The Great Depression would cause widespread poverty across the American population during the 1930’s. What caused the Great Depression?
The Great Depression was caused by the unchecked consumption, banking practices, and wealth inequality that characterized the American economic climate of the 1920s.
There are many schools of thought on the primary cause, but most historians agree that it was a complex mix of events and patterns that plunged America into the recession.
While nailing down the direct causes of the Great Depression is a complex endeavor, there a few distinct events and patterns that created the recession.
The Roaring 20’s
While corporate America had been relatively prosperous and steadily grown throughout the 1920’s, the economic prosperity of ordinary Americans began to decrease towards the end of the decade. This inequality limited the growth of the U.S. economy, as the elite profits of the rich were often hoarded and stored away instead of being put back into the nation’s economy.
As manufacturers expanded during the 1920’s they found that their inventory was stacking up, as consumers weren’t spending enough to match their supply.
The economic prosperity of the 1920’s created massive wealth inequality across the socioeconomic classes of America. Corporate profits rose throughout the decade, and though ordinary workers were making more money than ever at the beginning of the 1920’s, the wages of workers gradually decreased or remained stagnant.
Due to many of the products that were increasingly becoming more common throughout the 1920’s, such as the automobile, many members of the American middle class found themselves in enormous debt by the time of the 1929 crash.
The stagnation of wages and increase in debt would lead to decreased consumer spending and a surplus of goods, which led to a reactionary decrease in production by manufacturers.
The Depression Begins
As production slowed down during 1929, stock prices continued to increase. However, throughout September and October these prices suddenly began to decrease, causing panic among investors that would explode on October 29, on a day known as “Black Thursday.” This panic made shares owned by investors worthless overnight.
The decrease in production was part of a vicious cycle of economic collapse and chaos. Consumers had no money to spend, which caused production to decrease, which then caused factories and employers around the country to fire workers.
This created a massive surge of unemployment throughout the American work force, with 12 million Americans being unemployed by 1932. Along with these mass layoffs, those who were lucky enough to stay employed were ravaged by massive wage cuts.
After the panic of the stock market crash, many Americans lost faith in the financial institutions of the country. There was a mass scramble in American banks, as Americans rushed to withdraw their money and store it themselves or invest in gold.
As Americans began to withdraw their money from banks across the country, many of the banking institutions themselves had investments in shares in the stock market, which were now worthless.
This made banks gradually run out of money altogether. Bank deposits were often uninsured, so when the banking system began to collapse many Americans completely lost their savings.
Many have put the blame on the Federal Reserve for the collapse of the U.S. banking system of the 1920’s, as it had very little regulation and oversight. It also provided very little assistance to the rapidly failing banking system during the beginning of the recession.
Some have also put the blame on the tariffs put on European imports after the stock market crash. These tariffs were put in place to help the growth of American companies, but instead removed international trade opportunities and constricted the market further as European trading partners put retaliatory tariffs on American goods.
From Hoover to Roosevelt
President Hoover had a very noninterventionist, conservative approach to solving the challenges of the Great Depression. As the plight of Americans worsened every year of his presidency, he advocated that the recession should be handled at the local and state levels instead of by the federal government.
Hoover was very unpopular by the end of his term, and a new candidate who promised a more hands on approach to getting the country out of the depression would beat Hoover in a landslide.
Franklin D. Roosevelt would be inaugurated in 1933, when unemployment was at a staggering 25%. His administration marked a departure from the conservative attitudes of the Hoover administration.
With the rollout of New Deal programs and the shift to a war economy after the onset of World War 2, Roosevelt’s administration gradually helped Americans surmount the Great Depression.