Home » Great depression » Causes of the great depression

Causes of the great depression

Between the late 1890s, after the panic of 1893, and the late 1920s, the American people led good lives in which most prospered.  In the 1920s the problems that led to the Great Depression were dispersed over a time of maldistribution of wealth, and what was called a bull market.  A bull market is a stock market that is based on speculation.  Speculation was a system of borrowing money to buy stocks and selling for a profit.  Speculation only worked if the stock market was on the rise though.  To this day people who have not been properly educated about the Great Depression believe that President Hoover was the cause.  The idea that President Herbert Hoover caused the Depression could have arisen from the fact that he was the President at the time the Depression began.  However, the people who do not believe that President Hoover was the cause deem the crash of the stock market in 1929 as the real culprit.  The truth behind the stock market crash is that it was the event that caused the already unstable economy to go over the limit.

If the president and the stock market crash did not cause the Great Depression, then what did?  According to research done on the Great Depression, the causes rest on of different factors, but can be put under two main categories.  The responsibility for the Great Depression falls not only on the Stock Market Crash, but also on the maldistribution of wealth, an unstable economy and the wild stock market practices of the 1920s.

The largest reason for the growing gap between the rich and the working-class people was the sudden increase in manufacturing during the 1920s.  The people of the working class were significantly increasing their output, but their wages only increased slightly.  For example, the average worker out put from 1923-1929 increased about 32%, but the average income of the worker only increased about 8% (Gusmorino, Main Causes of the Great Depression).  Therefore one may conclude that wages only increased one-fourth the amount production increased.

Another amazing feat of the manufacturing increase was that prices for goods stayed the same, therefore the executives in the companies were keeping the mass amounts of profit that were now coming into the company.  In fact, one can see that top executives in a certain company increased significantly because their salaries from 1923-1929 rose 64% (Gusmorino, Main Causes of the Great Depression), eight times more than what the workers wages increased.
The roaring twenties was an era when the United States prospered tremendously. The national income rose from $74.3 billion to $89 billion (Gusmorino, Main Causes of the Great Depression).  The whole American population did not live through the benefits of the Coolidge Prosperity.  For example McElvaine, in his research on the Great Depression, stated, in 1929 the top 0.1% of the population had an income equivalent to the bottom 42% of the population, (McElvaine, Causes of Depression).  That same top 0.1% of the population in 1929 had 34% of all the savings, while 80% of the population had no savings at all.  A good example of this maldistribution of wealth can be seen with Henry Ford.  In 1929, Ford reported an income of fourteen million dollars, while the average income of the American people was seven hundred and fifty dollars annually (McElvaine, Causes of Depression).  If one were to calculate these numbers by present daily standards, with the average income at eighteen thousand dollars, Henry Ford would be making an astonishing three hundred and forty five million dollars.  However, one should be reminded that Ford was not the only man in America making this amount of money, there were many people just like Ford around the Nation.  Comparing the 1920s to today, one could say that such businessmen are like the Internet CEOs today.  With such a growing gap in the income of the people, it was without surprise that such a catastrophic event could occur.


The Federal government also could be held responsible for contributing to the growing gap between the rich and the working-class.  The President at the time, Calvin Coolidge, and the conservative Congress favored business; additionally, they supported the wealthy individuals who controlled the business.  One great example of the federal government helping the wealthy of the nation came in the Revenue Act of 1926.  This acted decreased the amount taxed on a persons annual salary.  For example, a business owner in the beginning of 1926 would have expected to pay six hundred thousand dollars on his annual one million dollar salary; however, when the Revenue Act of 1926 was passed, this businessman was obligated to pay only two hundred thousand dollars of his annual salary (None, Causes of The Great Depression).

The driving force behind this tax cut was President Coolidge and Andrew Mellon, the Secretary of the Treasury.  Besides the executive and legislative branches, the judicial branch was known for their influence in the growing gap between the socioeconomic classes.  In a 1923 Supreme Court case named Adkins vs. Childrens Hospital, the Supreme Court declared minimum-wage legislation to be unconstitutional (Kanjas, Timeline of the Great Depression).  The impact of this a declaration showed that employers did not have to pay their workers any certain wage so that the top executives and stockholders of a company may collect larger profits.

The large gap growing between the United States citizens was creating a very unstable economy.  According to economists who have studied the Great Depression, in order for the economy to operate appropriately the total demand must equal the total supply.  Unfortunately in the twenties this equilibrium with supply and demand was not held; there was incredible excess in the amount of goods produced and unfortunately the price of goods was not dropping and the working class could not afford to buy them.  The maldistribution wealth and income was one of the most profound causes of the Great Depression.

