{"id":2037,"date":"2016-04-07T19:53:27","date_gmt":"2016-04-07T19:53:27","guid":{"rendered":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/?p=2037"},"modified":"2026-02-18T06:53:27","modified_gmt":"2026-02-18T06:53:27","slug":"causes-of-the-great-depression","status":"publish","type":"post","link":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/causes-of-the-great-depression\/","title":{"rendered":"Causes of the Great Depression: A Detailed Summary"},"content":{"rendered":"\n

There were several significant causes of the Great Depression<\/a>, which combined to cause economic and social turmoil in the 1930s. The\u00a0Great Depression\u00a0was a significant event in world history and was of particular importance to American history.\u00a0 It was a worldwide economic recession that occurred primarily during the 1930s.\u00a0 A recession is a term that refers to a general economic downturn resulting in high levels of unemployment and a loss in consumer spending.\u00a0 As a result, during the Great Depression, working-class people struggled to find work while businesses struggled to survive with an overall reduction in the sales of goods and services.\u00a0 Historians have identified several different causes of the Great Depression, including: the\u00a0stock market crash of 1929<\/a>, the purchasing of stocks on margin, the wide income gap between the wealthy and the poor, the loss of consumer spending, the failure of banks to deal with the crisis,\u00a0protectionism<\/a>\u00a0and the\u00a0weather conditions of the American Midwest<\/a>.<\/p>\n\n\n\n

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STOCK MARKET CRASH OF 1929<\/h2>\n\n\n\n

In general, most historians identify the stock market crash in October of 1929<\/a> as the start of the Great Depression in the United States<\/a>.\u00a0 Beginning on October 24th, also known as \u2018Black Thursday\u2019, the\u00a0New York Stock Exchange\u00a0began to experience volatility and heavy trading which resulted in a large drop of the overall value of the market.\u00a0 Over the next several days, prominent American bankers attempted to slow the drop in the market, but all of their attempts only supplied temporary relief.\u00a0 Finally, on October 29th, also known as \u2018Black Tuesday\u2019, the market took another significant drop and the panic of the stock market crash reached its peak.\u00a0 In total, the market had lost over $30 billion with nearly $14 billion being lost on October 29th, alone.\u00a0 The crash saw the market lose over one third of its total value and led to several other major economic issues that furthered the recession, including: loss of consumer spending, increase in overall unemployment, and bank runs and closures.<\/p>\n\n\n\n

\"Stock
Stock Market Crash of 1929<\/figcaption><\/figure>\n\n\n\n
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BUYING STOCKS ON MARGIN<\/h2>\n\n\n\n

The second cause of the Great Depression was the method of purchasing stocks on margin.\u00a0 The 1920s are often referred to as the \u2018Roaring Twenties<\/a>\u2019 since it was a time of economic prosperity.\u00a0 In general, people were making large sums of money in the stock market by purchasing shares in companies.\u00a0 When you own a stock you own a part of that particular company, although usually a very small percentage.\u00a0 If the company is successful and grows its wealth then the value of the stock will increase, while if the company struggles, the value of the stock will fall.\u00a0 In the 1920s many people were buying stocks with the hope of them increasing forever, so they could sell their shares and make a profit.\u00a0 However, many investors did not have the necessary money to buy the stocks they wanted so financial institutions allowed them, including individuals, to buy stocks on margin.\u00a0 This means that people were borrowing money to buy stocks.<\/p>\n\n\n\n

The rules of the time allowed people to borrow as much as 90% of the value of the stock, meaning the investor was purchasing shares in a company with only about 10% of their own money.\u00a0 The hope was that the stock market would continue to increase and when the investor sold their shares, they could pay back the money they borrowed while still making a profit for themselves.\u00a0 However, this practice created the conditions for a major economic collapse when the stock market crash of 1929 finally occurred.\u00a0 After the crash, people were either forced to sell their stocks at a loss or continue holding on to a stock that had lost much of its value.\u00a0 As a result, many people went bankrupt from over-borrowing and being unable to pay back their debts.\u00a0 This was particularly hard on the banks as they were burdened with much of this debt, while also losing large amounts of money in the stock market crash themselves.<\/p>\n\n\n\n

