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Causes and Consequences of The Great Depression

The U.S. stock market crash of 1929 initiated the Great Depression in October of 1929 though this one event was caused by external sources and was not solely responsible for the most devastating economic collapse in American history. During the decade-long depression, many lost their businesses, jobs, homes, savings, and in most cases, hope. Both the positive and negative effects of government programs and policies instituted to alleviate the economic meltdown and the suffering of the people are still debated today but most did little to help while some only exacerbate the desperate situation. This discussion examines the causes of the Great Depression along with its effects on Americans and the outcomes, both immediate and long-term, of the government’s response.

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Many dynamics factored into instigating the Great Depression but the central reasons were twofold. One was that the wealth of the nation was unevenly distributed. A middle class, as we would recognize it today, did not exist. The country was divided between the ‘haves and the have nots,’ those with enormous wealth and power, and those struggling to pay the bills each month. This wide gap of economic means during the ‘Roaring Twenties’ served to create an unstable economy which combined with inflated speculations among the majority of stock market investors to send the country down the financial tubes. “The excessive speculation in the late 1920’s kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the mal-distribution of wealth, caused the American economy to capsize” (Hicks, 1960 p. 110).

The 1920s was a time of economic prosperity for the nation. In 1923, the total income of the country was $74.3 billion and rose to $89 billion by 1929. This prosperity was noticed mainly by those whose annual incomes were in the upper one-tenth of one percent of the population. “According to a study done by the Brookings Institute, in 1929 the top 0.1 percent of Americans had a combined income equal to the bottom 42 percent” (McElvaine, 1984 p. 38). At that time, 80 percent of the country’s citizens had no savings account while the uppermost earners, the 0.1 percent possessed more than one-third of all savings (McElvaine, 1984 p. 38). As an illustration of this disparity of wealth, one needs to look no further than the income of automobile tycoon Henry Ford whose reported annual income exceeded $14 million (Baughman, 1996) when the salary for the average U.S. worker was $750. In today’s dollars, Ford’s annual income would exceed $350 million (Hoffman, 1992 p. 155). The divide between wealthy and poor grew during the 1920s chiefly because the industrial output rose by about a third in this decade (McElvaine, 1984 p. 39).

The American economy became increasingly unstable as the disparity in income widened. “For an economy to function properly, total demand must equal total supply. In an economy with a disparate distribution of income it is not assured that demand will always equal supply” (McElvaine, p. 48). The U.S. economy was crippled by an over-supply of products. An economy is fueled by consumer spending. While the poor spend all of their income on goods and services, the wealthy save the greatest proportion of theirs. When a disproportionate amount of the nation’s money is in the hands of the very rich, not enough is being circulated through all stages of commerce which negatively affects businesses and the workers they employ. When a greater proportion of the nation’s money is in the hands of the poor, more money is continually being pumped into the economy. The nation’s economic health was at the mercy of the wealthy spending lavishly but they began to slow both spendings and investing as the economic outlook continued to decline during the late 1920s. Since there were relatively few persons of great wealth, a handful of industry leaders losing confidence in the health of the economy were all it took for an economic ‘domino effect’ to take place.

Another problem was that only two industries were strong at this time, the radio and automotive industries. The highest profit margin is gained on the high-end items and when the rich slow spending, industries lose money and lay-off workers. Massive lay-offs create a panic among the working class so they stop buying on credit fearing the imminent loss of employment which further hurts businesses. When the rich were to slow down or stop, so would the entire economy (McElvaine, p. 48). With these dynamics in place, the market continued to slow until it crashed in October of 1929 and again that December. To protect the interests of the nation’s businesses, the Herbert Hoover administration enacted protectionist measures such as the Hawley-Smoot Tariff of 1930 which imposed higher tariffs on goods entering the country. The White House and Congress were controlled by Conservative Republicans which bowed to business and industry interests in enacting this legislation. The Act effectively raised the number of tariffs to unreasonable levels and was opposed by the nation’s leading economists. The result of this ill-conceived action became the final factor that caused the Great Depression. It turned a serious economic recession into the worst economic disaster in American history. “Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe” (Hicks, 229).

The effects of the Great Depression were many and widespread. Banks were not federally mandated to insure depositors at this time. Therefore when the hundreds of banks suddenly failed, millions of people lost their life savings. Immediately following the bank failures, many factories were forced to close and all types and sizes of businesses dissolved leaving many workers without jobs or money in the bank. More than 32,000 businesses and 5,000 financial institutions failed. The businesses that stayed open were barely making enough to remain operational. The tax base fell suddenly which affected local governments, many of which could not continue to conduct some city services at a normal capacity (Gusmorino, 1996).

