What Caused The Great Depression?

The Great Depression was a global phenomenon that significantly changed the course of history. In America, people lost their life savings when banks collapsed. The severe decline in US capital triggered economic troubles overseas. The resulting German poverty ultimately contributed to the rise of Nazism and World War II! What sparked the world-changing Great Depression?

Historians cite many contributing factors. Most agree that the downturn began with the US stock market crash of 1929. Throughout the 1920s, rapid economic growth and industrialization had been accompanied by easy lending. There was a vast amount of unsecured consumer debt. But in October of 1929, the prosperity and optimistic speculation of the “roaring twenties” suddenly collapsed. A Black Thursday on Wall Street was followed by a Black Tuesday, and investors quickly lost $40 billion! Many had invested their life savings and mortgaged their homes.

President Herbert Hoover failed to realize that his nation’s economy could collapse; he believed he was witnessing a mere recession and said the market would naturally recover within a couple of months. He refused to establish a federal unemployment program, and he dismissed public construction projects as “progressive ideas” that wouldn’t improve the economy. Hoover was a sort of “trickle-down” theorist who was inclined to support businesses before unemployed individuals. He tried to protect American companies with the Hawley-Smoot Tariff, but by reducing trade he only worsened the faltering American and global economies.

When the American economy sputtered to a standstill, others suffered through association. America had been an important trade partner for England, France, Germany, Japan, Argentina, and Brazil. These countries suddenly saw sharp declines in demand for their products. Also, all of the countries’ currencies were linked through their adherence to the gold standard. Virtually every industrialized nation suffered wholesale price declines of 30 percent or more at the start of the Depression.

The 1930s were particularly harsh for farmers in the United States. In the Great Plains, the Depression was worsened from 1933 to 1939 by a severe drought and dust storms. Unable to produce crops, farmers lost their farms and banks seized their homes. Farm families were reduced to living in shantytowns, which Hoover’s critics called Hoovervilles. These farmers and other destitute citizens turned to bartering for basic goods in the absence of cash.

Farmers’ losses increased bank failures in rural areas, and urban bank failures had already been escalating rapidly. When stock investors lost their capital, banks started to fail at ten times the 1920s rate. Nine thousand banks failed during the 1930s. And when banks failed, customers lost their savings! By the end of Hoover’s term in 1933, Americans had $140 billion missing from their accounts. The bank failures limited new enterprise and growth across the country. Banks started to limit how much money customers could deposit, and loans became scarce. Hoover was not about to win a second term.

After Franklin D. Roosevelt was inaugurated in 1933, he instituted a bank holiday. Banks would rest for several days while Congress passed the Emergency Banking Relief Act to stabilize the banking system. The new President told his nation, “The only thing we have to fear is fear itself.”

Roosevelt tried to end the Great Depression by creating dozens of government agencies to support the people. Unemployment fell by two-thirds during his first presidential term. If it weren’t for his programs, surely many more people would have died from starvation and lack of shelter. Still, daily life remained precarious for most Americans until the depression ended six years later with America’s involvement in World War II.