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What caused the Great Depression?

What caused the Great Depression?

The most severe economic downturn in the history of the industrialized world is known today as the Great Depression, and it occurred, for the most part, in 1930s. Companies failed, banks went under, and more than 15 million people lost their jobs. So what exactly caused the Great Depression?

The roaring '20s

Line of women dancing the Charleston in traditional 1920s party attire
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During the 1920s, the United States enjoyed economic prosperity. In fact, the total wealth of the U.S. increased by more than 100% from 1920 to 1929. People across the country enjoyed the extra spending cash, transforming America into the consumer society that it is today. To keep up with the newly created material culture, manufacturing was at its peak.

Imagining this lifestyle would last forever, many people purchased goods on credit. In addition, everyone from big-wig CEOs to street sweepers were putting their money in the stock market in hopes of sizable returns on their investments. This was a bad combo.

A slight recession came about in the middle of 1929, though President Hoover assured people it was nothing and to go about their lives. People continued to buy shares that would soon plummet in value, and they often paid on credit.

Stock market crash

Up close view of stock market computer indicating a fall in stock prices
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On October 24, 1929, the over-inflated stock prices began to drop, and investors started to frantically sell their shares. Almost 13 million trades were made on what became known as “Black Thursday.” Only five days later, another 16 million shares were sold during another panic called “Black Tuesday.” Many stocks were now worthless. Those who had bought on credit were ruined.

After the crash, nobody wanted to go out and spend any money. They had lost all faith in the market. Now, factories that had been pumping out goods for a decade, couldn’t sell their products. They had to lay off workers and decrease wages to compensate.

With the lack of money coming into American households, many people had to borrow from the banks to pay for basic necessities. Foreclosures and repossessions reached an all-time high as more and more people couldn’t afford their payments, leaving many homeless.

Worldwide effects

While it may seem as if the Great Depression was strictly an American issue, its effects could be felt worldwide. Other countries, especially those in Europe, borrowed money from the United States during World War I. As interest rates began to rise at the end of the 1920s to combat inflation, countries, much like everyday people, had issues paying off their loans. The demand for U.S. exports fell sharply, which only encouraged the decrease in manufacturing further.

It's important to remember that most countries used the gold standard for their currency during this time, which meant that when one country showed signs of deflation, any country trading with them would see it, too, as commodity prices changed. When one fell, they all fell.

The United States was hit the hardest, but countries across the world could feel the effects of the Great Depression. Industrial production was cut in half in some countries.

Recovery

Franklin Roosevelt statue
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One of the more effective ways that countries fought the Great Depression was to move away from the gold standard. Without having to acquire more gold in order to increase value, countries could print more money to combat the heavy deflation and stimulate the economy, allowing greater control. It’s believed that leaving the gold standard is responsible for 90% of the recovery from the Great Depression.

In the United States, President Franklin Delano Roosevelt also implemented his New Deal, which created several new federal agencies designed to oversee and regulate specific industries. He also created the social security and welfare systems to help those who had been hurt by the depression, and also to create a safety net for people in the future.

With all the strides that FDR took during his time in office, the official ending of the Great Depression came in the 1940s with America’s entry into World War II. The explosion of manufacturing and the need for soldiers meant jobs became widely available once again. Unemployment dropped to below pre-depression levels, and the Depression was finally over.

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