America’s Great Depression and subsequent recovery, like all major events throughout history, had multiple contributors. There was not a singular cause. The economic ups and downs of the time involved an interplay of financial, governmental, and societal conditions. The precise details have been and will no doubt continue to be debated by those with different disciplinary and worldview perspectives. However, some points with evidentiary support can be synthesized briefly to provide an overview of the combined causes.
In predepression, postbellum America, the theme was improvement. Growth and advancements were evident across sectors, including transportation, communication, industrialization, interregional and international trade, and businesses of all types and sizes. Product specific services and area specializations were on the rise. The classical gold standard contributed to financial tranquility and stability, and the inflow of new gold promoted a two percent annual growth until the nineteen-teens. Money was available. The ideology carried forward to the time supported limited government and market preservation. This view coincided with the constitutional plan that protected property rights and curbed state and federal regulations on economic policy and on businesses, hence, leaving more decisions to local leadership and individuals. Freedom and a positive outlook promoted growth, providing the United States with a large common market and making it the wealthiest nation in the world by the start of the twentieth century.[1]
However, everything was not good. Some things were already at play that would jointly contribute to widespread depression. For instance, the government started increasing regulations and taxes, disagreements and changes in the gold standard arose, banking was modified, big business altered areas of the economy, some stock market investments and debts were over high, and the Great War interfered.
From the 1860s on, reformers and progressives began a series of governmental interventions to the economy. For example, the 1860s National Banking Acts produced a set-up halfway between free banking and centralized government banking which placed bank note issuance mostly in national Wall Street banks and forced national banks to accept other’s notes instead of turning down those which came from shaky, inflationary institutions, the 1887 establishment of the Interstate Commerce Commission led to distortions in the free market and to vested interests, the 1913 constitutional amendment permanently entrenched an income tax, taking funds from individuals, and the formation of the Federal Reserve System in 1913 and the Federal Trade Commission in 1914 regulated banks, railroads, and industries, changing practices, promoting big business, and turning the economy toward centralized statism.[2]
World War I interrupted America’s growth, but the postwar recession was soon replaced by prosperity and an optimistic outlook. During the 1920s, the gross national product grew steadily, the unemployment rates stayed low, stock market investments climbed, and commercial and industrial enterprises expanded on a large scale. This brought new dynamics into play. The larger enterprises needed long-term loans that regulations on commercial banks made difficult to obtain in the old way, so they obtained their funds through the sale of stocks and bonds and by retaining earnings. To circumvent restrictions, commercial banaks purchased bonds and formed affiliations. Loans from private investors, corporations, and foreign sources grew rapidly. The stock market experienced a bubble to the extent that some expressed concern that the public was investing irrationally in a bull market and some executives warned that their company’s earnings might not be high enough to justify the stock prices. Many of the stocks were purchased on a margin and were owned by average citizens. In 1928, the Federal Reserve intervened with policies intended to curb speculation in the stock market, but the effects seem to have been more negative than positive.[3]
Then came the fall of 1929, when the five-to-six-year bull market peaked and started declining. Newspapers printed both scare-inducing articles and reassuring ones. On October 2, The Washington Post reported a crash in stock prices due to a selling frenzy prompted by alarm over the mounting broker loans; losses that day on the New York Stock Exchange amounted to more than two billion dollars. Yet, the Federal Reserve’s weekly report showed a forty-three million dollar increase in broker loans, bringing the record to a new high. The day before, the same paper had reported uneasiness due to the situation with credit, the Bank of England’s rise in discount rate, a huge increase in broker loans, and an advanced call for money because of bank withdrawals of funds for month-end settlements. These issues led to the black days later in the month. In their analysis of the situation, which described several contributing factors, The New York Times summed up the situation as a startled public who all tried to sell simultaneously; they further noted that the liquidation was compounded by investors deciding to sell because of the partial reports they were receiving over lines covered in snow and ice and by calls from banking institutions to pay-up loans or add collateral.[4]
The banking crisis came on the heals of the stock market crash and was partially motivated by it. High levels of loan defaults and bankruptcies combined with declines in assets and shareholder wealth, decreases in money supply, increases in loan rates, an exchange rate crisis, financial panics, mass withdrawals, bank runs, bank liquidations, and bank and conglomerate closures all contributed to the downward economic spiral. Thus, the stock market crash and bank crisis, mostly motivated by government actions during the preceding decades and society’s responses in buying, borrowing, and panic selling, together produced the Great Depression.
