The Causes of the

Great Depression
Weaknesses in the Economy

After that disastrous week in October 1929, the econ

omy began unraveling. Econom.ists then saw flaws few had
noticed during the get-rich-quick era of the mid-1920s.

Depressed Farms and Industries

The shiny glow of prosperity had not rubbed off on
all Americans in the 1920s. Farmers' incomes fell
throughout the decade. The textile, lumber, mining, and
railroad industries also declined. In the months preced
ing the crash, the automobile and construction industries
suffered from a decrease in orders. As a result, wages

A DEPRESSED ECONOMY
It is tempting to see a landmark event like the
stock market crash as the cause of the Great
Depression. In reality, however, trends, deciSions,
technology, and foreign relations all contributed
to the slump that, by 1932, had driven the
country's manufacturing output down to 54
percent of its 1929 level.

Finance

Foreign Trade

In the late 1920s, investors speculated

in overvalued stocks. They borrowed
from brokers, who borrowed from
banks, who loaned out the savings of
depositors. After the crash, the
Federal Reserve restricted the money
supply, making recovery difficult.

After the crash, the United

States was unable to lend
money to other nations; their
American crops and import
goods declined. Higher
tariffs at home and abroad
also hurt trade.

Agriculture
In the 1920s new technology had
increased productivity, leading to
crop surpluses, lower prices, and
hard times. In the 1930s many
farmers lost their farms as banks
foreclosed on mortgages.

Industry

Business Activity in the United States, 1915-1940

Overproduction and
underconsumption
had been developing
before 1929. When
the crash came,
shaky businesses
failed. By 1933
unemployment
reached 25 percent.

Percent change in business activity; 0 represents the long-term trend

Conditions in industry, finance, agriculture, and trade contributed to the economic climate of the Great Depression. How might the
decline in industrial production have affected the agricultural surplus? How might the decline in the amount of money in circulation have
affected industrial production?

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dropped and employers laid off workers. With their in

comes cut, many farmers and workers could not afford
the manufactured goods that the nation's industries had
been churning out at impressive rates in the 1920s. This
underconsumption became a major weakness in the
economy.

Wealth Distribution
Another factor contributing to the underconsump
tion that fueled the Depression was the growing gap in
wealth between rich people and Americans of more
ordinary means. Although business profits in many in
dustries rose throughout the 1920s, not all workers
received a proportionate share ofthese profits. This meant
that there was not enough consumer buying power to
keep up with all the goods being produced. By the late
1920s, radios, telephones, refrigerators, washing machines,
and other goods were piling up in warehouses across
the country.

Monelary Policy
Errors in monetary policy also contributed to the
crash. After the crash the Federal Reserve System,
charged with regulating the amount of money in circu
lation, followed a restrictive policy that dried up credit.
This policy left the country with a supply of money in
circulation that was not large enough to allow the econ
omy to bounce back after the stock market bubble burst.

Decline in Foreign Trade

\Veaknesses in the American economy also sapped
the strength of foreign economies, some of which were
already unstable. Throughout the 1920s the United States
served as a bank for other nations, lending money to aid
foreign industries and speed recovery from the Great

* * *

War. During the late 1920s, however, as Americans be

gan pouring borrowed money into the stock market,
bank funds for loans to other nations dried up. Interna
tional trade slowed down because, without American
loans, other nations had less money to spend on our
nation's goods. High tariffs-taxes on imported prod
ucts-further blocked international trade. This decline
fed into the cycle of underconsumption, further weak
ening the American economy.
After the stock market crash, all these problems
with the economy began to take their toll. The economic
slowdown frightened everyone, from East Coast execu
tives to Midwestern store owners, from Utah miners to
the President of the United States.

Hoover's Response
Voluntary and Local Action Fail

Herbert C. Hoover occupied the White House

when the Depression began. Nicknamed the Great
Engineer, Hoover was elected President by a wide mar
gin in 1928. Orphaned at age 8, he left his Iowa home
to move in with relatives in Oregon. Although his early
childhood was sad, in young adulthood Hoover buried
unhappiness with driving ambition. He graduated
from Stanford University in 1895 with an engineering de
gree. For the next 18 years he worked on engineering
projects all over the world, building an unshakable
reputation for solving technical problems and amassing
a personal fortune.
Hoover's Quaker upbringing gave him a strong
desire to serve humanity. After the outbreak of World
War I, he coordinated war relief eftorts in Europe and

