October aforementioned financial problems contributed to the

October 29, 1929, marked the beginning of the Great Depression in the United States. Learn about this event, including the factors that contributed to the collapse of the American economy.

Limits of Prosperity

From the turn of the century through the late 1920s, the United States enjoyed a period of economic prosperity.

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From 1922 to 1929, the gross national product, or the value of goods produced during the fiscal year, grew at an annual rate of 5%; the gross domestic product measured in at over $200 billion, and wages (for some) skyrocketed by 15%. Additionally, unemployment during the period never surpassed 5%.However, on ‘Black Tuesday’ (October 29, 1929), the Wall Street stock market crashed and entrenched the United States in the Great Depression, the nation’s lengthiest economic downturn, from 1929 to 1941. Within a few short months after the initial crash, stock prices collapsed by 50%. They would eventually fall an additional 30% at the peak of the Depression. Industrial output significantly contracted.

Banks, unable to sustain business, closed and left thousands of Americans without money. Those who had invested in the market had lost everything. To make matters worse, unemployment reached 25% during the Depression years. Americans did what they could to survive, such as waiting in line at soup kitchens, scouring garbage cans and theft. How could such a prosperous nation fall into economic despair? Let’s take a look at the factors that contributed to the Great Depression.

Rampant Speculation

Throughout the 1920s, stock market speculation, or assuming the future success or failure of stocks, ran rampant throughout the United States.

As a result, by the end of the decade, many investors had purchased massive shares of stock, but mainly through loans and a minimum investment of roughly 10%. Most assumed that once the prices on stock rose, they would be able to withdraw their earnings, pay back their loans and be left with a net profit. Most investors shared their method and infused thousands of borrowed dollars into the stock market on various industries and products that did not have time to mature and be considered a proven, even valuable, commodity.

The major influx of investor money into the stock market caused prices to collapse as the market became far too saturated. Simultaneously, creditors who had supplied loans to investors began demanding the repayment of the loans after witnessing market earnings begin to spiral downward. Without the money being repaid to the creditors, the financial structure of the United States crumbled.

Consumer Credit

Another financial issue that contributed to the collapse of the market was consumer credit and installment loans.

The 1920s represented a boom in durable consumer goods, such as vacuum cleaners, refrigerators, radios, automobiles and farm equipment. Most Americans did not have the available cash to pay for the products, so banks and businesses decided to offer what became known as credit. Consumers were able to purchase an item, but pay for it over time (they also had to pay interest on the good). The problem was that many Americans could not afford the credit payments and defaulted on loans and installment plans.

Over time, banks and businesses lost a substantial amount of money, which in turn helped contribute to the market difficulties. It became worse in 1931, when the Federal Reserve Board decided to curtail credit and raise interest rates on current consumers. Americans especially struggled to pay for items after the misguided decision.

Failure of Leadership

While all of the aforementioned financial problems contributed to the collapse of the economic market, the failure of leadership by American presidents during the 1920s may have been the foremost catalyst to the Great Depression. During the period, the White House was occupied by the New Era Republicans – President Warren Harding, President Calvin Coolidge and President Herbert Hoover. These individuals projected pro-business politics and, in Harding’s words, a ‘return to normalcy.’ These Republican presidents believed in supporting big business because it would provide prosperity for the nation.

While Harding’s term was short and unimpressive, his successor, Coolidge, personified the ideas of the New Era Republicans. Coolidge repealed the progressive legislation of Presidents Theodore Roosevelt and Woodrow Wilson and replaced it with a pro-business ideology that consisted of tax reduction for the wealthy, high wall tariffs, deregulation of business by the federal government and the placement of the economy into the hands of business leaders. As a result, the wealthiest Americans paid less in taxes and received more money; all other Americans received less in earnings and faced tax hikes. Simultaneously, the overproduction of goods led to a flooded market because average Americans could not afford to purchase products unless they pursued credit plans.

Needless to say, Coolidge’s pro-business political mentality only made the Great Depression more imminent.Hoover added to the wanton disregard of the American economy and the American people. Continuing with the tradition of the New Era Republicans, Hoover called for cooperation between business and society over individualism. Unfortunately, businesses of the period marginalized the common American. Individuals, farmers and factory laborers, for instance, faced tax burdens, heightened prices, lower wages and a general devaluation of land and real estate, not to mention longer work days and more dangerous working conditions. These unchecked businesses also absorbed a significant amount of resources.

As you can see, there was little desire among the New Era Republicans to establish controls that would monitor speculation and credit plans, encourage an increase in wages to help consumers obtain more of the newly available products or protect the average American from the unregulated power of business. The severity of the economic impact of the Great Depression could have been lessened with more federal oversight.

Lesson Summary

After years of prosperity, the United States’ stock market collapsed on October 29, 1929. This marked the beginning of the Great Depression, which was the nation’s lengthiest economic downturn, lasting 1929 to 1941. Many causes are associated with the collapse, including rampant investor speculation on the stock market, the over-availability of consumer credit and the general disregard of the American economy by the New Era Republicans consisting of Presidents Harding, Coolidge and Hoover. Many attempts were made at curtailing the financial collapse, but it would not be until the United States entered into the Second World War that the nation’s economy rebounded.

Learning Outcomes

When this lesson is complete, you could be able to:

  • Recognize the role the stock market played in the collapse of the American economy in 1929
  • Have a discussion about the credit policies that hurt regular citizens
  • Expound upon the policies of the Republican New Era presidents that aided the depression
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