History Brief: The Causes of the Great Depression
Causes of the Great Depression
The 1930s saw a prolonged period of economic difficulties known as the Great Depression.
What caused the Great Depression? Could it have been prevented?
In the 1920s, the United States was becoming the world’s leading economic nation. The European
nations had been devastated by World War I, and America was prospering. The introduction
of electricity to American homes had revolutionized day-to-day life. Electric washing machines,
vacuum cleaners, irons, radios, and refrigerators were all in high demand.
Increased advertising on radio, and in magazines, only strengthened this desire for new devices.
Advertisers were stressing to the American people that they might be the last family
on the block to have the latest, greatest product. Americans found themselves needing
items that, just a few years before, did not even exist.
Unfortunately for consumers, many of these items were too expensive for the average person
to buy. A family might have to save for years to purchase a washing machine or an automobile.
This led to the development of installment buying, or buying on credit. A consumer would
purchase an item by making a small down payment and pay off the rest of the price in monthly
installments. This allowed families to own items that they could only dream of otherwise.
Consumers weren’t the only ones buying on installment. This same method of purchasing
was being used in the stock market. Investors would purchase stocks from a broker, paying
as little as 10% of the stock’s price. As long as the stock price continued to rise,
they could pay off the balance with little difficulty. The stock itself would serve as
collateral, meaning if the stock price fell, they would lose the stock and still have to
pay off the loan. This method of purchasing stocks was known as buying on margin.
In the 1920s, more and more people were turning to the stock market as a method of making
fast income. By 1929, it was estimated that about 4 million Americans were invested in
the stock market. Many of these inexperienced investors were also engaging speculation.
This meant they were gambling financially with high risk stocks. If the stocks became
successful, it meant quick profits. However, speculating on stocks, combined with buying
those stocks on margin, could mean financial doom for investors if the stock market took
a turn for the worse.
That is exactly what happened in the fall of 1929. In the last week of October, the
stock market began to fail. Nervous investors began to sell their stocks rapidly, which
intensified the problem. On October 29, 1929, the stock market collapsed. This day is remembered
as Black Tuesday. Banks were crippled by the stock market crash.
In all, 641 banks closed by the end of 1929. More than 5,000 would close in the next several
years. Many banks might have survived, but with so many closing, Americans panicked.
They hurried to their own bank to withdraw their money, fearing it was about to shut
down. This is known as a “run on the bank”. With no money to operate with, the bank was
forced out of business. This cycle of disaster only continued. Once
consumerism slowed, salespeople were laid off. Many who worked in manufacturing also
lost their jobs or had their hours and pay severely cut. As the Depression deepened,
millions of these employees were laid off. With no income, the average citizen could
no longer afford to repay the debts they had incurred through buying on installment. Since
no one was repaying their debts, this crippled even more businesses and financial institutions.
The end result was millions more losing their jobs.