Many Americans associate the Great Depression with the stock market crash of 1929. What caused this crash? What other factors led to the Great Depression?
For many Americans, the 1920s was a time of prosperity. Not all Americans shared in this prosperity, however. Wealth was distributed unequally, with the wealthiest Americans benefiting most from the booming economy and stock market. Farmers also failed to share in the general prosperity. The price of most crops fell after the end of World War I in 1918, so that farmers endured tough economic times for a decade before the Great Depression began. Because of poor prices, farmers often could not repay their mortgages and other loans, which in turn affected the banks and other institutions that had lent money to farmers.
Economists note two main causes of the Depression. First, much of the prosperity of the 1920s was an illusion, and the rising stock market did not reflect economic reality. Stock prices rose 40 percent in 1928 and 1929, and some stocks more than doubled in value during this period. When a person purchases shares of stock, she or he invests in a corporation and receives dividends, a portion of that corporation's future profits. If the value of the corporation rises, the investor also profits because the value of the stock will rise. Investors were so confident that prosperity would continue that they bid up the value of many stocks much higher than the real value of the companies in which they were investing. Because they expected prosperity to continue, many investors engaged in financially risky investments. Many investors bought stocks on margin, which means that they bought the stock by paying only a small fraction of the stock's price, and expected to pay the remainder of the stock's price with the profits they expected to make from the stock.
In 1929, some bankers, stock brokers, and other businessmen began to recognize that the stock market was overvalued, and some banks and corporations began to insist that investors repay some of the money they had borrowed to purchase stocks, or that they pay the full value of stocks bought on margin. Because many investors lacked the money to pay these expenses, they had little choice but to sell their stocks. As more investors dumped their stocks, the price of these stocks fell rapidly in October 1929. On Black Thursday, October 24, the stock market plunged. Over the weekend, financiers struggled to find a way to prop up the market, but, on Black Tuesday, October 29, the New York Stock Exchange plunged even further. Americans hoped the market would rebound, but it did not. The Great Depression had begun.
The stock market crash was not the only cause of the Great Depression. A second cause of the Great Depression was underconsumption. American factories had become much more productive during the industrial revolution. American industry now produced more goods than American consumers could purchase. Many working people barely made enough money to support themselves, let alone purchase any unnecessary consumer items. Many economists began to believe that raising the income of working Americans, so that they could afford to purchase more goods, was the key to ending the Depression.
Other causes also contributed to the Depression. Economic problems were not unique to the United States in the 1920s and 1930s, but affected many European nations also. American trade with European nations was harmed by depressions in the U.S. and in Europe. Also, many American banks had made loans to European businesses. When these businesses suffered losses, American banks suffered in turn. The Great Depression was felt not only in the United States, but throughout many parts of the world.