\"Stock
A crowd gathers outside the Stock Exchange after the crash of 1929.<\/figcaption><\/figure>\n\n\n\n
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FAILURE OF THE BANKS TO HANDLE THE CRISIS<\/h2>\n\n\n\n

The failure of banks to handle the economic crisis of the 1929 is the third major cause of the Great Depression.\u00a0 As the economy spiraled downward into recession, banks were hit particularly hard and many did not survive the turmoil of the 1930s.\u00a0 As previously stated, banks suffered due to the stock market crash because they were heavily invested in the market themselves.\u00a0 As such, they suffered heavy losses, along with many other businesses and investors.\u00a0 Since businesses, at this time, were scaling back their operations in order to save money, they began to borrow less from the banks which further hurt the ability of the banks to survive the crisis.\u00a0 Amid all of the confusion and panic of the stock market crash of 1929, there was a series of \u2018bank runs\u2019.\u00a0 A bank run is when a large group of people attempt to pull their money out of the bank at the same time.\u00a0 It creates a crisis because the bank does not have enough actual cash on hand to provide everyone with their money, since the bank has used it to invest in other financial deals.\u00a0 Afraid they would lose their own savings during the stock market crash, people rushed to banks that were still open to withdraw their money. This massive withdrawal of cash caused banks to close and many were unable to reopen.\u00a0 Since there was no way for a bank’s clients to recover any of their savings once the bank had closed, those who didn’t reach the bank in time became bankrupt.\u00a0 Having lost much of their own capital in either the stock market crash or the bank closures, many businesses started cutting back their workers’ hours or wages.<\/p>\n\n\n\n

\"Great
Crowd at New York’s American Union Bank during a bank run early in the Great Depression. (Colorized by historycrunch.com)<\/figcaption><\/figure>\n\n\n\n
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INCOME GAP<\/h2>\n\n\n\n

The fourth cause the Great Depression was the large income gap that existed between the wealthiest people and the poorest people in the late 1920s.  For example, in the years before the stock market crash of 1929, the top one percent of earners in the United States grew to have nearly twenty four percent of the share of the total national income.  The top one percent had seen their share of the national income rise by about five to ten percent in the decade before the market finally collapsed.  Some economists and historians have argued that this income gap led to the Great Depression because it lowered the consumption rates of the working-class.  The theory holds that, since working-class people had a smaller share of the total national income, it lessened their ability to consume goods and services at a high rate without taking on large levels of debt.  As such, since working-class people could not consume at heightened levels, it put a strain on businesses and their ability to create wealth.<\/p>\n\n\n\n

\"Great
Unemployed people lined up outside a soup kitchen opened in Chicago in February of 1931.<\/figcaption><\/figure>\n\n\n\n
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DROP IN CONSUMER SPENDING<\/h2>\n\n\n\n

The fifth main cause of the Great Depression was the overall drop in consumer spending during the 1930s.  As stated in the previous paragraph, consumer spending is an important aspect of any country\u2019s economy.  It allows consumers to purchase goods and services from producers while also providing jobs and wealth for companies and their workers.  Without consumer spending, companies would struggle to generate profit and would in turn need to lay off workers.  This is exactly what occurred the years of the Great Depression.  When the market crashed in October of 1929, it caused a wave of panic across the American economy, as well as many other countries.  Banks and other businesses had lost immense amounts of wealth in the market crash and sought to solve their economic issues by decreasing their number of employees.  This caused a high level of unemployment, which furthered working-class families to cut back on their monthly expenditures, especially luxury items.  This lack of consumer spending caused additional businesses to cut back wages or, to lay off some of their workers.   Some businesses couldn’t stay open even with these cuts and had to close their doors, leaving all their workers unemployed.  What resulted was a downward cycle in which reduced consumer spending resulted in higher unemployment and high unemployment resulted in reduced consumer spending.<\/p>\n\n\n\n

\"Impacts
Destitute pea pickers in California. Mother of seven children. Age thirty-two. Nipomo, California. (Library of Congress) (Colorized by historycrunch.com)<\/figcaption><\/figure>\n\n\n\n
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PROTECTIONISM<\/h2>\n\n\n\n

