What were the five main causes that contributed to the severe economic depression at the end of the 1920s in the U.S.?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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There is no clear answer to this question.  This is because economic historians have not really formed a complete consensus as to the causes of the Depression.  As the article in the link below says,

Interestingly, given the importance of the Great Depression … economists do not completely agree on what caused it.

This means that different textbooks will give different lists of causes.  Because of this, it would be a very good idea for you to consult your own textbook and/or class materials to see which five factors your instructor emphasizes.  Here are some possible factors that are often mentioned in textbooks:

  1. Not all parts of the economy in the 1920s were actually strong.  In particular, the farm industry was very weak during this time.  Prices for farm produce were low and costs of production were high.  This meant that the farming sector (which employed a much larger percentage of the population than it does today) was in danger.
  2. There was overproduction in the economy.  New technologies made it possible for companies to produce tremendous amounts of new goods but low wages made it hard for workers to buy those goods.  Thus, supply was greater than demand.
  3. The rich had too much money and the poor did not have enough.  This meant that a decline in the economy could get very bad.  The rich would stop buying as much and would just hold on to their money while the poor would not have enough money to keep buying.  This would reduce demand and businesses would fail as too few people bought their products.
  4. Credit was too easy.  People could easily borrow money, even to do things like speculating on the stock market.
  5. Because of the easy credit and because of a herd mentality on the part of investors, a stock market bubble formed.  Stock prices were much higher than they should have been, which meant that the stock market bubble could burst at any time, sending prices plunging and wiping out the wealth that investors had accumulated.

All of these factors are often cited in textbooks as having caused the Depression, even if there is no consensus among economists on the subject.

Sources:

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