For eight years, between 1921 and 1929, there was a boom in the American economy. Business was doing well, sales increased, profits increased and the prices of shares rose. Ordinary Americans were investing money in the stock market (Wall Street), buying shares in companies which they hoped would make large profits.
All this came to an abrupt end with the Wall Street Crash in October 1929, and America fell into serious economic depression. But why was this?
1. Companies were producing too many goods. People had already bought lots of new things like cars, radios etc.
American goods could not be sold abroad because other countries had put tariffs (taxes) on them to make them more expensive.
When the demand for goods began to fall, workers' wages were cut and some workers became unemployed, which meant that they could no longer afford to buy the new consumer goods.
“ Not as many people use me when they lose their jobs. This is because companies made too many goods and people stopped buying them. When people lose their jobs it means that there’s hardly any of us around!” A. US Dollar
The Knock On Effect: The workers who produced the parts that were essential for cars and radios eg: Rubber and transmitter industries also suffered
The overproduction of goods was also caused by the unequal distribution of wealth. People who could afford goods no longer wanted to buy them because they had already bought them. A survey showed that 60% of Americans could not even afford such goods as they were living in poverty. For such people the so called ‘boom’ had never been a reality.
“ The USA was a funny place. 60% of people were living in poverty and didn’t have much of me or my friends, only a much smaller percentage of people had lots of us and could afford to buy any goods.” A. US Dollar
People were allowed to borrow too much money and they could not afford to pay it back.
2. People had taken out loans or invested their savings in the stock market, but there were too few controls on the buying and selling of shares.
3. Advertising and hire purchase agreements were not controlled, and this encouraged people to spend more.
4. Too many people thought that share prices could only go up, which encouraged them to invest more than they could afford in the stock market.
“ People had borrowed too much of me and my friends. There was no one to control who borrowed what. When people started to gamble on the stock market they lost what they had borrowed. This caused lots of trouble!” A. US Dollar
Tariff Policy One way of getting rid of the goods that had been overproduced was to sell them abroad in areas like Europe. However, after WW1 the USA wanted to become isolated from the rest of the World. They did this by withdrawing from the League of Nations (Politically isolated)) and by putting tariffs (taxes) on foreign goods (economically isolated). This meant that American goods were much cheaper than foreign goods. However, other countries retaliated and put tariffs on American goods. This prevented any recovery by selling goods abroad. “ I’ve put a tax on your goods. That way people will buy American!” “ I’ve put a tax on your goods. That way people won’t buy American!”
Try to group reasons together and, where possible, show how one event led to another. Also, always try and divide the causes into Short Term and Long Term causes. If you can show these techniques in your exam it will get you much higher marks.
Typical exam questions you might get in your exam:
Why did the Wall Street Crash happen in October 1929?
Why did the Wall Street Crash lead to the Great Depression in the USA?
In what ways did the Wall Street Crash change the lives of people in America?