What caused the Great Depression?

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enotechris eNotes educator| Certified Educator

Since the New Deal, most history texts will agree that the Depression was caused by "wealth inequity" and only by the benign munificence of the federal government was this injustice corrected after the crash.  However, this appears to not account for several factors.  Firstly, at the conclusion of World War I, the US was the only major industrial power not severely weakened by the war.  The unprecedented industrial growth to produce war materiel switched to the domestic market for consumer goods, resulting in an overabundance. This was the era in the US of the "Roaring Twenties," where the economy continued to expand after the war and the standard of living for both rich and poor increased, but it was an "artificial high" due to the war. Secondly, because of restrictive tariffs imposed by government, trade with foreign nations, and especially Europe was disrupted. Thirdly, postwar Europe suffered from the effects of the war, US tariff policy, and Germany especially went through a period of hyperinflation due to the harsh conditions of the Versailles Treaty, which effectively destroyed their economy.  Finally, abusive investment practices, where individuals (such as JP Kennedy, father of the President) would manipulate the stock market, causing huge amounts of money to flow in an out over a short time created market instability. Today we would call that insider trading. Because the Federal government did not stop the stock market manipulations, but did enforce a restrictive tariff policy, the market crashed, Europe could not purchase US goods for lack of capital, and the US had huge stockpiles of consumer goods that didn't sell.  This brought the US, and then the world's economy to a standstill, and then decline.

pohnpei397 eNotes educator| Certified Educator

This is a matter of a great deal of discussion and disagreement.

The common argument is that the depression (in the United States) was caused by wealth being poorly distributed among the people.  The argument goes that there were too many very rich and very poor and not enough people in the middle.  This is said to have been caused in part by a lack of government supervision, which let the rich exploit the poor by not paying them enough.  By this theory, the poor did not have enough money to buy goods and this made it easy for businesses to go broke because they couldn't sell their products.

Conservative historians dispute this view, however.  They tend to argue that the government made mistakes when it tried to regulate the economy more than it should have. For example, they argue that the move to erect tariffs was a major cause of the crash.

krishna-agrawala | Student

Great depression refers to substantial reduction in economic output and increase in unemployment rate in countries the wort starting in 1929 and continuing to mid 1930's.

There are many different views on the the causes of this depression. But one thing is clear that, like the depression we are currently facing, the depression of 1929 followed a major boom. This boom which was fanned by a runaway rise in real estate and stock prices to levels that could not have been sustained. Lot of common people in a mass frenzy believed that these prices could never fall and invested heavy amounts hoping to make quick profits. Their mood was as optimistic as it could be and they indulged in heavy spending in expectation of future prosperity.

However, prosperity cannot be crated by just raising the prices of stocks and real estate. This balloon of rising prices had to burst one day, and it happened. First the real estate prices fell, and with this panic set in among people then prices crashed. In bargain many people lost their entire fortunes. Some had no alternative but to commit suicide. Soon the excessive optimism turning into excessive pessimism. Now not only people had no money to spend as much as they were spending in the boom period. Expecting worse time to follow, hesitated to spend even what they have, trying to save for the future. This reduced demand for the industrial products causing industries to lay off people. Thus started the spiralling cycle of reduced demand, lower employment and still lower demand, which spread from USA to many other countries.

Looking at this sequence of events, I believe that the boom preceding the depression was its direct cause. Of course there must have been many other factors that sustained and extended the depression. but what cause it in the first place was the runaway boom.