The price of farm products also fell sharply and the mass foreclosures of family farms soon followed causing bloody clashes between the owners and the bank representatives. Of those who were able to hold on to their farms, widespread droughts during this time forced many more away from their livelihood. By the end of 1930, more than four million were unemployed and another four million by the next year. “Wretched men, including veterans, looked for work, hawked apples on sidewalks, dined in soup kitchens, passed the time in shantytowns dubbed ‘Hoovervilles,’ and some moved between them in railroad boxcars. It was a desperate time for families, starvation stalked the land, and a great drought ruined numerous farms, forcing mass migration” (Avery, 2007).

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State governments were in no position to do much to aid depression victims, so hard-pressed were they for revenues. The response of the federal government was, at least in the early years, too little and too late. President Herbert Hoover and his aides were convinced that “prosperity is just around the corner” (Perlo, 2004). Roosevelt, as he repeatedly claimed, restored optimism to the American people after they had descended into misery as a result of the depression and that his New Deal policies ‘saved capitalism’ (Yantek, 2007).

The economic conditions of the time demanded that the solutions foster relations between the capitalist class and the working class, each of whom had opposing interests The New Deal, while serving to save capitalism primarily by alterations within the government structure, internal alterations, was complemented by programs of domestic reform. Roosevelt did not arrive at the New Deal policies on independent or personal reasoning but as the result of the continuing divergence of forces surrounding him. The economic conditions of the time demanded that the solutions foster relations between the capitalist class and the working class, each of whom had opposing interests. According to many, the New Deal was successful only in creating a new economic predicament instead of bringing its touted prosperity. Despite extraordinary fundamental changes and reforms brought about by the New Deal, the economy had not accomplished the levels of production that were present before the stock market crash. The working class was very dissatisfied as their standard of living had steadily declined. The national income per person in 1938 was also much less than it was in 1929. Unemployment was escalating and farmers faced a crisis of their own. Governmental assets deteriorated by the year and neither civil nor world peace were foreseeable shortly. (Baker, 2003).

Unemployment was escalating and farmers faced a crisis of their own. After the failures of the New Deal, a predisposition for militarist conquests by industrialists sought to solve the economic troubles facing the American capitalist way of life by external measures thereby extending the capacity of its economic rule over other countries of the world. The militarist wing represented the outlook and interests of the big business, which proved to be the actual leaders of the United States under the guise of social reforms of the New Deal (Novack, 1940). The government’s corporate liberal strategy of the Hoover era was reincarnated in the 1950s, the Eisenhower years. Though this approach was discredited by the failure of liberal policies during the Great Depression era, the government’s role during this period was to promote corporate self-government of the economy. “Rather than requiring that public spending be sufficient to maintain adequate investment and growth, the national government used fiscal and monetary tools to stabilize the business cycle while leaving decisions regarding investment, pricing, and production in private hands” (Furner, 1996). The tenets of Liberalism proclaim a strong conviction in democracy and belief that the constitutional authority of the people will limit a powerful, expansive government. Liberal legislative leadership, partly through necessity, instigated steady governmental growth well beyond where the architects of the Constitution and most citizens would favor, however.

The proponents of imperialistic military actions used to ease economic woes argue that World War Two pulled the country out of Great Depression. This mindset continues at the highest levels of government today as evidenced by the current war in Iraq. However, this simplistic connection was not necessarily the case. The U.S. economy began making a comeback in 1938, well before the U.S. entered the conflict in late 1941. Additionally, this economic expansion ended before the end of the war thus debunking the argument. Today, incomes are again becoming disproportionate. This combined with poor economic strategies and the exploding National Debt threaten to plunge America into another Great Depression potentially much worse than the catastrophe of the 1930’s.


  1. Avery, Steve (2007). “Social Issues The Great Depression 1929-1942Online Highways Florence, OR. Web.
  2. Baker, Dorie. (2003). “Yale Professor Writes Book on American ‘Security’ System.” Yale News Release. Yale University.
  3. Baughman, Judith S. (1996). “American Decades 1920-1929.” Detroit: Gale Research, Inc.
  4. Furner, Mary O. (1996). “Antistatism and Government Downsizing.” Urban Institute.
  5. Gusmorino, Paul A., III. (1996). “Main Causes of the Great Depression.” Gusmorino World.
  6. Hicks, John D. (1960). “Republican Ascendancy, 1929-1933.” New York: Harper & Row.
  7. Hoffman, Mark S. (1992). ed. The World Almanac. New York: Pharos Books.
  8. McElvaine, Robert S. (1984). “The Great Depression.” New York Times Books.
  9. Novack, George. (1940). “Autopsy of the New Deal.” Fourth International. Vol. 1, N. 1. pp. 10-13.
  10. Perlo, Art. (2004). “Prosperity just around the corner?”) People’s Weekly World
  11. Yantek, Tom. (2007). “The New Deal: Capitalism Loses its Hat.” Kent State University.

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