How did the Great Depression begin?

The Great Depression is conventionally dated from the US stock market crash of October 1929, which ended the economic expansion of the Roaring Twenties. The crash was the trigger rather than the sole cause. It exposed weaknesses that had built up in the American economy, and a series of banking panics and international financial crises followed in the early 1930s. [1] [2] [3]

Many investors had bought stock on margin, paying a small share of the price and borrowing the rest, which worked only while prices kept rising. The Dow Jones Industrial Average peaked at 381 points in early September 1929, roughly ten times its level at the start of the 1920s. By the end of that month, people were recognizing that share prices had grown too high compared with the value of companies. On October 24, known as Black Thursday, panic selling began, and a record 12.9 million shares were traded. On October 29, Black Tuesday, over sixteen million shares changed hands and more than $14 billion in wealth was lost in a day. Banks demanded repayment of loans from investors, many of whom lost their savings while still owing the debt. [3] [4] [5] [1]

Income was unevenly spread. The BBC Bitesize guide says more than 60 per cent of Americans lived just below the poverty line, and the poorest 10 per cent of households received only 1.8 per cent of national income in 1929. Businesses therefore produced more than they could sell, and prices and wages began to fall. OpenStax adds that 80 percent of families had virtually no savings, so the market had few new buyers when speculation ended. [5] [3]

Consumers also took on heavy personal debt, assuming prosperity would last, and the stock market was loosely regulated, allowing speculators to manipulate prices. [1]

World War I made the United States a center of global finance and left European countries deeply in debt to it. The US raised tariffs in 1921 and 1922 to protect its industry. The Allies hoped to repay their debts with German and Austrian reparations, but those economies were struggling. The US government did not forgive the loans, and American banks extended further private loans that were also at risk of default. This strained US banks, which sought to liquidate such loans at the first sign of a market crisis. OpenStax also names the Federal Reserve's questionable policies and misguided banking practices as contributing factors. [1] [3]

Only about 10 percent of American households held stock, yet nearly a third lost their savings and jobs in the following depression, which shows the link ran through the wider economy. OpenStax describes panic as a self-reinforcing cycle: people sold because the market was falling, which pushed it lower. President Hoover, like many others, expected the economy to recover with limited government intervention, which did not happen. The Federal Reserve notes that regional banking panics in 1930 and international financial crises from 1931 deepened the contraction. [3] [2]