Causes of Great Depression of 1929

The Great Depression was an economic slump in North America,

Europe, and other industrialized areas of the world that began in

1929 and lasted until about 1939. It was the longest and most

severe depression ever experienced by the industrialized Western

world. It had a lot of impacts on America and now we will try to find

those causes which led this Great Depression. It was not just one

factor, but instead a combination of domestic and worldwide

conditions that led to the Great Depression. As such, there is no

agreed upon list of all its causes. Here instead is a list of the top

reasons that historians and economists have cited as causing the

Great Depression.

Over- production of Agricultural:

Both in United States the farmers produced more wheat, cotton,

corn and other commodities, than could be consumed. Now what

happened there was sharp decline in the prices and purchases of

farm products. This affected the purchasing capacity of the farmers.

Furthermore the farmers had assumed heavy mortgage burdens

during the prosperous time, which further curtailed their purchasing

capacity. This inevitably cut down the market for the manufactured
goods and prevented the factories from producing to their full

capacity and stood in the way of workers getting employment.

Over-production in Industry:

During the period of World War 1, the

American manufacturers encouraged by high profit had made too

many goods which could not be consumed by home market.

Ultimately these manufacturers were compelled to cut down the

production which meant dismissing a number of workers. The

unemployed workers had very little or no capacity to spend which

meant further reduction in the production of good and more

workmen being thrown out of jobs. As depression grew this process

continued. For some time the production of these merchants was

consumed by the domestic consumers due the system of instalment

buying. However, carried to extreme this plan of instalment buying

was dangerous and completely dried up the future purchasing

power and increased the load of private debts.

Labour saving devices:

The introduction of labour saving device led

to greater production with less labour. As a result of introduction of

the machines a large number of men were thrown out of jobs and

usually they failed to secure alternative jobs. We can say that

invention of machines also became the cause of Great Depression.

Concentration of wealth in fewer hands:

The huge profit and

prosperity of 1920’s want to the pockets of a small fraction of the

population (0/3%). these people had an unlimited capacity of

purchasing but there was limit beyond which they could not

consume the goods. if the profit had been distributed more evenly

among the entire population then manufacturers would have able to

sell more goods. however this was not the position and ultimately

led to lesser consumption of goods and less profits. by 1929 the

American industry was feeling that the Americans people could not

absorb the huge quantities of goods being produced by the

Americans factories.

Impact of World War I:

The United States entered World War I

late (1917) and emerged as a major creditor and financier of post-

War restoration. Germany was burdened with massive war

reparations (a political decision on the part of the victors, see the

Treaty of Versailles). Britain and France needed to rebuild. US banks

were more than willing to loan money. However, once US banks

began failing ... the banks not only stopped making loans, they
wanted their money back. This put pressure on European

economies, which had not fully recovered from WWI, contributing to

the global economic downturn. The World War 1 played in

importuned role in the Great Depression.

Decline in American trade:

As a result of war the economy of the

European powers was badly shattered and they owed huge debts to

United States. Most of these debtors’ nations made an effort to buy

a little as possible and well more to United States. For the some

time American investors kept the international trade machinery

working by providing huge loans to foreign powers. But once the

borrower reached a point where their capacity to repay ceased, the

loans were stopped. This thing badly affected the American trade.

Further, the American government adopted high tariffs (Fordeny-

McCumber Tariff of 1920 and Hawley-smooth Tariff of 1930), which

checked the inflow of European goods into Unites States. The

European power retaliated by erecting tariff barriers against

American goods. As a result, the American exports to overseas

market fell considerably.

Stock market speculation:

The practice of stock makers’ speculation

also contributed toward the deepening of the depression. In 1920’s

billions of dollars, which according to Mellon’s theory of wealth

should have gone into developing new products and creating

employment was diverted to stock exchange market. In addition too

much of national income was diverted toward payment of interest

due to system of instalment buying. This thing also contributed in

the Great Depression.

Bank Failures:

In 1929, there were 25,568 banks in the United States; by 1933,

there were only 14,771. Personal and corporate savings dropped

from $15.3 billion in 1929 to $2.3 billion in 1933. Fewer banks,

tighter credit, less money to pay employees, less money for

employees to buy goods. This is the "too little consumption" theory

sometimes used to explain the Great Depression but it, too, is

discounted as being the sole cause.