The Great Depression was the worst economic downturn in American history. Countless books and historical explorations have focused on the era, but, somehow, myths about the Great Depression abound. While most recessions are over in a few years, the Great Depression lasted for over a decade and saw massive unemployment and the destruction of wealth. It shaped a generation who grew up with fewer material possessions and an understanding of poverty and what it means to struggle. It's one of the reasons Franklin Delano Roosevelt is considered one of the greatest US Presidents of all time. However, it also spawned a multitude of popular legends about the causes of and solutions for this dark period in American history.
There are many misconceptions about the Great Depression that endure today. A variety of interested parties have made it a point to craft the narrative of the Depression to support their political agendas in the time since it took place. Fortunately, there still are serious historians who have looked at the Depression from many angles and seek to uncover the truth of the matter.
The Depression Was Caused By The 1929 Stock Market Crash
In reality, the 1929-30 recession was less severe than the one in 1920-21. Yet, while 1921 saw an economic boom, 10 years of economic hardship followed 1930. So, if it wasn't the stock market crash, then what did cause the Great Depression?
First, keep in mind that the number-one characteristic of the Great Depression was high unemployment. After the 1929 crash, unemployment spiked, but it didn't reach double digits, peaking at 9%. It was actually on the mend, falling to 6.3% by June of 1930.
That month, the Smoot-Hawley Tariff was passed. While the tariff was pitched as a way to tax imports and thus incentivize the production of goods domestically, 1,000 economists from the leading public universities signed a public appeal against the act. The tariff spawned retaliatory tariffs in other countries that made it harder for Americans to sell their goods abroad. Within five months of the passage of the bill, unemployment reached double digits for the first time, where it stayed for the rest of the 1930s.
The tariff was the first of many misguided government interventions that were largely the cause of the Depression. Some have argued that the Federal Reserve's loose monetary policy of the 1920s, which was followed by a tight monetary policy in the early 1930s (dubbed The Great Contraction), played the biggest part in creating the Depression, while others hotly contest that theory.
The Depression Was Limited To The US
While the Great Depression started in the US, it quickly spread outward and became a global event. It gave rise to Fascism and National Socialism in Europe, and, in many ways, it set the stage for WWII. The protectionist policies that began in the US quickly spread around the world, causing international trade to grind to a virtual standstill.
People Buying Stocks On The Margin Caused The Stock Market Crash
By 1929, the US stock market was inflated to unsustainable levels, fueled by the oft-derided "stock speculators," and indeed many of the stocks were purchased on the margin. Purchasing a stock on the margin basically means that the purchaser pays a percentage of the stock's cost in cash, and the rest is fronted by a broker or agent. Thus, when such a stock fails, the person still owes the part of the sale that was fronted by the broker.
The problem with attributing the crash to this is that marginal trading was no worse in the 1920s than it had been in the previous decades. Margin requirements actually started to rise by the Fall of 1928.
Instead, some argue that the actions of the Federal Reserve during the 1920s may have helped fuel a stock bubble. Between 1921 and mid-1929, the Fed increased the money supply some 60%. Others suggest that the increased support for the Smoot-Hawley Tariff also played a role in causing the market to crash (it passed the House of Representatives in May 1929).