Causes of the Great Depression

The Gold Standard

America and other countries adopted the gold standard as their monetary system. This standard meant the value of gold-backed up that currency. America could not print more paper money without increasing physical gold reserves. With a slowing economy in the late 1920s, American citizens started to hoard gold. Countries in Europe quickly dropped the gold standard, but the U.S. adhered to the standard for two whole years, only exacerbating the Great Depression. While the gold standard was not a direct cause of the Great Depression, it worsened the economic downturn.

Stock Market Crash of 1929

The stock market crash of 1929 did not occur in a single day. The critical event started on October 24, 1929, when a record number of trades were made. Bankers such as J.P. Morgan used their own money in an attempt to bail out the banks. Then on October 29, the market lost almost $ 14 billion. The market impacted not only individual investors but businesses and banks. Some banks had even invested clients' money without their knowledge or permission. The stock market crash in 1929 was not the only event of the Great Depression, yet it did help speed up economic failure.

Fig. 2 - Farmer in despair over the Great Depression

Bank Failures

The quote above from White indicates that bank failures were multi-faceted and did not just fail randomly but for specific reasons. He continues to state that the reason for bank failures generally lies in the interpretation of three key events. The most recognized historical event is the loss of public confidence in the banking system (banking panics).

Money is critical to a functioning economy. Banks rely on customers' confidence in their ability to access their money whenever they want. However, banking panics in the thirties debilitated U.S. finances. Both businesses and individuals did not have enough income to cover their basic needs, including loans and other debts. Bankruptcies increased, and thousands of banks failed. It is estimated that 9,000 banks failed in just three years (1930-1933).

Fig. 3 - A bank run on a Michigan Bank in 1933

Reduction in Purchasing Power

It is generally believed that overproduction and reduction in purchasing power play a critical role in the economic downturn. More items were being produced, and people lacked the finances to purchase those items. As businesses and households lost their ability to pay for loans or other debt, their purchasing power significantly dropped. Many Americans were evicted from their homes and had other assets repossessed.

Underlying Causes of the Great Depression

Various contributing factors caused the Great Depression, such as drought and deflation. While influential in the economic downturn, these factors are often overlooked as direct causes of the depression.

Drought Conditions

In the 1930s, a severe drought struck the Great Plains region in America, giving this event the nickname the "Dust Bowl." Suffocating dust swept Texas to Nebraska, killing people, livestock, and crops. The effects on the Great Plains sent devastating ripples throughout the American economy. Fleeing the impact of the Dust Bowl, many migrated to other areas of the country looking for work. The influx of people to local communities only exacerbated relief efforts and put more strain on an already overtaxed system.

Deflation

During the Great Depression, many came to expect deflation. Even though interest rates were low at the start of the 1930s, Americans did not take out loans due to the fear of low wages and profit. The lack of borrowing quickly led to low consumer consumption and business investments. Prices of American goods severely dropped, and the rate of deflation surpassed 10% in 1932.¹

Socio-Economic and Political Causes of the Great Depression

Fig. 4 - Waiting for relief checks during Great Depression in Calipatria

Income Inequality

The "Roaring Twenties" came to an abrupt halt with the Great Depression. However, even with the superficial prosperity on the surface, Americans fought to earn a basic living. "In 1929, economists considered $2,500 enough to support a family. However, in that year alone, more than 60% of the nation's families earned less than $2,000 a year."² The income gap worsened throughout the twenties creating a volatile economy.

American Economic Policy with Europe

With the crushing weight of the Great Depression, Congress passed the Smoot-Hawley Tariff in 1930, imposing excessive taxes on imports, nearly 40%. The act ushered in several consequences both at home and abroad. In response to the act, several European nations retaliated with their high imports of U.S. goods. The high import rate also led to U.S. isolationism and a lack of confidence in Wall Street. The act only worsened global trade, with trade falling almost 2/3 from 1929 to 1932.

Effects of the Great Depression

The effects of the economic downturn were widespread and impacted all levels of society. The people felt it the most, not only the institutions. In the next sections, we'll explore two social aspects that the effects of the Great Depression could be seen directly: migration and crime.

Mass Migrations

Spurred by extreme economic hardship, many decided to migrate to other areas of the country in hopes of finding work. In the 1930s, the Dust Bowl pushed roughly 2.5 million people away from the Great Plains states.³ Many migrants left their homes hoping to find work in California and other western states. The woman in the "Migrant Mother" photograph is reported by photographer Dorothea Lange to have sold tires from the car to purchase food.⁴ California became so overcrowded that Los Angeles arranged for police officers to be bouncers to turn people away. While many made it to California, their life was still difficult, with earnings averaging $1.25 daily.

Fig. 5 - Al Capone Mugshot in Miami, Florida 1930

Crime Rate

Organized crime saw a surge with the passing of the 18th Amendment in the 1920s. With the loss of jobs and income during the depression, some turned to crime as a means of survival. President Franklin D. Roosevelt passed an anti-crime law in 1934, giving the fledgling Federal Bureau of Investigation (FBI) more authority. By the end of 1934, the law showed effectiveness, with the FBI arresting many well-known criminals.

Fig. 6 - African-American woman working on a farm in North Carolina, 1938

Standard of Living

People across America saw great suffering during the Great Depression, and living standards dropped sharply. Many embraced frugality in every aspect of their daily life. Clothes were patched up, and many kept personal gardens as a food source. Many children were unable to attend school due to schools closing. Malnutrition also affected children. "In a 1932 study by the Health Department in New York City, it was found that 20.5% of the children were suffering from malnutrition and children in rural areas were even worse off."⁵

Great Depression Summary

The Great Depression occurred between 1929 to 1939 and was the worst economic depression in modern history. Production decline, deflation, nationwide unemployment, banking panics, and poverty ran rampant throughout the country. The economic depression was a worldwide event that impacted Europe, Japan, Latin America, and the U.S. America was hit the hardest by the depression with high unemployment rates, bank failures, deflation, the Dust Bowl, and the stock market crash. A single event did not cause the Great Depression but was a culmination of several incidences causing an economic downturn.

The great depression triggered human suffering on a nationwide scale. The standard of living was drastically altered due to the loss of income, homes, and other assets. Not all Americans lost their homes or earnings but had to transition into a life of frugality. The crime rate surged throughout the thirties, ushering in new anti-crime legislation that gave the FBI more authority. The Great Depression hit rural America the hardest, and many in the Great Plains states left their homes for California to find work. These mass migrations saw millions of people fleeing their homes. The Great Depression changed the American way of life for many and impacted economic policy for decades.

1. The Risk of Deflation, Federal Reserve Bank of San Francisco

2. Why it Happened-The Great Depression, Digital History

3. Dust Bowl Migration, The Regents of the University of California, 2008

4. Dust Bowl Migration, The Regents of the University of California, 2008

5. Life During the Great Depression, Marquette University