The policies of protectionism<\/a> that became popular during the time period are often considered to be a major cause of the Great Depression.\u00a0 Simply put, protectionism is when a country enacts laws or policies that attempt to promote their own industries against those of other countries.\u00a0 To do this, a country usually places tariffs (a form of taxes) on goods that are imported from a foreign country.\u00a0 For example, if the United States wanted to protect its lumber industry it might place tariffs on lumber from Canada that is being sold in the United States.\u00a0 The hope of the government is to make imported goods more expensive and therefore less appealing to consumers.\u00a0 For example, in the United States, many economists and historians consider the Smoot-Hawley Tariff Act of 1930 as an example of protectionism that led to the Great Depression.\u00a0 The act imposed or increased tariffs on over 20,000 goods imported into the United States from foreign countries.\u00a0 At the same time, other countries imposed their own tariffs in retaliation and because it was a popular political view in many countries.\u00a0 Some economists have argued that these policies caused trade between countries to slow to extremely low levels which furthered the downward spiral into a recession. \u00a0\u00a0Companies, which had earlier sold their goods around the world, were forced to sell primarily to their own country, which lessened their ability to generate profits.<\/p>\n\n\n\n

\"Smoot-Hawley
Willis C. Hawley (left) and Reed Smoot in April of 1929, shortly before the Smoot\u2013Hawley Tariff Act passed the House of Representatives. (Colorized by historycrunch.com)<\/figcaption><\/figure>\n\n\n\n
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DROUGHT CONDITIONS IN THE AMERICAN MIDWEST (DUST BOWL)<\/h2>\n\n\n\n

The last cause of the Great Depression was the drought conditions that affected the American Midwest during the timeframe of the Great Depression.\u00a0 While not technically a direct cause of the economic conditions of the Great Depression, the drought had a profound effect on farming communities in the United States at the time and worsened life for many people.\u00a0 Often referred to as the\u00a0Dust Bowl<\/a>\u00a0or the Dirty Thirties, the drought conditions impacted large areas of the Great Plains in Canada and the United States but was generally centered on Colorado, Kansas, Oklahoma and Texas.\u00a0 In general, extensive farming was carried out in these areas in the decades before the Great Depression.\u00a0 As a result, historians now understand that aggressive farming practices led to a deterioration in the soil quality and caused the top level to erode into a dust.\u00a0 When strong winds hit the region, it quite literally caused entire fields to be swept away across the country.\u00a0 The dust was lifted high into the air and caused a blackening of the sky.\u00a0 Because of the Dust Bowl, many families were forced from their farms.\u00a0 Famously, many of them relocated to the west coast in hopes of finding employment, but were often met with the harsh unemployment caused by the Great Depression.<\/p>\n\n\n\n

\"Dust
Old machinery in a barn lot in South Dakota in May of 1936 during the events of the Dust Bowl. (Colorized by historycrunch.com)<\/figcaption><\/figure>\n\n\n\n
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CAUSES OF THE GREAT DEPRESSION – SUMMARY<\/h2>\n\n\n\n

In general, the Great Depression was a major event of the 20th century.  Historians have identified several different causes of the recession, including: the stock market crash of 1929, the purchasing of stocks on margin, the wide income gap between the wealthy and the poor, the loss of consumer spending, the failure of banks to deal with the crisis, protectionism and the weather conditions of the American Midwest.<\/p>\n","protected":false},"excerpt":{"rendered":"

Historians have identified several different causes of the Great Depression, including: the\u00a0stock market crash of 1929, the purchasing of stocks on margin, the wide income gap between the wealthy and the poor, the loss of consumer spending, the failure of banks to deal with the crisis,\u00a0protectionism\u00a0and the\u00a0weather conditions of the American Midwest.<\/p>\n","protected":false},"author":1,"featured_media":5426,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"iawp_total_views":9,"footnotes":""},"categories":[32],"tags":[57,66,15],"class_list":["post-2037","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-great-depression","tag-american-history","tag-great-depression","tag-history"],"_links":{"self":[{"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/posts\/2037","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/comments?post=2037"}],"version-history":[{"count":3,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/posts\/2037\/revisions"}],"predecessor-version":[{"id":5430,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/posts\/2037\/revisions\/5430"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/media\/5426"}],"wp:attachment":[{"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/media?parent=2037"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/categories?post=2037"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/crunchlearning.com\/website_ec2cbfb0\/wp-json\/wp\/v2\/tags?post=2037"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}