Cause and Effects of the Great Depression

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The Causes and Effects of

The Great Depression In America

Few Americans in the first months of 1929 saw any reason to question the strength and stability of the nation's economy. Most agreed with their new president that the booming prosperity of the years just past would not only continue but increase, and that dramatic social progress would follow in its wake. "We in America today," Herbert Hoover had proclaimed in August 1928, "are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us."1

In mid-October, 1929, the average middle-class American saw ahead of him an illimitable vista of prosperity. The newly inaugurated president, Herbert Hoover, had announced soberly in the previous year that the conquest of poverty was no longer a mirage: "We have not yet reached our goal, but given a chance to go forward with the policies of the last eight years, and we shall soon with the help of God be within sight of the day when poverty will be banished from the nation." This was the economic promise interwoven with what a popular historian would call the American Dream. More complacently, Irving Fisher and other economists in the confidence of Wall Street assured the citizen that he was dwelling upon "a permanently high plateau" of prosperity.2

Only fifteen months later, those words would return to haunt him, as the nation plunged into the severest and most prolonged economic depression in its history. It began with a stock market crash in October 1929; it slowly but steadily deepened over the next three years until the nation's economy (and, many believed, its social and political systems) approached a total collapse. It continued in one form or another for a full decade, not only in the United States but throughout much of the rest of the world, until war finally restored American prosperity.3

In the autumn of 1929, the market began to fall apart. On October 21, stock prices dipped sharply, alarming those who had become accustomed to an uninterrupted upward progression. Two days later, after a brief recovery, an even more alarming decline began. J. P. Morgan and Company and other big bankers managed to stave off disaster for a while by conspicuously buying up stocks to restore public confidence. But on October 29, all the efforts to save the market failed. "Black Tuesday," as it became known, saw a devastating panic. Sixteen million shares of stock were traded; the industrial index dropped 43 points; stocks in many companies became virtually worthless. In the weeks that followed, the market continued to decline, with losses in October totaling $16 billion. Despite occasional hopeful signs of a turnaround, the market remained deeply depressed for more than four years and did not fully recover for more than a decade.4

The sudden financial collapse in 1929 came as an especially severe shock because it followed so closely a period in which the New Era seemed to be performing another series of economic miracles. In particular, the nation was experiencing in 1929 a spectacular boom in the stock market.5

In February 1928, stock prices began a steady ascent that continued, with only a few temporary lapses, for a year and a half. By the autumn of that year, the market had become a national obsession, attracting the attention not only of the wealthy, but of millions of people of modest means. Many brokerage firms gave added encouragement to the speculative mania by offering absurdly easy credit to purchasers of stocks.

It was not hard to understand why so many Americans flocked to invest in the market. Stocks seemed to provide a certain avenue to quick and easy wealth. Between May 1928 and September 1929, the average price of stocks rose more than 40 percent. The stocks of the major industrials, the stocks that are used to determine the Dow Jones Industrial Average, doubled in value in that same period. Trading mushroomed from...
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