What Caused the Great Depression?

Economists and historians have struggled for almost 80 years to account for the American Great Depression, which began in 1929 and lasted until the early years of World War II. The depth of this depression was unprecedented; in March, 1933, more than one quarter of willing workers in the United States were unemployed, and another quarter could find only part-time work. Although conditions improved after this low point, high rates of unemployment continued to haunt the economy for many years. Business Cycles and the Great Depression Depressions (or recessions) occur when there is not enough demand for all the goods and services that an economy produces. Inventories of unsold goods build up, and manufacturers cut production by laying off workers and buying less of the raw materials that they use to make their products. Service providers, from doctors to hair stylists, have fewer clients, and their incomes fall. Most economists believe that such falling demand is a normal part of what is commonly called a Demand for two kinds of goods--durable goods and capital goods--tends to fluctuate, and these fluctuations drive the cycle. Durable goods are consumer goods that last a long time, such as automobiles, appliances, and home furnishings. Demand for such goods increases when consumers are feeling prosperous; it falls when they are not feeling prosperous. Many economists also believe that durable goods markets can be saturated--that there are, in other words, times when most consumers have purchased the durables that they want and have no desire to buy more. At such times, demand obviously will fall. Capital goods are goods such as factory buildings, machinery, and equipment. These are goods that are used to produce other goods. Business firms invest in such goods only when they feel that consumers will buy what is produced by the new capital goods. When that prospect seems doubtful, demand for these goods falls. At some point in the course of a business cycle, most economists believe, demand will reverse. Durable goods eventually wear out and must be replaced. To supply new goods for consumers seeking replacements, manufacturers purchase new equipment, rehire workers, and increase their purchase of raw materials. As demand increases, employment increases. In times of peak demand in a given sector of the economy, almost every potential worker who wants a job can find one. There is also a price dimension to the business cycle. When demand is increasing, prices tend to rise; but when demand is falling, prices normally go down, too. At the low point of the business cycle (the trough), low prices create an incentive for consumers to buy more, leading the economy into recovery. Events during the mid-1920s illustrate the high point (peak) of a business cycle. In these years, there was a great increase in the number of Americans who bought houses, home furnishings, appliances, and automobiles. Towns and cities were growing rapidly, and state and local governments spent money to provide roads, sidewalks, and water and sewage services. The homes of town dwellers were connected to electricity and telephone services. Spending by consumers, business firms, and state and local governments created plentiful, high-paying jobs. In the late 1920s, demand was beginning to soften for houses and automobiles. Cities and states had completed most of the efforts they had undertaken to provide services for their citizens. In the summer of 1929, total spending in the American economy was falling, and business firms began to cut production. October's stock market crash--signaling to shareholders that business profits would fall--probably made the recession worse. There was a loss of wealth and, as a result, people spent less, but the crash did not cause the recession. At first, most observers thought that the recession would be temporary. …

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