What Caused the Great Depression?

What Caused the Great Depression?

The Great Depression was a global phenomenon that significantly changed the course of 

history. In America, people lost their life savings when banks collapsed. The severe 

decline in US capital triggered economic troubles overseas. The resulting German 

poverty ultimately contributed to the rise of Nazism and World War II! What sparked the 

world-changing Great Depression?

Historians cite many contributing factors. Most agree that the downturn began with the 

US stock market crash of 1929. Throughout the 1920s, rapid economic growth and 

industrialization had been accompanied by easy lending. There was a vast amount of 

unsecured consumer debt. But in October of 1929, the prosperity and optimistic 

speculation of the “roaring twenties” suddenly collapsed. A Black Thursday on Wall 

Street was followed by a Black Tuesday, and investors quickly lost $40 billion! Many 

had invested their life savings and mortgaged their homes. 

President Herbert Hoover failed to realize that his nation’s economy could collapse; he 

believed he was witnessing a mere recession and said the market would naturally recover 

within a couple of months. He refused to establish a federal unemployment program, and 

he dismissed public construction projects as “progressive ideas” that wouldn’t improve 

the economy. Hoover was a sort of “trickle-down” theorist who was inclined to support 

businesses before unemployed individuals. He tried to protect American companies with 

the Hawley-Smoot Tariff, but by reducing trade he only worsened the faltering American 

and global economies. 

When the American economy sputtered to a standstill, others suffered through 

association. America had been an important trade partner for England, France, Germany, 

Japan, Argentina, and Brazil. These countries suddenly saw sharp declines in demand for 

their products. Also, all of the countries’ currencies were linked through their adherence 

to the gold standard. Virtually every industrialized nation suffered wholesale price 

declines of 30 percent or more at the start of the Depression.

The 1930s were particularly harsh for farmers in the United States. In the Great Plains, 

the Depression was worsened from 1933 to 1939 by a severe drought and dust storms. 

Unable to produce crops, farmers lost their farms and banks seized their homes. Farm 

families were reduced to living in shantytowns, which Hoover’s critics called 

Hoovervilles. These farmers and other destitute citizens turned to bartering for basic 

goods in the absence of cash. 

Farmers’ losses increased bank failures in rural areas, and urban bank failures had already 

been escalating rapidly. When stock investors lost their capital, banks started to fail at ten 

times the 1920s rate. Nine thousand banks failed during the 1930s. And when banks 

failed, customers lost their savings! By the end of Hoover’s term in 1933, Americans had 

$140 billion missing from their accounts. The bank failures limited new enterprise and 

growth across the country. Banks started to limit how much money customers could 

deposit, and loans became scarce. Hoover was not about to win a second term.

After Franklin D. Roosevelt was inaugurated in 1933, he instituted a bank holiday. Banks 

would rest for several days while Congress passed the Emergency Banking Relief Act to 

stabilize the banking system. The new President told his nation, “The only thing we have 

to fear is fear itself.” 

Roosevelt tried to end the Great Depression by creating dozens of government agencies 

to support the people. Unemployment fell by two-thirds during his first presidential term. 

If it weren’t for his programs, surely many more people would have died from starvation 

and lack of shelter. Still, daily life remained precarious for most Americans until the 

depression ended six years later with America’s involvement in World War II.