The Great Depression: Causes & Effects

Instructor: Nate Sullivan

Nate Sullivan holds a M.A. in History and a M.Ed. He is an adjunct history professor, middle school history teacher, and freelance writer.

In this lesson we will learn about the Great Depression. We will introduce the causes and effects of the Great Depression, and highlight the key themes and historical developments associated with it.

A Troubled Time for America

Imagine for a moment that you have lost everything and you can't find a steady job. Your next meal might come from a soup kitchen, or from relatives in the next town over. When you can scrounge together enough money for a little bit of gasoline, you travel from town to town looking for odd jobs just to provide food for your family. If you are lucky, you may find a farm where you can work in exchange for some crops. This was the life many Americans lived during the 1930s, a terribly dark period in American history. This was the time of the Great Depression, a worldwide economic downturn that began in 1929 and lasted until the outbreak of World War II. Unemployment, homelessness, and poverty were widespread during this time.

great depression

Lead-Up to the Great Depression

The 1920s were prosperous and exciting years, leading them to be dubbed the 'Roaring Twenties.' Throughout this decade, buying stock and investing were popular activities. There was a lot of money to be made by playing the stock market, and investors increasingly began engaging in risky, speculative practices. One of these risky practices was called buying on margin. This refers to a buyer paying for stock by putting some of his own money down, but borrowing the rest from a broker. During the 1920s, a buyer only had to put down between 10 and 20 percent and was free to borrow the rest. This practice, however, was extremely risky. If the price of the stock fell lower than the amount of the loan, both the buyer and the broker would be in trouble. By 1929, over 8.5 billion dollars were out on loan. Nevertheless, many people honestly believed that the stock market would continue to rise indefinitely. This was in spite of economic indicators, such as slowing industrial production and falling wages for those working in agriculture.

There is much disagreement among historians about the many causes of the Great Depression, and how those causes all fit together is a complex and hotly debated subject. However, most historians emphasize speculative stock buying as a major cause of the economic downturn.

Risky stock market practices, like buying on margin, contributed to the Great Depression

On October 24, 1929, the stock market plummeted. Investors were shocked and began selling their stock. The market recovered that afternoon because a group of bankers invested large sums of money, helping to instill confidence, but the rally did not last. On October 29, 1929, a day that has come to be called 'Black Tuesday,' the bottom fell out. Investors couldn't get rid of their stock quickly enough; everyone panicked, and the market collapsed. Basically banks were unwilling to loan out money. This was a major factor leading to the Great Depression. Black Tuesday was the worst day in stock market history, and it ushered in the Great Depression.

Effects of the Great Depression

Overnight, fortunes were lost. There were reports of businessmen committing suicide by jumping off of buildings. The uncertainty of the stock market influenced the business community, which in turn led to massive unemployment. This brings us back to the bleak scenario you imagined yourself in earlier. Many families struggled just to survive in this demoralizing time. To counter the depression, President Herbert Hoover signed the Smoot-Hawley Tariff Act, which raised tariffs on over 20,000 imported goods. The act was designed to bolster American production, but most economists consider the act to have been counter-productive. President Hoover was blamed for the depression and was despised by many. Homeless communities and shantytowns that sprang up across the country were given the cynical nickname 'Hoovervilles.'


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