What were the causes of the great depression?

In America, through the 1920's, new industries and new methods of production developed. America was able to use its great supply of raw materials to produce steel, chemicals, glass and machinery that became the foundation of an enormous boom in consumer goods, making America more prosperous. Many US citizens invested on the stock market, speculating to make a quick profit. This great prosperity ended in October 1929. People lost confidence as rumours spread that the boom might be over, the stock market crashed, the economy collapsed and the USA entered a long depression. Poverty, unemployment and homelessness became big problems.

The Wall Street Crash happened on 24th October 1929 and led to the Great Depression. Was the Wall Street Crash actually the cause of the Depression?

In the great boom of the 1920's many companies were doing well. Many people bought shares in these companies 'on the margin'. Between 1920 and 1929 the number of shareowners rose rapidly from 4 million to 20 million. There were thousands of inexperienced speculators, all buying shares in companies that they knew nothing about. They didn't understand how well the company may do, they just followed others' advice and stories in the newspapers and invested to make a profit and pay back the money which they had borrowed to buy the shares in the first place.

The banks were also involved in this share speculation. Many banks lent money to anyone, regardless of whether they had any money to pay them back. This turned out to be a big mistake, especially as many banks were small banks as laws stopped large chains from forming. The banking system was very unstable, so was the stock market boom of the late 1920's which people thought would continue forever.

By the late 1920's there was a falling demand for products, due to people having either all they wanted or all they could afford, but just as many goods were being produced as before. This led to overproduction which led to a drop in profits, which led to industrial cutbacks because all the products were not selling, so less needed to be made. Because fewer products were being made than at the beginning of the boom, fewer people were needed to produce products. This led to many workers being laid off. Unemployment levels started to rise.

By 1928 speculation had really taken hold. In the 6 months between March and September 1928 the shares in Union Carbide rose from $145 to $413. During the boom of the 1920's there was a great confidence that prosperity would continue indefinitely. This confidence lasted well into 1929 but then the sales of goods began to slow down, which prompted investors who had some knowledge of the companies they were investing in to sell their shares while prices were still high. This information that people were selling their shares got out to other shareholders who decided that they would follow knowledgeable people's tips and also start selling their shares, even in reputable 'blue-chip' companies. There was a chain reaction as the prices of shares were forced down along with the enormous confidence there had once been.

The banks then started re-calling loans, but because there were so many small banks who had lent out money unwisely this led to over 5000 banks collapsing in the space of 6 months. This then led to many more businesses collapsing, as the majority of the country had no money to pay for new goods or products like many had done previously. 'Black Thursday' was the name given to October 24th 1929…the stock market was doing terribly. 6 banks spent $40,000,000 buying shares in companies to try and gain back the confidence, but it didn't work. Four days later on 'Black Tuesday' was the day that the depression really started and 16 million shares changed hands. By this day over $8,000,000 had been lost by stockbrokers. Even J D Rockafeller could not sway the public's opinion and could not convince them to buy any stocks and shares. Many had foolishly withdrawn all their savings to gamble on the stock market and were left with nothing. Many more were left in poverty, as there was much more unemployment and many wage cuts. The demand for goods fell away and even even more cut the industrial production. This led to the unemployment level rising greatly to 12 million by 1932. By this time the majority of people could afford no luxuries and many couldn't afford to pay their mortgages, which led to many evictions. By October 1929 people started to sell shares for whatever they could get for them, which resulted in share prices tumbling drastically. The suicide rate also went right up as thousands of people found their lives ruined.

The Wall Street Crash was the start of the Great Depression, but there were many weaknesses in the US economy before the Wall Street Crash.

One reason why the boom did not continue and the Depression began was the fact that the economy was actually fairly weak to begin with. A lot of US citizens were never participating in the boom from the start. The US economy did look strong during most of the 1920's with new gadgets and new hobbies - but not for the majority of people. There were some wealthy individuals but 60% of people wer living ...

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The Wall Street Crash was the start of the Great Depression, but there were many weaknesses in the US economy before the Wall Street Crash.

Some individuals were influenced by the advertising campaigns that went on, telling them to buy more and more new products. An easy solution for these people seemed to be to buy on credit. It seemed a good solution, but eventually they had to pay back instalments on what they had bought. Credit gave people the impression that they could afford more than they really could, but eventually they had to stop buying, as their wages weren't high enough. Sooner or later the people would have to pay back what they owed and stop buying new goods. Many people were also conned into buying products or land with their money. The gullibility of some Americans drove them into debt. One of the most famous financial tricksters was Charles Pansy who fooled many Americans into paying money to supposedly make profit by doing nothing at all and into buying land that they didn't know where it was, especially in Florida, which at that time was just swamp land! These people stopped participating in the boom when they realised they were being tricked and couldn't really afford it. There were many groups of people who could not afford to take part in the consumer boom. Coal miners were one such group.

