Top 5 Causes of the Great Depression

Causes of the Great Depression

ThoughtCo / Vin Ganapathy

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 States, 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. One cause of the depression in Europe, was that the Nazis came to power in Germany, sowing the seeds of World War II.


Watch Now: What Led to the Great Depression?

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Stock Market Crash of 1929

The Great Depression
Workers flood the streets in a panic following the Black Tuesday stock market crash on Wall Street, New York City, 1929. Hulton Archive/Archive Photos/Getty Images

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, but it's typically remembered as the most obvious marker of the Depression beginning. 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% of its value and wiping out $14 billion of investments. By 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

The Great Depression
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. FPG/Hulton Archive/Getty Images

The effects of 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 as-yet unheard of, so when the banks failed, people lost all their money. Some people panicked, causing bank runs as people desperately withdrew their money, which in turned forced 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
FPG/Hulton Archive/Getty Images

With people's 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. In a chain reaction, 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 unsold inventory began to accumulate. The unemployment rate rose above 25%, which meant even less spending to help alleviate the economic situation.

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American Economic Policy With Europe

Great Depression
D. Baker Rails Against the Hawley-Smoot Tariff. Bettmann / Getty Images

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

The Great Depression
Florence Thompson sits with her children during the Great Depression. Dorothea Lange/Stringer/Archive Photos/Getty Images

The economic devastation of the Great Depression was made worse by environmental destruction. A years-long drought coupled with farming practices which did not use soil-preservation techniques 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, federal support of conservation tillage and sustainable agriculture, and federal deposit insurance, 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.

Sources and Further Reading

  • Eichengreen, Barry. "Hall of Mirrors: The Great Depression, the Great Recession, and the Uses—and Misuses of History." Oxford: Oxford University Press, 2015. 
  • Turkel, Studs. "Hard Times: An Oral History of the Great Depression." New York: The New Press, 1986.
  • Watkins, Tom H. "The Great Depression: America in the 1930s." New York: Little, Brown, 1993.
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Kelly, Martin. "Top 5 Causes of the Great Depression." ThoughtCo, Jul. 29, 2021, Kelly, Martin. (2021, July 29). Top 5 Causes of the Great Depression. Retrieved from Kelly, Martin. "Top 5 Causes of the Great Depression." ThoughtCo. (accessed May 29, 2023).