Causes and Effects of the Great Depression

Whitney Nyman, Nate Sullivan
  • Author
    Whitney Nyman

    Whitney has taught 6th-12th grade social studies and language arts. She has a bachelor's degree in history and a master's degree in social studies education from St. Mary's College of Maryland; she also holds a dual teaching certification in social studies and language arts in multiple states.

  • 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.

Learn about the causes and effects of the Great Depression. Explore the stock market crash of 1929, Black Tuesday, and other causes of the Great Depression. Read about the political, economic, and social effects of the Great Depression. Updated: 11/18/2021

Causes of the Great Depression

Historically, the Stock Market Crash of 1929 has been identified as the cause of the Great Depression. However, the causes are more numerous and nuanced. The 1920s, also known as the Roaring '20s, were characterized by economic excess, including unprecedented amounts of credit purchasing, which ultimately led to market saturation for consumers and investors alike. Below is a list of the economic factors that led to market saturation, the Crash of 1929, and, ultimately, the Great Depression:

  • The Roaring '20s were a period of great optimism for Americans who had lived through the hardships of World War I. The 1920s were socially progressive and economically prosperous; the level of industrial and financial growth seemed as if it would continue forever.
  • The first sign of economic trouble came from the American agricultural industry in the latter half of the 1920s. The agricultural industry had grown exponentially during the World War I era in order to support the war effort, but many of the new owners later defaulted on property and equipment loans. The market for agricultural equipment was saturated and many farms were foreclosed on. By the 1930s, droughts and over-farming led to inhospitable farming conditions in the Midwest, which became known as the Dust Bowl.
  • Automobile manufacturing and residential construction had slowed by the mid-1920s.
  • March of 1929 saw the first slide in the stock market after eight years of unprecedented growth, as the Federal Reserve suggested the growth was the result of over-speculation and buying on margin, or purchasing stocks using borrowed money.
  • The stock market began to falter in September 1929, then experienced a massive sell-off of stocks at the end of October. On October 29, 1929, the stock market crashed, losing more than 10% of its total value, and the day became known as Black Tuesday
  • Banks had invested their depositors' money in the stock market and lent money to investors to purchase their own stocks. When the market crashed, it became apparent that there was not enough capital to support the investments that had been made over the preceding decade. This realization caused a "run" on the banking industry, wherein people attempted to withdraw everything they had invested at once and many banks were forced to default.

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.

Effects of the Great Depression

The effects of the Great Depression penetrated nearly every aspect of American life. The Stock Market Crash of 1929 marked the end of the Roaring '20s and ushered great social, political, and economic change.

Social Effects of the Great Depression

Arguably the most dramatic effects of the Great Depression were social. The 1920s were a decade of socially progressive change, but the stock market crash shifted focus to economic issues, unintentionally changing many American social dynamics. It became impossible for most Americans to maintain their former standard of living; many endured unemployment and homelessness during the first years of the Depression.

Makeshift shelters sprung up around the country to accommodate people who had been evicted or had their homes foreclosed on. Americans nicknamed these shantytowns "Hoovervilles" after then-President Herbert Hoover, who they felt had not done enough to avert the crisis. Residents of Hoovervilles and many others who were able to keep their homes were forced to seek assistance from soup kitchens and breadlines. Although Hoover did create some federal relief programs, they did not provide nearly enough resources to those in need, so most were run by private organizations. Those who were able to avoid soup kitchens found themselves cutting expensive items from their diets, subsisting on staples that were cheap and easily accessible, like potatoes. When President Roosevelt later created the Works Progress Administration (WPA), he employed roughly 8.5 million people, who were paid to improve American infrastructure; the initiative proved much more effective than relief programs.

The Works Progress Administration employed millions of people to fortify America

Dietary changes are just one of the many ways Americans' daily lives were influenced by the Great Depression. In many ways, the Roaring '20s had been dominated by the "self-made man" and American men suffered psychologically for being forced to ask for assistance. Additionally, the rate of women seeking employment rose slightly during the Great Depression, which some men felt was hurting their own chances of employment. However, the situation for other families was so dire that their children were even forced to seek employment.

Finally, the Great Depression was featured prominently in literature and songs of the era. John Steinbeck's fiction about the Great Depression features some of the most visceral writing on the hardships Americans faced in the 1930s. Songs lyrics also reflected the economic uncertainty that permeated American life. However, going to the movies was one of the few bright spots that remained for Americans living through the Depression. Although screenwriters didn't entirely avoid the topic of the Depression, it was mentioned less often in film than in other media. Americans were still spending their hard-earned money to attend movie screenings during the Depression, so writers did their best to provide an uplifting experience.

Economic Effects of the Great Depression

The economic effects of the Great Depression influenced extensive changes in the public and private sectors. Below is a detailed list of large-scale changes and descriptions of their influence:

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
stock

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.'

hooverville

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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
stock

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.'

hooverville

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Frequently Asked Questions

What were the effects of the Great Depression?

The effects of the Great Depression were social, political, and economic; specifically a massive increase in unemployment, a withdrawal from the gold standard, a rise in nationalism and nativism, and an increase in government programs.

What were the 5 causes of the Great Depression?

The five main causes of the Great Depression were the Stock Market Crash of 1929, buying stocks on margin, excessive borrowing by individuals and corporations, the decline of the agricultural industry, and lack of government action under the Hoover administration.

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