In the 19th century the coal mining industry had expanded greatly, creating many jobs, but with the introduction of oil and gas the production of coal was decreased along with the amount of jobs at the pits. Many American miners lived in poverty in the 1920's. Similarly the cotton industry was in a state of change.

The cotton industry was one industry that suffered particularly badly; this was partly due to the introduction of synthetic fibres such as nylon and rayon and partly due to the change in fashions. In 1914, 19 yards of fabric were needed to create an average ladies outfit, but by 1928, the fashions had changed and the average amount decreased dramatically to just 7 yards. This obviously decreased the profits made by the textile industry. Some towns that relied heavily on the textile industry had already entered the depression whilst the boom was still going on in many parts of the USA. This decline in some industries was very damaging, as many people became unemployed. This is damaging because it means that these people could not contribute to the consumer boom and many could not afford necessities. Unemployment was a major feature of the depression.

Overproduction was also common in the agricultural industry, which proved to be a large problem. Wheat prices fell by 75% and the total income of farmers by about 70%. The farmers were another of the groups of people that were never rich enough to participate in the boom to start off with.

New machinery and farming techniques helped the farmers, farming wheat, maize and corn on the prairies. During the boom in the USA, Americans discovered many different types of foods and began to eat more expensive foods such as meat; they ate less bread so less grain was needed. Also, the grain used to be exported to Europe, but as they were still recovering slowly from the effects of WW1, they also needed less grain, as many people in European countries were living in poverty and were unemployed. Farmers had discovered new techniques that allowed them to be more productive, along with a series of good summers. This would have been a good thing if the demand had have been high, but this rise in production unfortunately coincided with the decrease in demand. Farmers were overproducing, and this was during the boom. Farmers borrowed money, like many other Americans, from banks. They used this to buy new machinery, but many farmers were making too little to pay their debts. Over one million farmers were evicted from their farms during the 1920's and many more lived in poverty.

Farmers made up a fairly large part of the population and another group (although many were also farmers) who also made up a large part of the population, were the black Americans who made up between 10 and 15% of the population.

Millions of black people lived in the southern states such as Alabama. Nearly all blacks were too poor to buy consumer goods, as most were very poor farmers who were in debt. Most whites in America were very racist and did not think that equal rights for blacks should be allowed. The Ku Klux Klan was a very racist group who made sure that any blacks that tried to live a normal life, without living in poverty couldn't make any economic progress. The KKK and the racist Jim Crow laws put many restrictions on black people's freedom. Even after 1900 when black people moved into the north of the country they were still discriminated against and lived in ghetto areas such as Harlem in New York. Black people did not have equality and there was much truth in the saying that Negroes were "the last to be hired and the first to be fired." Even when they were doing the same jobs as whites they were getting worse wages, so the blacks and the farmers, the textile workers and the miners (who made up a large proportion of the country) could not even afford the consumer goods in the boom.

America's foreign policies also helped to restrict the market for its goods by the immigration controls. Prior to 1922 America had welcomed immigrants who had been young, strong and ambitious people. After the policy, introduced in 1922, the population growth was slowed therefore the market for goods restricted. If the majority of the USA had originally participated in the boom then it would probably have continued for longer because there would have been a wider target market, but there were millions of Americans who could never afford the goods in the first place.

All of these groups being poorer than the rest of the country meant that there was a major maldistribution of income. Some studies suggested that up to 60% of the population were living on or below the poverty line. There were some very wealthy individuals such as John D Rockafeller, but not in comparison to the amount of Americans altogether. Many Americans did have good jobs and did improve their standard of living in the 1920's. In the late 1920's it was estimated that the richest 1% of Americans owned approximately 40% of the country's wealth.

A major reason for the depression was that whilst company profits rose by 72% during the 1920's wages for workers rose by just 7%. This meant that only a very small minority of people could genuinely afford as many consumer goods as they wanted, but this minority could not possibly keep company profits rising. The workers made up a fairly large proportion of the country and because they (and the groups previously identified) could not afford the products themselves. With hindsight, the general public could not sustain the boom and the knock on effects would be that the companies' profits would drop because of the greediness of some rich individuals who would not increase wages. I think that this unequal distribution of wealth, along with the industrial problems mentioned, is a very significant reason why the depression happened. Maybe if the employers hadn't have let the difference between the increase in company profit and the increase in wages be so vast, then the boom would have carried on, as the surplus goods, which many workers couldn't afford to buy, would have been sold and profit would have continued to be made.