The United States working class would generally spend what they could as soon as they received their paychecks.  In fact, three quarters of the United States population would spend most of or nearly all of their money on consumer goods, food, clothing, radios, and cars.  Everyone seemed to be living a good life despite the fact they did not have exceptional wages.  Middle-class familys income was usually around two thousand five hundred dollars.  What was most amazing about the income distribution was the fact that 55% of the national income was distributed to the top 25% of the national population (Nordean, Causes and Cures).  The working and middle-class of this time lived for three things; credit sales, luxurious spending and investment from the rich.  The way in which most people could afford to buy what they wanted, was credit.

The credit problem appeared as a result of the middle-class wanting to spend money on a luxurious living.  The key for the middle-class to living a luxurious living was the magical word, credit.  Credit was something anyone could have and with credit they could buy whatever they wanted and not have to worry about paying for it until a later time.  The concept of buying now and paying later caught on quickly with the American people.  At the end of 1920s, 60% of cars and 80% of radios were bought on credit (Gusmorino, Main Causes of the Great Depression).  Between 1925 and 1929 the credit amount in the United States rose from $1.38 billion to $3 billion (Gusmorino, Main Causes of the Great Depression).

The President could also be seen taking part in the whole credit trend.  A Presidential committee, unidentified by the author, stated that credit was the, telescope the future into the present, (None, Causes of the Great Depression).  This notion of the telescope to the future meant that when the future was to come, there was little to buy that already had not been bought.  This concept of credit was good for the time being, however, it made the time in which the people who could not originally buy these products even worse when they had to pay the credit companies.  Furthermore, the wages of the working-class could not go to new products to buy, or sometimes in extreme cases food, because they had to pay for products that had already been previously purchased by credit.
The United States economy required the middle-class population to continue their luxurious spending and increasing investment from rich people to continue prosperity.

The significant problem with this idea of the United States economy being based on the rich investing and the middle-class credit use was that the economy would gain a false wealthy confidence that would later on hide the oncoming Depression.  If conditions in the United States economy took a slight turn off track (as they did in the stock market crash of 1929), investing by the rich and spending on luxuries would come to a sharp halt.  According to many economists, it is important for savings and investment to stay balanced.  If the levels of investment were to increase suddenly, the level of production should increase.  However, because of maldistribution of income that existed in the 1920s, the sudden increase in investment created problems for the economy.

The great amount of investment and credit use led to the widespread amounts of market speculation.
Maldistribution of wealth existed not only among the social classes, but also in the business world.  For example, in 1929, 200 corporations controlled approximately half of all the cooperate wealth (McElvaine, Causes of Depression).  While many industries, such as automobiles for example, were thriving in the new industrial America, industries such as agriculture were still prospering but it families began moving off the farms and into the cities; furthermore, farm life in America was being cut down.  In 1929, Ford Motor Company reported earnings of more than $345 million; farm prices fell about 72% (McElvaine, Causes of Depression).  In 1929, the average income of an American was $750, but in that same year the average income of someone working in agriculture was about $273 (McElvaine, Causes of Depression).  Therefore one could conclude that industry during the 1920s was prospering but not equally between the industries.  In fact, most companies that succeeded in the 1920s were linked to the automotive or radio industry somehow.

Agriculture had been greatly supported by the federal government during World War I.  The federal government bought bushels of wheat from farmers at an unheard of price of two dollars a bushel.  After the war, the federal government stopped supporting the agricultural industry and the price of wheat fell back to sixty-seven cents (None, Causes of Depression).  Farmers increasingly fell into debt, they began selling their land and this became tenant farming.  The farmers during this time were not known to join and do something as a whole, but in one case the farmers did so.

They had left their farms to the cities because they could no longer farm their land.  The farmers were in debt and the federal government, not needing the excess of farmers that had existed during World War I, let them lose their land.  There was no significance to this action of the farmers for many American people of the time, but it showed the problems that the lower class experienced during the 1920s.

The real driving force behind the American economy in the 1920s was the automotive industry.  By 1929 there were 21 million cars on the road, which was about one car per six people (None, Causes of the Great Depression).  As stated earlier, other businesses were succeeding in this decade if they were connected to the automotive industry somehow.  The first genre of companies whose success was connected to the automobiles was the steel companies, because they were the suppliers of the materials for the automobiles to be made with.  As the automobile became a closed car, meaning they had a roof and interior designs, the textile, glass and leather industries began to grow.  Hotels began to spring up around the nation, because now people could get around faster and easier.

