Causes of the Great Depression
America had gone through hard times before
: a bank panic and
depression in the early 1820s, other economic hard times in the late 1830s, the
mid-1870s, and the early and mid-1890s. But never did it suffer an economic
illness so deep and so long as the Great Depression of the 1930s.
Economists have argued ever since as to just what caused it.
But it's safe to say there were a bunch of intertwined things that contributed.
Among them:
The stock market crash. The stock market soared throughout
most of the 1920s, and the more it grew, the more people were eager to pour
money into it. Many people bought "on margin," which meant they paid
only part of a stock's worth when they bought it, and the rest when they sold
it. That worked fine as long as stock prices kept going up. But when the market
crashed in late October 1929, they were forced to pay up on stocks that were no
longer worth anything. Many more had borrowed money from banks to buy stock,
and when the stock market went belly-up, they couldn't repay their loans and the
banks were left holding the empty bag.
Bank failures.
Many small banks, particularly in rural
areas, had overextended credit to farmers who, for the most part, had not
shared in the prosperity of the 1920s and often could not repay the loans. Big
banks, meanwhile, had foolishly made huge loans to foreign countries. Why? So
the foreign countries could repay their earlier debts from World War I. When
times got tough and the U.S. banks stopped lending, European nations simply
defaulted on their outstanding loans. The result of all this was that many
banks went bankrupt. Others were forced out of business when depositors
panicked and withdrew their money. The closings and panics almost completely
shut down the country's banking system.
Too many poor people. That may sound goofy, but it's a real
reason. While the overall economy had soared in the 1920s, most of the wealth
was enjoyed by relatively few Americans. In 1929, half of the families in the
country were still living at or below the poverty level. That made them too
poor to buy goods and services and too poor to pay their debts. With no markets
for their goods, manufacturers had to lay off tens of thousands of workers,
which of course just created more poor people.
Farm failures. Many American farmers were already having a
hard time before the Depression, mostly because they were producing too much
and farm product prices were too low. Things were so bad in some areas that
farmers burned corn for fuel rather than sell it. Then one of the worst
droughts in recorded history hit the Great Plains. The Midwest became known as
the "Dust Bowl." Dry winds picked up tons of topsoil and blew it
across the prairies, creating huge, suffocating clouds of dirt that buried
towns and turned farms into abandoned deserts.
