Causes and Context of the Great Depression
A number of factors played a role in the stock market crash of 1929 and the ensuing depression, or severe, long-term economic recession. The 1920s, also known as the Roaring Twenties, were characterized by economic prosperity and optimism coupled with ever-rising production and consumerism. Increasingly, consumers bought goods using credit and installment plans. Stores allowed customers to pay for more expensive items, like household appliances and cars, over a period of months instead of paying the entire value up front.
Despite this consumer fervor, production began to decline by the end of the decade. Manufacturers produced more goods than consumers could afford or needed to buy and, as a result, began scaling back and laying off workers.
At the same time, stock prices in the United States and around the world were on the rise. Stock is the financial worth of a company that can be bought, sold, or traded in units called shares. In the fall of 1929, stock prices—the price of individual shares in the ownership of a company—were four times greater than their value just eight years earlier. These numbers did not reflect the actual value of the stocks and were far higher than the expected earnings of their respective companies.
The stock market bubble edged toward bursting in October 1929. A slight drop in stock prices caused investor panic. October 24 marked the onset of this panic. On this day, which came to be called Black Thursday, many investors rushed to sell off their stocks for fear that prices would further decline. This panic culminated in the stock market crash of 1929. On Black Tuesday, October 29, the New York Stock Exchange suffered overwhelming price drops in stocks and virtual collapse. Stock prices dropped as much as 33 percent between September and November of that year.Matters were made even worse by investors who had bought into the stock exchange by buying on margin. When buying on margin, investors borrow money from banks and other lenders to purchase stocks and plan to repay the loan after sale of the stocks has earned them a small, or marginal, profit. Fearing they would be unable to repay their loans, these investors hurriedly sold most, if not all, of their stock holdings, helping to perpetuate the market's downward spiral.
Immediate and Long-Term Effects of the Stock Market Crash
The stock market crash of 1929 set off a ripple effect in the American economy. Stock prices nose-dived and struggled to recover. In mid-1932, nearly three years after the crash, stock prices had lost an estimated 90 percent of their earlier value in the fall of 1929.
The crash also eroded American confidence in the banking system, resulting in runs on banks. During a bank run, customers rush to withdraw their savings, having lost faith in their banking institutions. Banks, however, do not generally have the total value of customer deposits on hand. As a result of these runs, banks quickly ran out of cash and were forced to close, causing many customers to lose their entire life's savings.
Consumers were impacted by the crash in other direct and indirect ways. Across the board, consumers had less money to spend on new goods and services. Meanwhile, those who had bought goods on credit or installment plans could not pay on their debts. Both of these factors further stressed the already contracting manufacturing sector and fueled further layoffs that had begun earlier in the decade.In 1933 at least one-fourth of the population was unemployed, and for some groups, such as African Americans, that percentage was dramatically higher. Those who managed to keep their jobs saw a sharp decline in wages. Salaries fell as much as 40 percent between 1929 and 1933. Average industrial wages, or the average pay of industrial workers, fared much worse, declining as much as 60 percent during that same time period.
U.S. Unemployment, 1929-38
The crash and depression also contributed to sociocultural changes. The 1930s saw an increase in crime, including theft and prostitution, and in health-related concerns, including increased suicide, malnutrition, and alcoholism. The number of marriages and births also declined during this time. Dwindling job prospects had an interesting effect on education. Growing numbers of young people finished high school instead of dropping out to seek work, but higher education (college or university) that required tuition became even less attainable for the masses.