What were the causes and effects of the world economic crisis of the 1930s?

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Well, the stock market crash is everyone's kind of popular cause of the Great Depression. We had a stock market crash in the fall of 1929, immediately we had the Great Depression, therefore if — I used to know the Latin for that, it's whatever it was — post hoc ergo propter hoc — one followed from the other. Therefore, the first one caused the second one.

For this, there's some truth to it actually. The stock market lost 80%, or 85%, of its value from the peak in September 1929 to the trough in July 1932. Now, what could (the) that wipeout of the stock market have done?

Well, it destroyed a lot of wealth. There's the so-called wealth effect. So if you were an investor in the stock market, and in the 1920s a lot of kind of middle-class people got into the stock market for the very first time, there was a lot more buying of stocks on credit. It was the great credit boom. And so a lot of ordinary folk like us got into the stock market, but it was still pretty much a rich man's game. Rich men lost a lot of money. Some of them jumped out of windows on Wall Street, and they certainly, with their decline of wealth, could afford to buy a lot less goods and services than they did before. So there's a wealth effect that matters. Uncertainty about the economy, even if you are not an investor in the stock market, but you saw the smart rich guys jumping out of windows on Wall Street, you have to be wondering ... What in the world is happening here? Is this really healthy, an indication of a healthy economy? Well, probably not.

So what are you going to do? What's the logical thing to do if you've got a little money in the bank? Keep it there, save. You're not going to go out and buy a new car or a new refrigerator, go on a vacation. You're going to hunker down and be as conservative as you can until the clouds have cleared away and you have a better sense of the future of the economy.

Christina Romer — some of you may know that name, she's an economic historian who teaches at University of California, Berkeley — and she was, for a time, President Obama's chairperson of the Council of Economic Advisers. Christina wrote a paper that was published a few years ago looking at this uncertainty effect of the stock market crash. Her research found that after the stock market crash, there was a lot less spending on consumer durable goods, like cars and refrigerators, all those newfangled inventions that had come along in the 20s. But the level of spending on food and fuel and basic necessities kept right on steady. So people kept buying their daily necessities, but they really pulled back on the big-ticket spending.

And so it did have a measurable effect. That is, the stock market crash did have a measurable effect on spending. And then there's the role of banks. Banks were heavily involved in lending to investors in the stock market; many banks subsequently failed. So there's this connection as part of the financial fabric was involved here.

So the consensus among economists — excuse me, economic historians — is the stock market crash had some effect. However, as big as it was, still not big enough to have caused the Great Depression. Without the stock market crash alone we would have had a pretty severe recession, but we would not have had the Great Depression. So there must be more to the story than that.

Some people point to the Smoot-Hawley Tariff, enacted by Congress in 1930, signed by President Hoover against a petition signed by hundreds of economists at the time saying "don't do this, it's a mistake."

Well, big business and agriculture, they wanted protection from foreign competition. They didn't like the fact that there were cheap imported goods of rice and wheat and corn and and manufactured goods coming in from abroad. And so they petitioned Congress to raise tariffs to block those imports or to make them more expensive to discourage consumers from buying the goods and services.

Well, what happens when one country raises its tariff? They all did — it was retaliatory. Canada raised their tariffs, United Kingdom raises its tariffs, France raises its tariff. So everybody's putting up these walls against trade to try to protect their domestic industries from foreign competition and everybody ends up losing.

So there's a tremendous collapse in world trade. I stole this picture, I mean I borrowed this picture [audience laughter] from a book called The World in Depression by Charles Kindleberger, who is an economist and economic historian at MIT. And he investigated the collapse of world trade during the Great Depression and I thought this was a cool chart because it just shows this downward spiral of world trade that was going on during the Depression, from about three billion dollars’ worth of trade in 1929, it collapsed by two-thirds to less than a billion dollars by 1933. So the global economy that is trading shrank by two-thirds, whereas the U.S. economy shrank by one-third, so that was a much bigger collapse than the total amount by which the U.S. economy collapsed.

However, the U.S. was much of a what we call a "closed economy" in the 1930s. International trade accounted for a relatively small part of domestic U.S. production, so despite the fact that the Smoot-Hawley Tariff was was not helpful at best and other countries retaliated, the decline in world trade, the decline of U.S. exports was not big enough to have caused the Great Depression, although it was another contributor.

There's a professor at UCLA, Lee Ohanian, recently has a paper blaming Herbert Hoover for the Great Depression. Now Hoover has often long been blamed for the Great Depression. He was blamed as this sourpuss who didn't care about people. "Heck, it's all right, people get laid off. I'm going to put the water cannons on him or worse, if they're in trouble." Now, Hoover has been a much-maligned individual over the years. He was a great humanitarian during World War I and he basically fed the country of Belgium during the war. He was also — he was an engineer by training, he was really an interventionist in the economy and was one for using the government to help solve problems.

One thing he did when he saw the Great Depression come on is he asked the big corporations not to cut wages, which was their traditional inclination when the demand for their products fell, they would cut wages. Prices fell, they'd cut wages.

Man in audience: But they keep people employed.

Wheelock: That's the difference. So according to Ohanian, Hoover brought all these guys in that said don't cut wages because if you cut wages, then people won't have income to spend. Well that — there is some logic to that, but in a macroeconomic sense that doesn't hold up. So what happens, as you pointed out, instead of cutting wages, they laid people off instead. So it's great if you're one of the 75% who kept a job but it was not so great for the 25% who went from the wage to nothing.

That's Ohanian's argument. Now it's not a widely accepted view. I'm rather skeptical that Hoover had as much power as Ohanian ascribes to him to actually get big business to come in and do what he wanted them to do. But it is true, the wages did not fall very rapidly at the beginning of the Depression. As I pointed out, in talking to Ohanian, you wouldn't have had this problem if we didn't have deflation. If prices weren't falling, because the prices of the cars that Ford was trying to sell or General Motors was trying to sell, if they weren't falling, then Ford, General Motors wouldn't have had any reason to cut wages or lay people off. So the deflation was kind of the problem, it wasn't Hoover so much. And there, where I get to the meat of my story, which is to blame the Fed, and bank failures, and the monetary collapse.

I've been monologuing it here for 40 minutes so I'm happy to take a break and stop and answer any questions as we go. Particularly if anybody's completely lost or asleep at this point. I don't see more than half the room is not asleep despite having that dessert but...

Woman in audience: I think I saw your original presentation here...

Wheelock: So you're really bored then, you've seen the whole thing [audience laughter]. You want it to quit right now, then...

Woman in audience: I really need a lot of economics support, but um... as I remember it and not jumping ahead too far, and what I share with my students generally is the Fed's inaction to do anything with monetary policy is what exacerbated it. Is that...?

What caused the economic crisis of the 1930's?

Among the suggested causes of the Great Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply. In this video, Great Depression expert David Wheelock of the St.

What were 3 major causes and effects of the Great Depression?

While the October 1929 stock market crash triggered the Great Depression, multiple factors turned it into a decade-long economic catastrophe. Overproduction, executive inaction, ill-timed tariffs, and an inexperienced Federal Reserve all contributed to the Great Depression.

What were the causes of the economic crisis of the 1920s and 30s?

(1) The stock market crash of 1929 shattered confidence in the American economy, resulting in sharp reductions in spending and investment. (2) Banking panics in the early 1930s caused many banks to fail, decreasing the pool of money available for loans.

What were the effects of economic crisis of 1929 1935?

International trade fell by more than 50%, unemployment in the U.S. rose to 23% and in some countries rose as high as 33%. Cities around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries.