Which of the following was a cause of the Great Depression that began in October 1929

The decade, known as the "Roaring Twenties," was a period of exuberant economic and social growth within the United States. However, the era came to a dramatic and abrupt end in October 1929 when the stock market crashed, paving the way into America's Great Depression of the 1930s.

In the years to follow, economic upheaval ensued as the U.S. economy shrank by more than 36% from 1929 to 1933, as measured by Gross Domestic Product (GDP). Many U.S. banks failed, leading to a loss of savings for their customers, while the unemployment rate surged to over 25% as workers lost their jobs.

  • In October of 1929, the stock market crashed, wiping out billions of dollars of wealth and heralding the Great Depression.
  • Known as Black Thursday, the crash was preceded by a period of phenomenal growth and speculative expansion.
  • A glut of supply and dissipating demand helped lead to the economic downturn as producers could no longer readily sell their products.

The crash began on Oct. 24, 1929, known as "Black Thursday," when the market opened 11% lower than the previous day's close. Institutions and financiers stepped in with bids above the market price to stem the panic, and the losses on that day were modest, with stocks bouncing back over the next two days.

However, the bounce was short-lived since the following Monday—now known as Black Monday—the market measured by the Dow Jones Industrial Average (DJIA) closed down 13%. The next day, Black Tuesday, the Dow, which contains some of the largest companies in the U.S., fell another 12%.

Before the crash, which wiped out both corporate and individual wealth, the stock market peaked on Sept. 3, 1929, with the Dow at 381.17. The ultimate bottom was reached on July 8, 1932, where the Dow stood at 41.22. From peak to trough, the Dow experienced a staggering loss of 89.2%.

Although the price of many large, blue-chip stocks declined, smaller companies suffered, even more, forcing companies to declare bankruptcy. Many speculative stocks were delisted from stock exchanges. It was not until Nov. 23, 1954, that the Dow reached its previous peak of 381.17.

In the first half of the 1920s, companies experienced a great deal of success in exporting to Europe, which was rebuilding from World War I. Unemployment was low, and automobiles spread across the country, creating jobs and efficiencies for the economy. Until the peak in 1929, stock prices went up by nearly 10 times. In the 1920s, investing in the stock market became somewhat of a national pastime for those who could afford it and even those who could not—the latter borrowed from stockbrokers to finance their investments.

The economic growth created an environment in which speculating in stocks became almost a hobby, with the general population wanting a piece of the market. Many were buying stocks on margin—the practice of buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or a broker—in ratios as high as 1:3, meaning they were putting down $1 of capital for every $3 of stock they purchased. This also meant that a loss of one-third of the value in the stock would wipe them out.

People were not buying stocks on fundamentals; they were buying in anticipation of rising share prices. Rising share prices brought more people into the markets, convinced that it was easy money. In mid-1929, the economy stumbled due to excess production in many industries, creating an oversupply. Essentially, companies could acquire money cheaply due to high share prices and invest in their own production with the requisite optimism.

This overproduction eventually led to oversupply in many areas of the market, such as farm crops, steel, and iron. Companies were forced to dump their products at a loss, and share prices began to falter.

With Europe recovering from the Great War and production increasing, the oversupply of agricultural goods meant American farmers lost a key market to sell their goods. The result was a series of legislative measures by the U.S. Congress to increase tariffs on imports from Europe. However, the tariffs expanded beyond agricultural goods, and many nations also added tariffs to their imports from the United States and other countries. The overproduction, oversupply, and higher prices due to tariffs had devastating consequences for international trade. From 1929 to 1934, global trade plummeted by 66%.

Margin trading can lead to significant gains in bull markets (or rising markets) since the borrowed funds allow investors to buy more stock than they could otherwise afford by using only cash. As a result, when stock prices rise, the gains are magnified by the leverage or borrowed funds.

However, when markets are falling, the losses in the stock positions are also magnified. If a portfolio loses value too rapidly, the broker will issue a margin call, which is a notice to deposit more money to cover the decline in the portfolio's value. If the funds are not deposited, the broker is forced to liquidate the portfolio.