CALLERY OF PRESIDENTS

* * *

Herbert C. Hoover

" OUl'S is a land I'ich in resoul'('es;

stimulating in its glorious beaut),;
ftlled with millions of happy homes;
blessed with comfort and opportu
nity.... No country is illOl'e loved
by its people. r have an abiding
faith in their capacity, integrity, and
high purpose. 1 have no fears for
the future of our country. It is
bl'ight with hope:'

BACKGROUND
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ACHIEVEMENTS IN OFFICE
~

~
~

lnaugUl'al Addl'ess, Mal'ch 4, 1929

HEAIERt HOOVEA PAESI DE IHi A.L L1 BAA BY MUSIHl M

422

C HAP T E R 1 3

THE

Born 1874; Died 1964

Republican, Iowa
Headed the Commission for Relief
in Belgium .1914-1917
Secretary of Commerce
1921-]928

G REA TOE PRE S S ION

F'edel'3J Fann Board (1929)

Smoot-Hawley Tariff Act (1930)
Reconstruction Finance
Corpol'3tion (1923)

food production in the United States. Effi

cient and successful, Hoover inspired con
fidence. He quickly rose as an important
political figure. President Harding ap
pointed him secretary ofcommerce in 1921.
From this influential post, Hoover tried
to put into practice his vision for the Unit
ed States. He encouraged voluntary asso
ciations of business leaders to eliminate
inefficiency in industry. He suggested that
federal, state, and local governments coor
dinate efforts to dampen harmful swings in
the business cycle. With these and other
meaSilles, Hoover was sure that the Unit
ed States in 1928 was "nearer to the final
triumph over poverty than ever before in
the history ofany land." His optimism and
confidence matched the mood ofthe coun
try and won him the presidency.

When You

BUY

an AUTOMO B IL~
You 6 1 V~

hs' Work

Which
Allows
Him to

Initial Reaction to the Depression

Only months after Hoover made that
prediction, the stock market crashed.
Realizing that people's plwnmeting faith
in the economy hindered chances of re
covery, Hoover tried to bolster confidence.
"\Ve have now passed the worst," he told
Americans in May 1930, "and ... shall
rapidly recover."
Even with his optimistic pronounce
ments, the President took immediate
action to try to arrest the economic down
I Wishful Thinking Auto companies urged Americans to help the economy by
turn. Following his own faith in voluntary
spending money-money that most Americans did not have. In what ways
did Hoover's efforts to end the Depression fall short?
action, he called a meeting of business
leaders and asked them to pledge not to
cut wages or production of goods. He
suggested that city and state governments stimulate
Hoover also funneled aid to farmers through the
their local economies by funding building projects to
Agricultural Marketing Act, which Congress had passed
even before the economy began to weaken in the
provide new jobs.

E CON 0 M ICC R I S E S. I NUN I TED S TAT E S HIS TOR Y I 1 8 0 7 - 1 9 8 7

11807 Embargo Act forbidding

i
I

export of American goods is

passed. Depression follows.

: 1819 Postwar panic

1and depression begin.
I Large amounts of Western
real estate are foreclosed.

: causes global depression;

: 47,000 American firms fail.

' 1929 Stock

Imarket crashes;

: Great Depression
begins.

11987 Worldwide

! stock crash occurs.

I

L---- - - -i

t
r- ----- -

18705 Fierce competition

i in uncontrolled markets

'f

...
I

j 1837 Banking panic causes

: depression. Sales of public
; lands fall from 20 million acres
I in 1836 to 3.5 million in 1838.

: 1893 Speculators worried about

i gold supplies unload stocks. Banks

: and railroads fail. Unemployment
: rises to 18 percent.

ig-8iis--s~~~1e recession ,

1981-1982; one-third of
: industrial capacity is idle.

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WORLD-S HIGHEST STANDARD OF

Natural Disaster Margaret Bourke-White was one of the four original staff photographers for Life magazine. This photograph,
probably the most famous of her career, was taken at a flood relief station in louisville, Kentucky, in 1937. What examples of irony
do you see in this photo?

aftermath of the crash. Through this legislation, the

federal government established the Farm Board, which
lent money to farmers to help them set up cooperative
marketing associations. Farmers who joined these asso
ciations agreed to sell their crops as a group. Ifthey could
not get the prices they wanted at the time of the har
vest, they would store their crops until prices rose.
Voluntary marketing associations might, in time,
have raised crop prices. Many farmers, however, need
ed immediate help paying the mortgages on their land.
The Farm Board was not authorized to lend money to
individual farmers, so thousands of farm families went
bankrupt in the early ]9308, losing their jobs and their
homes.