Causes of the Great Depression Notes

Topics: Great Depression, Federal Reserve System, Monetary policy Pages: 16 (4915 words) Published: April 24, 2012
The Causes of the Great Depression


The young man shivered as the wind ripped through the large wooden crate, his temporary home as he searched for work in Toledo. Three months ago he defaulted on his mortgage loan and the bank seized his farm in Indiana. As his wife and kids lived with his in-laws, he ventured to the city in hopes of a job. He wondered how his fortune and that of his country could change so drastically.

The Great Depression was a worldwide tragedy that affected millions of people. The event is well chronicled by historians and economists alike. We know what occurred, and it is staggering. GNP fell from $104 billion in 1929 to $56 billion in 1933; one out of every four in the labor force was without a job; residential construction fell by 90%; nine million savings accounts were lost due to bank closings; 85 thousand businesses closed. But knowing what occurred does not tell us why it occurred; and even today, experts disagree on the causes of the Great Depression.

In sorting through these disagreements, we look first at American Agriculture.


The dilemma of the American farmer began long before the stock market crash of 1929. His sad plight through much of the 1920s followed a more prosperous time in the preceding decade.

The First World War generated a great demand for farm products. From 1915 to 1920, European countries imported much of their food, causing prices to rise, and US farmers' cash receipts to double.

After the war, European farmers resumed their output, decreasing the demand for imported foodstuffs. Farm products flooded the domestic market. A worldwide overproduction of wheat, cotton and other staples caused prices to drop. The retail price of agricultural goods fell 40% in 1920-21. Technological improvements and the lack of crop limitations only made matters worse by further increasing output and oversupplying the market. Wheat prices declined from $1.05 a bushel in 1929 to $.39 in 1932, and cotton went from $.17 a pound to $.06.

To compound the problem, the drought of the thirties struck, creating a dust bowl in much of the Midwest.

Thirty million Americans made their living in the agricultural sector during the 1920s. Farmers became poverty stricken, as their produce could no longer command prices high enough to support their families. Many of them struggled each year to earn enough money just to pay their taxes or the interest on their mortgage. As one fifth of the population's purchasing power lagged, so did demand for manufactured consumer goods.

Industrial Sector

Generally speaking, the 1920s in America were a good time. Prior to the stock market crash, industrial production and profits were high and rising. Although many people were poor, more people were well off or rich than ever before. The main reason for this wealth was the increase in domestic production. Between 1925 and 1929, the number of manufacturing establishments increased from 183,900 to 206,700. The value of their output rose from $60.8 billion to $68 billion. The Federal Reserve Index of Industrial Production, which averaged only 67 in 1921, had risen to 126 by June 1929. In 1926, Henry Ford and his competitors produced 4,301,000 automobiles. Three years later, automobile production grew by a million cars.

Business earnings increased rapidly. Profits of large corporations tripled between 1920 and 1929.

While production rose steadily in industries such as manufacturing, mining, transportation and utilities, employment began decreasing due to rapid technological advancements. Technological displacement gripped the labor force as machines began to replace men on the assembly lines and in the mines. Consequently, output per man-hour rose tremendously. However, the gains from productivity were passed on to the...
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