When the market crashed in 1929, banks issued margin calls. Due to the massive number of shares bought on margin by the general public and the lack of cash on the sidelines, entire portfolios were liquidated. As a result, the stock market spiraled downwards. Many investors were wiped out, and the Federal Deposit Insurance Corporation (FDIC), which guarantees depositors' funds, didn't exist back then. Many Americans began withdrawing their cash from banks while the banks, which made too many bad loans, were left with significant losses.

The stock market crash and the ensuing Great Depression (1929-1939) directly impacted nearly every segment of society and altered an entire generation's perspective and relationship to the financial markets.

In a sense, the time frame after the market crash was a total reversal of the attitude of the Roaring Twenties, which had been a time of great optimism, high consumer spending, and economic growth.

The term "Great Depression" refers to the greatest and longest economic recession in modern world history. The Great Depression ran between 1929 and 1941, which was the same year that the United States entered World War II in 1941. This period was accentuated by a number of economic contractions, including the stock market crash of 1929 and banking panics that occurred in 1930 and 1931.

Economists and historians often cite the Great Depression as one of the largest—if not the most—catastrophic economic events of the 20th century.

  • The Great Depression was the greatest and longest economic recession in modern world history that ran between 1929 and 1941.
  • Investing in the speculative market in the 1920s led to the stock market crash in 1929, which wiped out a great deal of nominal wealth.
  • Most historians and economists agree that the stock market crash of 1929 wasn't the only cause of the Great Depression.
  • Other factors including inactivity followed by overaction by the Fed also contributed to the Great Depression.
  • Both Presidents Hoover and Roosevelt tried to mitigate the impact of the depression through government policies.

During the short depression that lasted from 1920 to 1921, known as the Forgotten Depression, the U.S. stock market fell by nearly 50%, and corporate profits declined by over 90%. The U.S. economy enjoyed robust growth during the rest of the decade. The Roaring Twenties, as the era came to be known, was a period when the American public discovered the stock market and dove in headfirst.

Speculative frenzies affected both the real estate markets and the New York Stock Exchange (NYSE). Loose money supply and high levels of margin trading by investors helped to fuel an unprecedented increase in asset prices.

The lead-up to October 1929 saw equity prices rise to all-time high multiples of more than 19-times after-tax corporate earnings. This, coupled with the benchmark Dow Jones Industrial Index (DJIA) increasing 500% in just five years, ultimately caused the stock market crash.

The NYSE bubble burst violently on Oct. 24, 1929, a day that came to be known as Black Thursday. A brief rally occurred Friday the 25th and during a half-day session Saturday the 26th. However, the following week brought Black Monday (Oct. 28) and Black Tuesday (Oct. 29). The DJIA fell more than 20% over those two days. The stock market would eventually fall almost 90% from its 1929 peak.

Ripples from the crash spread across the Atlantic Ocean to Europe triggering other financial crises such as the collapse of the Boden-Kredit Anstalt, Austria’s most important bank. In 1931, the economic calamity hit both continents in full force.

The 1929 stock market crash wiped out nominal wealth, both corporate and private, sending the U.S. economy into a tailspin. In early 1929, the U.S. unemployment rate was 3.2%. By 1933, it soared over 25%.

Despite unprecedented interventions and government spending by both the Hoover and Roosevelt administrations, the unemployment rate remained above 18.9% in 1938. Real per capita gross domestic product (GDP) was below 1929 levels by the time the Japanese bombed Pearl Harbor in late 1941.

While the crash likely triggered the decade-long economic downturn, most historians and economists agree that the crash alone did not cause the Great Depression. Nor does it explain why the slump's depth and persistence were so severe. A variety of specific events and policies contributed to the Great Depression and helped to prolong it during the 1930s.

The relatively new Federal Reserve mismanaged the supply of money and credit before and after the crash in 1929. According to monetarists such as Milton Friedman and acknowledged by former Federal Reserve Chair Ben Bernanke.

Created in 1913, the Fed remained fairly inactive throughout the first eight years of its existence. After the economy recovered from the 1920 to 1921 depression, the Fed allowed significant monetary expansion. The total money supply grew by $28 billion, a 61.8% increase between 1921 and 1928. Bank deposits increased by 51.1%, savings and loan shares rose by 224.3%, and net life insurance policy reserves jumped 113.8%. All of this occurred after the Federal Reserve cut required reserves to 3% in 1917. Gains in gold reserves via the Treasury and Fed were only $1.16 billion.

