lost their savings. The lack of regulation meant that there were no safeguards to prevent this financial collapse from spiralling into a full-blown depression.

The Wall Street Crash of 1929

The culmination of these economic weaknesses was the Wall Street Crash of 1929, which marked the beginning of the Great Depression. The stock market had been experiencing speculative excess throughout the 1920s, with share prices rising to unrealistic levels. Many investors had bought shares "on margin"—meaning they borrowed money from banks to purchase stocks. When stock prices began to fall, investors tried to sell their shares to limit their losses. This led to a panic on the stock market, and on Black Thursday, 24th October 1929, nearly 13 million shares were sold in a single day.

The panic continued throughout the week, and on Black Tuesday, 29th October 1929, a further 16 million shares were sold. As a result, the stock market experienced a dramatic collapse, and shareholders lost billions of dollars in a matter of days. The panic in the stock market caused a loss of confidence in the economy, which had widespread consequences for banks, businesses, and individuals across the country.

Many speculators who had purchased shares on margin were unable to repay their loans, which led to a wave of bankruptcies. The collapse of the stock market also triggered the closure of banks, and millions of people lost their savings. The banking crisis deepened the economic collapse, as fewer people had money to spend, and businesses continued to fail.

The Great Depression was the result of a combination of economic factors, including income inequality, overproduction, unsustainable debt, international trade issues, and lack of government regulation. The Wall Street Crash was the final trigger that set off the economic collapse, but the underlying weaknesses in the economy had been building for years. The depression led to mass unemployment, poverty, and hardship for millions of Americans, and its effects were felt worldwide. The economic crisis prompted significant changes in government policy and marked the beginning of a long period of recovery, which included the implementation of New Deal reforms aimed at stabilising the economy and addressing the root causes of the Great Depression.