Analyzing the Causes of the Great Depression
America had gone through hard times before: a bank panic and depression in the early 1820s, other economic hard times in the late 1830s, the mid-1870s, and the early and mid-1890s. But never did it suffer an economic illness so deep and so long as the Great Depression of the 1930s.
Economists have argued ever since as to just what caused it. But it’s safe to say there were a bunch of intertwined things that contributed. Among them:
- The stock market crash. The stock market soared throughout most of the 1920s, and the more it grew, the more people were eager to pour money into it. Many people bought “on margin,” which meant they paid only part of a stock’s worth when they bought it, and the rest when they sold it. That worked fine as long as stock prices kept going up. But when the market crashed in late October 1929, they were forced to pay up on stocks that were no longer worth anything. Many more had borrowed money from banks to buy stock, and when the stock market went belly-up, they couldn’t repay their loans and the banks were left holding the empty bag.
- Bank failures. Many small banks, particularly in rural areas, had overextended credit to farmers who, for the most part, had not shared in the prosperity of the 1920s and often could not repay the loans. Big banks, meanwhile, had foolishly made huge loans to foreign countries. Why? So the foreign countries could repay their earlier debts from World War I. When times got tough and the U.S. banks stopped lending, European nations simply defaulted on their outstanding loans. The result of all this was that many banks went bankrupt. Others were forced out of business when depositors panicked and withdrew their money. The closings and panics almost completely shut down the country’s banking system.
- Too many poor people. That may sound goofy, but it’s a real reason. While the overall economy had soared in the 1920s, most of the wealth was enjoyed by relatively few Americans. In 1929, half of the families in the country were still living at or below the poverty level. That made them too poor to buy goods and services and too poor to pay their debts. With no markets for their goods, manufacturers had to lay off tens of thousands of workers, which of course just created more poor people.
- Farm failures. Many American farmers were already having a hard time before the Depression, mostly because they were producing too much and farm product prices were too low. Things were so bad in some areas that farmers burned corn for fuel rather than sell it. Then one of the worst droughts in recorded history hit the Great Plains. The Midwest became known as the “Dust Bowl.” Dry winds picked up tons of topsoil and blew it across the prairies, creating huge, suffocating clouds of dirt that buried towns and turned farms into abandoned deserts.