By increasing the money supply and keeping the interest rate low during the decade, the Fed instigated the rapid expansion that preceded the collapse. Much of the surplus money supply growth inflated the stock market and real estate bubbles.

After the bubbles burst and the market crashed, the Fed took the opposite course by cutting the money supply by nearly a third. This reduction caused severe liquidity problems for many small banks and choked off hopes for a quick recovery.

Trade routes created during World War II remained open during the Great Depression and helped the market recover.

As Bernanke noted in a November 2002 address, before the Fed existed, bank panics were typically resolved within weeks. Large private financial institutions would loan money to the strongest smaller institutions to maintain system integrity. That sort of scenario had occurred two decades earlier, during the Panic of 1907.

When frenzied selling sent the NYSE spiraling downward and led to a bank run, investment banker J.P. Morgan stepped in to rally Wall Street denizens to move significant amounts of capital to banks lacking funds. Ironically, it was that panic that led the government to create the Federal Reserve to cut its reliance on individual financiers such as Morgan.

After Black Thursday, the heads of several New York banks had tried to instill confidence by prominently purchasing large blocks of blue-chip stocks at above-market prices. While these actions caused a brief rally Friday, the panicked sell-offs resumed Monday. In the decades since 1907, the stock market grew beyond the ability of such individual efforts. Now, only the Fed was big enough to prop up the U.S. financial system.

The Fed failed to do so with a cash injection between 1929 and 1932. Instead, it watched the money supply collapse and let thousands of banks fail. At the time, banking laws made it very difficult for institutions to grow and diversify enough to survive a massive withdrawal of deposits or run on the bank.

While difficult to understand, the Fed's harsh reaction may have been the result of its fear that bailing out careless banks would only encourage fiscal irresponsibility in the future. Some historians argue that the Fed created the conditions that caused the economy to overheat and then exacerbated an already dire economic situation.

Herbert Hoover took action after the crash occurred even though he's often characterized as a "do-nothing" president.

Between 1930 and 1932, he implemented:

  • An increase to federal spending by 42%, which engaged in massive public works programs such as the Reconstruction Finance Corporation (RFC)
  • Taxes to pay for new programs
  • A ban on immigration in 1930 to keep low-skilled workers from flooding the labor market

Hoover was mainly concerned with the fact that wages would be cut following the economic downturn. He reasoned that prices needed to stay high to ensure high paychecks in all industries. To keep prices high, consumers would need to pay more.

But the public was burned badly in the crash, leaving many people without the resources to spend lavishly on goods and services. Nor could companies count on overseas trade, as foreign nations were not willing to buy overpriced American goods any more than Americans were.

Many of his and Congress' other post-crash interventions, such as wage, labor, trade, and price controls, damaged the economy's ability to adjust and reallocate resources.

This bleak reality forced Hoover to use legislation to prop up prices and hence wages by choking out cheaper foreign competition. Following the tradition of protectionists, and against the protests of more than 1,000 of the nation's economists, Hoover signed into law the Smoot-Hawley Tariff Act of 1930.

The act was initially a way to protect agriculture but swelled into a multi-industry tariff, imposing huge duties on more than 880 foreign products. Nearly three dozen countries retaliated, and imports fell from $7 billion in 1929 to just $2.5 billion in 1932. By 1934, international trade had declined by 66%. Not surprisingly, economic conditions worsened worldwide.

Hoover's desire to maintain jobs and individual and corporate income levels was understandable. However, he encouraged businesses to raise wages, avoid layoffs, and keep prices high at a time when they naturally should have fallen. With previous cycles of recession/depression, the United States suffered one to three years of low wages and unemployment before dropping prices led to a recovery. Unable to sustain these artificial levels, and with global trade effectively cut off, the U.S. economy deteriorated from a recession to a depression.

President Franklin Roosevelt promised massive change when he was voted-in in 1933. The New Deal he initiated was an innovative, unprecedented series of domestic programs and acts designed to bolster American business, reduce unemployment, and protect the public.

Loosely based on Keynesian economics, it was based on the fact that the government could and should stimulate the economy. The New Deal set lofty goals to create and maintain the national infrastructure, full employment, and healthy wages. The government set about achieving these goals through price, wage, and even production controls.

