Contributor: Sarah Lerdal. Lesson ID: 11205
Imagine your family having no jobs, no cash, no food. In the United States? Learn the unexpected causes of the Great Depression, the worst financial crisis in US history! "Play" the stock market, too!
You will need the help of a friend, teacher, or parent to complete this activity. First, you will need to stand up, stretching out your arms, with your palms up. Have someone place a textbook in your outstretched arms. Every ten seconds, ask your partner to add another textbook. If you can, do this until you have four textbooks. Now hold those textbooks for as long as you can!
Eventually, your arms became fatigued and you had to drop the textbooks, right?
Even the strongest individual can hang on for only so long. That activity was a simplified look at the causes of the Great Depression.
Each of these textbooks represents one reason why the Great Depression occurred. One cause alone may disrupt or tire the system, but together, a variety of causes made the economic system completely collapse. Scholars would cite a variety of reasons for the causes of the Depression, but the four main reasons that we will focus on are: the stock market crash of 1929, bank failure, agriculture troubles, and personal debt.
In the 1920s, the economy appeared strong, and many people were buying shares in various companies. Shares are called stock, and if you own stock, then you own a part of that company. Stockholders get a percentage of the company's quarterly or yearly profits, based on the number of shares they own. That money is called a dividend.
Let's say you bought one share at $10, and a few months later, there was an increased demand in shares and the price went up to $14 a share. You could choose to sell your share and make a $4 profit on that stock.
In the 1920s, there was a riskier method of investing called "buying on margin." Investors could use the value in their existing stock as collateral to borrow money from the bank to purchase more stock. This meant individuals could buy more stock without actually having the money. It also meant they could easily accumulate much more debt.
Buying on margin still exists today, but the guidelines for doing so are far more strict than they were in the 1920s. On October 29, 1929, a day now known as "Black Tuesday," more than 16 million shares of various companies were sold. Watch part of the PBS documentary, The Crash of 1929 & The Great Depression (below):
Banks lent money to all those people buying stock. Now, those people cannot repay the banks. That causes widespread panic, and the general population loses trust in the Federal banking system.
Bank failures occur when banks cannot provide the depositor's money. Banks only keep a certain amount of money on hand, an amount determined by the Federal Reserve (government). So, when too many people go to withdraw money (known as bank runs), and the bank does not have enough to cover the depositors' needs, the bank must seek more money from the government. If the government cannot supply more money to the bank, and a bank with money does not want to buy the bank's debt, the bank will close.
Below is an image of a bank run on New York's American Union Bank early in the Great Depression:
Image, via Wikimedia Commons, is in the public domain in the United States because it is a work prepared by an officer or employee of the United States Government as part of that person’s official duties under the terms of Title 17, Chapter 1, Section 105 of the US Code.
During World War I (1914-1917), farmers were encouraged to produce more. The demand led to farmers buying more land and farm equipment. These higher yields were great until after the war, when supply remained high but demand fell. This meant farmers could not pay banks for their loans on land and equipment.
While many other Americans were enjoying prosperity in the 1920s, that was not the case for rural farmers. Watch the Iowa Pathways short video from Iowa Public Television, Overproduction Leads to Low Prices, to learn more about the plight of farmers.
The 1920s brought about a consumer revolution, helped in part by the ability to buy on credit. Americans could buy items like cars, radios, and appliances by getting them up front and paying monthly amounts until the item was paid in full. This high personal debt helped cause the Depression because Americans were living beyond their means and, once the economy collapsed, they could not pay for their goods.
These causes, and several others, led to the highest unemployment rate in American history. America had been loaning European nations money to rebuild, but those loans had to be halted once the American economy collapsed. This caused the Depression to spread across the globe.
Take some time to review from your notes what you learned to be the main causes of the Great Depression.
Continue on to the Got It? section to see how well you understand these Great Depression causes by writing about them in your own words.
Resources Referenced in the Lesson