The new type of hotel was the motor hotel, or as we know as the motel.  Externally the automotive industry helped the American economy, but it was slowly hurting the economy from the inside out.  If the automotive industry were to fall apart, then all other companies that were making mass profits off of the automotive industry would fall or have a great decline in sales with it.  The automotive industry was growing too fast and getting too big.  The people were not ready for such a boost in industry because the great majority of the people in America could not afford these cars but bought them on credit without the knowledge that they had to pay for it later on.
The problem with the economy being based on certain industries, such as the automotive, was the same as having a great gap in income within the population.  Some industries ran the nation and other industries were not thriving.  The United States economy in the 1920s was partially dependent on new industries.  If one of these new industries were to have a dilemma the whole economy would have a major problem.  The economy in the 1920s was prospering greatly, but there was no diversity in industry.  The trouble with the new industries was that they could not expand indefinitely, at some point everyone would have enough cars and radios.  If these industries fell, the only other major industry that would be left is the agricultural industry, which was doing very poorly in the 1920s.

Finally, the unstable United States economy was part of an unstable world economy.  As America prospered in the 1920s, Europe struggled to rebuild itself from the devastation of the war.  America throughout the 1920s, with its booming economy, helped Europe by lending them millions of dollars.  By the end of the 1920s, America had lent Europe about 1.25 billion dollars (None, The World Depression).  Of all these loans more than 90% were used to buy United States goods (None, The World Depression).  The loans given out by the United States were expected to be repaid by the foreign allies.  However, what was really misunderstood by the United States was that the foreign allies were in no shape to repay any loans that had been taken from the Untied States.

The foreign nations sent great amounts of gold into the United States, but not enough was sent in to repay the loans without ruining their own economies.  The Allies states since the United States entered the war late and did not sacrifice, as many lives as Europe did, then the United States main effort to the war should be the money that they provided.  Meaning that the United States should drop all loan payments because the United States did not loose as many lives as Europe in the war.

In the 1920s the United States was trying to be the worlds banker, food producer and manufacturer, however the United State was not buying anything in return.  The United States had a high tariff in order to protect American business, but if the United States was not to buy from European markets, then there was no way for Europe to buy from the United States, or even fully repay United States loans.  In order for the United States to prosper beyond the 1920s (which we now know they did not) they needed Europe to buy their products.  By 1929 10% of all foreign nations could not buy from American markets; furthermore since the foreign nations could not buy from the United States, the domestic exports to European countries fell about 30% (None, The World Depression).  The United States lost about $1.5 billion in foreign exports during the late 1920s, contributing to the onset of the Great Depression.  Despite the World economic problems, the United States had an erratic stock market that was ready to fall upon itself at any moment.

Speculation is when an investor buys a stock by only paying for 10% of the stock value.  In such a system an investor could get money without actually investing too much money.  The problem with the system was that if the stock prices began to fall, as they began to in the end of the 1920s, the market and investors panic.  In 1929 the record volume of the New York Stock Exchange was 1,124,800,410 shares traded and the Dow Jones rose from 191 to 381 (Underwood, Black Tuesday).  As long as stock prices rose, investors were not concerned about the actually profits of the company.  One such example was the RCA Corporation, whose stock price leapt from 85 to 420 during 1928, even though the companys profits were not really rising (Gusmorino, Main Causes of the Great Depression).

The concept of credit overlapped with the stock market with the creation of buying stocks on margin.  Buying a stock on margin meant one could by a stock without investing any money at all.  If the investor was only obligated to pay 10% of the stock value, but then used credit to pay that 10%, they did not have to invest any money.  If the stock went up, which it did consistently in the 1920s, then the investor could pay his broker easily.  By mid 1929 brokers had lent out over $7 billion in loans.  The loans that the brokers were lending out were for the 90% that they had to pay for a stock that an investor was buying.

Furthermore, as 1929 went on, the amount of loans made soon rose to $8.5 billion dollars (Underwood, Black Tuesday).  Interest rates for brokers rose up to 20% by March of 1929, because brokers knew that investors would pay any price for incredible return they would receive.
At the beginning of September 1929, stock prices began to fall, although most people were still optimistic and were convinced that prices would begin to rise again.  On Monday, October 21st, prices began to fall significantly, and investors began selling quickly.  On the following Tuesday and Wednesday the prices began to stabilize.  Then on Thursday, October 24, stock prices fell hard and even the biggest investors gave up on the market and sold their stocks.  On the following Tuesday the stock market fell and the market was not able to get back up. This day is forever known as Black Tuesday, and the official start of the Great Depression.
The speculation and the resulting stock market crash acted as the trigger for the already unstable United States economy.  Due to the maldistribution of wealth and the unstable economy of the 1920s, the nation headed into a decade of trouble.  In response to its economic difficulties, the United States set up even higher trade barriers with other nations, causing more trouble within the nation.  Many of the working class lost their jobs, and since these people did not have savings, they were in big trouble.  Unemployment grew to 13 million by 1932 as the country quickly spiraled into a catastrophe.  The Great Depression had begun due to the maldistribution of wealth, a bad economy based on over confidence, and the irresponsible erratic of the bull stock market.

Cite This Work

To export a reference to this essay please select a referencing style below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Leave a Comment