Some economists claim that Roosevelt continued many of Hoover's interventions, just on a larger scale. He kept in place a rigid focus on price supports and minimum wages and removed the country from the gold standard, forbidding individuals to hoard gold coins and bullion. He banned monopolistic business practices and instituted dozens of new public works programs and other job-creation agencies.

The Roosevelt administration paid farmers and ranchers to stop or cut back on production. One of the most heartbreaking conundrums of the period was the destruction of excess crops, despite the need for thousands of Americans to access affordable food.

Federal taxes tripled between 1933 and 1940 to pay for these initiatives as well as new programs such as Social Security. These increases included hikes in excise taxes, personal income taxes, inheritance taxes, corporate income taxes, and an excess profits tax.

The New Deal led to measurable results, such as financial system reform and stabilization, boosting public confidence. Roosevelt declared a bank holiday for an entire week in March 1933 to prevent institutional collapse due to panicked withdrawals. This was followed by a construction program for a network of dams, bridges, tunnels, and roads. These projects opened up federal work programs, employing thousands of people.

Although the economy showed some recovery, the rebound was far too weak for the New Deal's policies to be unequivocally deemed successful in pulling America out of the Great Depression. Historians and economists disagree on the reason:

  • Keynesians blame a lack of federal spending, saying that Roosevelt did not go far enough in his government-centric recovery plans
  • Others claim that by trying to spark immediate improvement instead of letting the economic/business cycle follow its usual two-year course of hitting bottom and then rebounding, Roosevelt may have prolonged the depression, just like Hoover did before him

A study by two economists at the University of California, Los Angeles estimated that the New Deal extended the Great Depression by at least seven years. But it is possible that the relatively quick recovery, which was characteristic of other post-depression recoveries, may not have occurred as rapidly post-1929. That's because it was the first time the general public (not just the Wall Street elite) lost large amounts in the stock market.

American economic historian Robert Higgs argued that Roosevelt's new rules and regulations came so fast and were so revolutionary that businesses became afraid to hire or invest. Philip Harvey, a professor of law and economics at Rutgers University, suggested that Roosevelt was more interested in addressing social welfare concerns than creating a Keynesian-style macroeconomic stimulus package.

Social Security policies enacted by the New Deal created programs for unemployment, disability insurance, old-age, and widows' benefits.

The Great Depression appeared to end suddenly around 1941 to 1942. That's if we look at employment and GDP figures. This was just around the time that the United States entered World War II. The unemployment rate fell from eight million in 1940 to just over one million in 1943. However, more than 16 million Americans were conscripted to fight in the Armed Services. In the private sector, the real unemployment rate grew during the war.

The standard of living declined due to wartime shortages caused by rationing, and taxes rose dramatically to fund the war effort. Private investment dropped from $17.9 billion in 1940 to $5.7 billion in 1943, and total private-sector production fell by nearly 50%.

Although the notion that the war ended the Great Depression is a broken window fallacy, the conflict did put the United States on the road to recovery. The war opened international trading channels and reversed price and wage controls. Government demand opened up for inexpensive products, and the demand created a massive fiscal stimulus.

In the first 12 months after the war ended, private investments rose from $10.6 billion to $30.6 billion. The stock market broke into a bull run in a few short years.

It's hard to pinpoint exactly what specific factor caused the Great Depression. But economists and historians generally agree that there were several mitigating factors that led to this period of downturn. These include the stock market crash of 1929, the gold standard, a drop in lending and tariffs, as well as banking panics, and contracted monetary policies by the Fed.

The Great Depression started following the stock market crash of 1929, which wiped out both private and corporate nominal wealth. This sent the U.S. economy into a tailspin and eventually trickled out beyond the U.S. border to Europe.

The Great Depression ended in 1941. This was around the same time that the United States entered World War II. Most economists cite this as the end date, as this was the time that unemployment dropped and GDP increased.

The Great Depression was the result of an unlucky combination of factors, including a flip-flopping Fed, protectionist tariffs, and inconsistently applied government interventionist efforts. This period could have been shortened or even avoided by a change in any one of these factors.

While the debate continues as to whether the interventions were appropriate, many of the reforms from the New Deal, such as Social Security, unemployment insurance, and agricultural subsidies, exist to this day. The assumption that the federal government should act in times of national economic crisis is now strongly supported. This legacy is one of the reasons the Great Depression is considered one of the seminal events in modern American history.