What exactly caused the Great Depression and what are the most important dates?

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larrygates eNotes educator| Certified Educator

There were numerous elements that led to the Great Depression. The Stock Market Crash of October 29, 1929 was symptomatic of the problems leading to the depression but was not per se the cause of the depression.  Among the causes:

Businesses had tried to maintain prices and take profits while holding wages down. The end result was that one third of personal income went to 5 % of the population. Profits were put into expansion rather than wages, businesses created an imbalance between productivity and purchasing power. They never made the connection.

Governmental policies didn’t help. Secretary of the Treasury Andrew Mellon’s tax policies encouraged over-saving, which diminished the demand for consumer goods. This extra money in the money supply encouraged speculation. Much of that overspeculation was in the Stock market and real estate.There were signs in the air that things were about to come to a screeching halt. Residential construction and automobile production were catching up with demand. There were no more people standing in line to buy them. Business inventories began to rise because there were not that many customers; and consumer spending began to slacken off. All these are signs of a slowing economy, but the speculators in the stock market ignored the signs, and continued to buy, buy, buy, and as a result, the market continued to rise.

The gold standard was another problem. Keeping money tied to gold kept the money supply tight, and made the economy worse. The only way that the economy could stabilize under the gold standard was to allow prices and wages to fall until they reached a point where they were stable. Needless to say, it would wipe out a lot of people on the way down.

By 1929, the market had gotten so high it was a fantasy world, everybody knew it was overpriced, but it didn’t stop. Financial experts who argued that things should slow down were ignored. Hoover was worried, and told the Federal Reserve to discourage speculation. As a result, the Fed raised the discount rate, the amount it loaned to member banks, thereby making it more expensive to borrow money, but it had no effect.

By Fall of 1929, the stock market began to fluctuate; it was beginning to show signs of uneasiness. Finally, investors got worried, and were afraid prices could go no further, and started unloading shares. This, of course, drove prices down. The market staggered for a few days until Tuesday, October 29, 1929, (Black Tuesday); the bottom fell out, with sellers dumping stock wildly. The end result was the most disastrous day in Wall Street history. A busy day for the market then was three million shares. On that day, 16.4 million shares were traded.

The decline in the stock market and slowdown in the economy caused consumers and business people to hold out for lower prices. As a result, prices fell, but at the same time wages fell, and business dropped drastically. From 1929 – 1932, American’s personal incomes fell by more than half. More than 9,000 banks closed; hundreds of factories and mines shut down, thousands of farms were sold at foreclosure