New Deal plans were enacted to improve the situation, which they did do to an extent, but not without corresponding negative effects. Other factors helped more. An influx of gold during the 1930s helped rebuild the money stock, stimulate the economy, lower real interest rates, encourage investments, and increase purchases of durable goods. Private businesses brought a ten percent increase in employment accompanied by a ten percent decrease in crime. The passage of time allowed normal activities to reestablish the economy. Finally, the demands of World War II produced full employment and turned America to its next phase.[5]
[1] Sources referenced in this paragraph include Ben S. Bernanke, “The Macroeconomics of the Great Depression: A Comparative Approach,” Journal of Money, Credit and Banking 27, no. 1 (February 1995): 1-28; Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA: Harvard University Press, 1994); David R. Meyer, “Midwestern Industrialization and the American Manufacturing Belt in the Nineteenth Century,” The Journal of Economic History 49, no. 4 (December 1989). 921-937; Cary Roberts, “The Big Picture of American Industrialization,” (lecture in HIUS 713 at Liberty University, Lynchburg, VA, 2020); Hugh Rockoff, “Review of A Monetary History of the United States, 1867-1960.” Economic History Association. Accessed February 16, 2021. EH.net; and Barry R. Weingast, “The Economic Role of Political Institutions: market-Preserving Federalism and Economic Development,” Journal of Law, Economics, & Organization 11, no. 1 (April 1995): 1-31. See them for more concepts on the postbellum, predepression economic situation.
[2] For additional studies on the Great Depression with its pre and post conditions check these sources also referenced in this paragraph, including Robert L. Bradley Jr. and Roger Donway, “Reconsidering Gabriel Kolko: A Half-Century Perspective,” The Independent Review 17, no. 4 (Spring 2013): 561-76; Gabriel Kolko, “The Triumph of Political Capitalism: The Federal Trade Commission and Trust Legislation,” in The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916” (New York: Free Press, 1963) ; David S. Landes, “Review of The Visible Hand: The Managerial Revolution in American Business.” Economic History Association (2000). EH.net; Murray N. Rothbard, “The Origins of the Federal Reserve,” Quarterly Journal of Austrian Economics 2, no. 3 (Fall 1999): 3-51
[3] See sources previously listed and Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited,” The Journal of Economic Perspectives 4, no. 2 (Spring 1990): 67-83 for further information on 1920s conditions.
[4] “Stock Prices Cave in Selling Frenzy: Speculators Throw Their Holdings,” Washington Post, October 4, 1929, ProQuest Historical Newspapers; “Stock Prices Fall in Spite of Bulls,” Washington Post, October 1, 1929, ProQuest Historical Newspapers; “Prices of Stocks Crash in Heavy Liquidation: Total Drop of Billions,” New York Times, October 24, 1929, ProQuest Historical Newspapers.
[5] For additional information on bank crises and failure and on recovery, check these sources referenced in these last two paragraphs: Ben S. Bernanke, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” The American Economic Review 73, no. 3 (June 1983): 257-76; Thomas R. Brown, “The Newest on the New Deal,” Essays in Economic and Business History 36, no. 1 (2018): 1-23; Gary Richardson, “Categories and Causes of Bank Distress During the Great Depression, 1929-1933: The Illiquidity Versus Insolvency Debate Revisited.” Exploration in Economic History 44 (2007): 588-607; Christina D. Romer, “What Ended the Great Depression?” The Journal of Economic History 52, no. 4 (December 1992): 757-84.