What caused the Great Depression?

The Great Depression was caused by a combination of the 1929 stock market crash, widespread bank failures, weak federal economic policy, and global trade collapse. After World War I, the United States economy boomed during the 1920s, fueled by new mass production methods, the spread of automobiles, and consumer credit. Stock prices rose rapidly, and millions of Americans bought shares with borrowed money in a practice called buying on margin. The Federal Reserve kept interest rates low for much of the decade, encouraging speculation. By 1929 stock values had risen far faster than corporate earnings could justify.

When the market broke in late October 1929, with Black Thursday on October 24 and Black Tuesday on October 29, the Dow Jones Industrial Average lost almost half its value in a few weeks. Investors who had borrowed to buy stocks now owed more than they had, and banks that had lent that money began to fail. Around 9,000 American banks collapsed between 1930 and 1933, taking the savings of millions of depositors with them because deposit insurance did not yet exist.

As cash disappeared, businesses cut production and laid off workers, which reduced spending and forced more layoffs in a downward spiral. The Federal Reserve made matters worse by tightening the money supply rather than expanding it, allowing thousands of banks to die when they might have been saved.

Congress passed the Smoot-Hawley Tariff Act in June 1930, raising import duties to record highs in an effort to protect American industry. Other countries retaliated with their own tariffs, and global trade collapsed by about two-thirds between 1929 and 1934.

Severe drought in the southern Great Plains created the Dust Bowl, ruining farms across Oklahoma, Texas, Kansas, and Colorado and pushing hundreds of thousands of refugees toward California. International debt left over from World War I, especially German reparations under the Treaty of Versailles, also strained European economies and spread the crisis across the Atlantic.

Underlying weaknesses such as unequal income distribution, fragile family farms, and overproduction in industry made the system vulnerable. President Herbert Hoover relied on voluntary action and limited federal relief, which proved inadequate. The combination of these factors turned a market panic into a deep depression that lasted through the 1930s.