Top 5 Causes of the Great Depression

The Great Depression lasted from 1929 to 1939 and was the worst economic depression in the history of the United States. Economists and historians point to the stock market crash of October 24, 1929, as the start of the downturn. But the truth is that many things caused the Great Depression, not just one single event.

In the United State, the Great Depression crippled the presidency of Herbert Hoover and led to the election of Franklin D. Roosevelt in 1932. Promising the nation a New Deal, Roosevelt would become the nation's longest-serving president. The economic downturn wasn't just confined to the United States; it affected much of the developed world. In Europe, the Nazis came to power in Germany, sowing the seeds of World War II.

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Stock Market Crash of 1929

Workers flood the streets in a panic following the Black Tuesday stock market crash on Wall Street, New York City, 1929
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Remembered today as "Black Tuesday," the stock market crash of October 29, 1929, was neither the sole cause of the Great Depression nor the first crash that month. The market, which had reached record highs that very summer, had begun to decline in September.

On Thursday, October 24, the market plunged at the opening bell, causing a panic. Though investors managed to halt the slide, just five days later on "Black Tuesday" the market crashed, losing 12 percent of its value and wiping out $14 billion of investments. Two months later, stockholders had lost more than $40 billion dollars. Even though the stock market regained some of its losses by the end of 1930, the economy was devastated. America truly entered what is called the Great Depression.

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Bank Failures

A crowd of depositors outside the American Union Bank in New York, having failed to withdraw their savings before the bank collapsed, 30th June 1931
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The stock market crash rippled throughout the economy. Nearly 700 banks failed in waning months of 1929 and more than 3,000 collapsed in 1930. Federal deposit insurance was unheard of. Instead, when banks failed, people lost their money. Others panicked, causing bank runs as people desperately withdrew their money, forcing more banks to close. By the end of the decade, more than 9,000 banks had failed. Surviving institutions, unsure of the economic situation and concerned for their own survival, became unwilling to lend money. This exacerbated the situation, leading to less and less spending.

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Reduction in Purchasing Across the Board

Unemployed men queuing for coffee and bread at a soup kitchen run by the Bahai Fellowship at 203 East 9th Street, New York, circa 1930
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With their investments worthless, their savings diminished or depleted, and credit tight to nonexistent, spending by consumers and companies alike ground to a standstill. As a result, workers were laid off en masse. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans; repossessions and evictions were commonplace. More and more inventory began to accumulate. The unemployment rate rose above 25 percent, which meant even less spending to help alleviate the economic situation.

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American Economic Policy With Europe

Newton D. Baker Rails Against the Hawley-Smoot Tariff
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As the Great Depression tightened its grip on the nation, the government was forced to act. Vowing to protect U.S. industry from overseas competitors, Congress passed the Tariff Act of 1930, better known as the Smoot-Hawley Tariff. The measure imposed near-record tax rates on a wide range of imported goods. A number of American trading partners retaliated by imposing tariffs on U.S.-made goods. As a result, world trade fell by two-thirds between 1929 and 1934. By then, Franklin Roosevelt and a Democrat-controlled Congress passed new legislation allowing the president to negotiate significantly lower tariff rates with other nations.

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Drought Conditions

Florence Thompson sits with her children during the Great Depression
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The economic devastation of the Great Depression was made worse by environmental destruction. A years-long drought coupled with poor farming practices created a vast region from southeast Colorado to the Texas panhandle that came to be called the Dust Bowl. Massive dust storms choked towns, killing crops and livestock, sickening people and causing untold millions in damage. Thousands fled the region as the economy collapsed, something John Steinbeck chronicled in his masterpiece "The Grapes of Wrath." It would be years, if not decades, before the region's environment recovered. 

The Legacy of the Great Depression

There were other causes of the Great Depression, but these five factors are considered by more history and economics scholars as the most significant. They led to major governmental reforms and new federal programs; some, like Social Security, are still with us today. And although the U.S. has experienced significant economic downturns since, nothing has matched the severity or duration of the Great Depression.