The Many Causes of the Great Depression


By Patrick N. Allitt, Emory University

During the 1920s, overproduction had become a chronic problem in the USA, especially because it was closely connected to maldistribution of income. The producers were the consumers as well, and as American businessmen were insufficiently attentive to this macro issue, they distributed income too narrowly. How was this responsible for the Depression? What were the other factors?

The workers working on an assembly line in a factory in 1920.
A hallmark of a successful consumer economy is when more people can buy far more consumer goods. This was not true for the American economy in the 1920s. (Image: Everett Collection/Shutterstock)

Loss for Producers

By 1890, America was producing more food than it could consume, and that kept the prices down. This was beneficial for the consumer, but terrifying for the producer. American industry was also making more commodities than it could sell. The spread of consumer financing and installment purchasing enabled productivity to outstrip people’s capacity to buy, at least for a while.

In the late 1920s, although income was relatively widely spread if you compare America with many other parts of the world, still, it was heavily biased in favor of a rich minority. Five percent of the American population got one-third of all personal income. Although wages were relatively high by world standards, they weren’t high enough to match the productivity that American producers were now capable of.

If you’re an individual employer, you have an incentive to pay low wages so that profits will be higher. You will be able to satisfy your shareholders, and your shares will tend to become more valuable. If every employer takes the same view, the effect on the whole economy is to deny spending power to the consumers.

This denial made the Depression inevitable in America.

This is a transcript from the video series A History of the United States, 2nd Edition. Watch it now, on Wondrium.

The American Tariff Policy

In the early days of the American Industrial Revolution, tariffs seemed to be essential. The imported goods were made artificially costly by adding the price of the tariff to them so that American manufacturers could put their products onto the market competitively. The people who didn’t like them were the farmers, because it made it more difficult for them to export their commodities abroad, and American farmers had to export food to be able to sell it. In the 1920s, America favored a high tariff policy to protect its manufacturers, even though they were no longer the vulnerable infants they had once been.

An advertisement for a Gillette razor blade stropper.
In the 1920s, the American consumer goods spread widely throughout the country. (Image: The Literary Digest Volume 66, 1920/Public domain)

In the short term, it was a very successful policy, and it was in the 1920s that American consumer goods not only spread widely throughout the United States, but also began to spread around the world. For the first time, some of the American things including Kellogg’s Cornflakes and Gillette safety razor blades showed up in European markets.

This policy of high tariffs backfired in the long run. It backfired against America itself when the Europeans had no more dollars with which to pay. The Europeans couldn’t sell their own products in America because of the high tariffs, which made it difficult for them to penetrate the American market. The Congress shortsightedly raised tariffs even higher in 1930, in the hope of being able to protect American industry, but that just made matters worse.

International Financial Instability

This can be traced straight back to the terms of the Treaty of Versailles. The reparations payments exacted from Germany were so high that they had the effect of delaying the vigorous recovery of the German economy. It’s no wonder that France had been in favor of a policy like this. They wanted Germany to be weak.

In world economic terms, though, it would have made far more sense to enable the German economy to recover vigorously and to be a healthy competitor in world capitalism. The slowness of German recovery, and the widespread belief in Germany that the reparations payments were unjust not only hindered German recovery, it also crippled the legitimacy of the Weimar Republic regime.

It’s because the Weimar Republic was never wholeheartedly believed in by many of the German people, though they were willing to elect Adolph Hitler, who then repudiated the Treaty of Versailles and repudiated the reparations payments.

The Period of the Dust Bowl in the Great Plains

In the late 1860s and 1870s, the Great Plains were settled for the first time after the completion of the first railroads, and when settlers had had this belief that rain follows the plow. It turned out to be a fallacious belief, because the 1880s was a very dry period, which bankrupted a lot of farmers then.

The first and second decades of the 20th century was the golden age of Plains farmers, especially during the First World War. There was an enormous incentive for farmers to grow as much food as they could, because they could sell it to the warring powers in Europe, and get a good price for it. In the early 1930s, a dry spell returned to bother the farmers.

Buried machinery in a barn lot in Dallas, South Dakota in 1936.
The severe dust storms buried everything on the farms of the Great Plains. (Image: Everett Collection/Shutterstock)

During the drought conditions, soil that has been plowed and planted repeatedly tends to dry out and become dust. The whole area of the Plains had always been swept by high winds, and the absence of the dense, mattive prairie grasses (which could hold the soil in place) rendered the area into dust, making it vulnerable to blowing.

The dust storms during the 1930s were violent enough to transform the landscape, and millions of tons of earth was lifted into the jet stream. When it rained in eastern cities after these storms, dust and dirt would come pouring down in showers of muddy rain in New York and Boston and Philadelphia. The dust storms led to the bankruptcy of large numbers of Plains farmers, whose lands’ values fell to nothing.

As a result of these factors, the American economy spiraled down into depression, which persisted right through the 1930s.

Common Questions about the Many Causes of the Great Depression

Q: What caused bankruptcy amongst the Plains farmers?

The dust storms during the 1930s caused bankruptcy amongst the Plains farmers. The values of their lands fell to nothing.

Q: How did the maldistribution of income lead to the Great Depression in the USA?

The wages of the workers were relatively high by world standards, but they did not have enough money to buy the goods that had swamped the market.

Q: How did the policy of high tariffs backfire against America?

The policy of high tariffs backfired against America as the Europeans did not have dollars to pay to the Americans.

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