As well as many people not being able to afford goods in the first place, there was another factor, which helped stop the market from expanding - the demand had been met.

Cars, vacuum cleaners, radios, telephones, cookers, washing machines and typewriters were popular items bought by US citizens during the great boom, but by the late 1920's, most Americans who could afford these new goods had purchased them and the need was satisfied. The poor could not afford them and the rich had already got them.

The amount of products being produced exceeded the amount being sold in the USA. These items could have then been exported and sold abroad but by this time, most foreign countries did not sell goods made in the USA because of the tariffs that had been introduced, so when the demand in the US was satisfied there was no growth of exports to compensate. One of these tariffs was the 1922 Fordney-McCumber Tariff, on imports. This seemed like a good idea because it prevented foreign competition, but backfired. Europe needed the profit made from exporting their goods to the USA in order to help them re-build from WW1. They didn't sell America's products but also couldn't pay back their war loans. The Smoot-Hawley Tariff was passed in 1930 for extra protection to American industries, but ended up spreading the effects of the depression all over the world.

So, the excess products could not be sold in the USA and could not be sold abroad. As soon as the demand was satisfied, overproduction began. This led to industrial cutbacks and because there weren't as many products being made, not as many people were needed to make them. Workers were laid off as a result of overproduction. The ex-workers could not afford new products which meant that more workers were laid off, who in turn bought less, and so the vicious circle continued. There were industrial cutbacks in many fields, not just consumer goods. When the demand for cars went down, so did the demand for glass, oil, rubber, service stations and motels, therefore there was much unemployment. Unemployment was a major feature of the depression, so overproduction did, in ways, lead to the depression.

So, there appears to be much evidence suggesting that the US economy wasn't too healthy even before 1929. The Wall Street Crash occurred just before the depression began but that does not mean that it was the main cause of the depression, but what exactly did cause the economy to collapse?

Overall, I feel that the US economy was not as strong as it seemed and there were lots of problems weakening the economy at the time of the depression, the economic boom was somewhat false and it was obvious that it could not possibly continue forever. Many Americans thought that they could become rich because the country was doing so well and knew little about the state the country was in. They gullibly believed that they could make money by doing nothing and millions invested in shares in companies they knew nothing about. Many people made profit, as the whole country appeared to be doing well, everybody were confident that the boom would continue. Therefore, when the first signs appeared that the sales of goods were beginning to slow down, better-informed investors began to sell their shares. Suspicion spread and soon everybody began to sell. I think that a main cause of the Wall Street Crash was that people were ill informed and believed whatever they were told, but I don't feel that this is a major cause of the depression, just the incident which triggered it.

I think that the Wall Street Crash is just one symptom of the many problems with the US economy and even if it hadn't have occurred in 1929, the boom couldn't have lasted much longer, as too many goods were being produced, workers were continually being laid off, therefore companies weren't doing as well, and the unemployment rate was rising. This would have happened with or without the Wall Street Crash, so I don't think that the depression was caused by the Wall Street Crash.

Many of the other causes are inter-related, therefore it is hard to decide which is the most significant. I think that the protectionist policies were a key cause as it was obvious that the boom could not last forever on the sale of consumer goods in the USA, as people would no longer have a desire to buy more and more of the same items. Exporting the goods would have been a sensible suggestion. If the protectionist tariffs had not have been introduced, then Europe could have been better off and so could the USA.

Although the protectionist policies were problematic I think that the unequal distribution of wealth was a long-term cause, which played a very significant part in leading to the depression. If the Americans had have bought the goods to start with then there would have been no need to export them anyway. The boom was bound to come to an end some time, as a large proportion of the country (farmers, blacks, coal miners etc) could never afford the great new goods anyway. Only a small minority of the country could honestly afford the goods - the rest could not afford them or bought on credit and fooled themselves. This meant that when the minority had bought what they wanted, the surplus goods could not be sold to the blacks, farmers, miners, textile workers and the 60% of the country living below the poverty line, before exports were even thought about. If a larger percentage could have afforded these goods then the boom could have continued for longer.

Overall, I would say that the depression was a result of many linked reasons, leading from a reason, which had been present for years - the fact that there were far too many poor people and far too few rich people to keep the economic boom going.