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There were several factors that led to the Great Depression. Although the US economy boomed during the 1920s, the prosperity of this decade was not built on firm foundations.

Weaknesses of the US economy

There were various underlying weaknesses in the US economy.

Inequality

• There was an unequal distribution of wealth, with around 60 per cent of families earning below the minimum liveable income of $2,000 a year.
• Republican Party tax policies favoured the wealthy.
• Workers in old industries (such as coal) did not share in the prosperity of the 1920s because there was competition from other industries.
• Working-class women, African Americans, Native Americans, the elderly and the rural poor continued to have a low standard of living despite the boom.
• Many Americans, such as farmers and agricultural workers, did not prosper during the boom.

Problems in agriculture

• As farming techniques improved, farmers started producing more food. However, demand fell and so did prices.
• Tariff wars made it difficult to sell any surplus abroad.
• Thousands of farmers had large debts and lost their farms. This in turn meant sharecroppers were evicted.

Overproduction

• American industries and businesses were producing more than the population could consume.
• There was a decline in demand for consumer goods once those who could afford them had already bought them. Many Americans could not afford to buy these new products. Those who had bought them often did so on credit, so the amount of debt in America was increasing.
• By 1927, 63 per cent of American homes had electricity. However, this meant that nearly 40 per cent of homes, mainly in rural areas, did not have access to electricity, so electrical products were of no use to those people.

Problems abroad

• US businesses struggled to sell surplus goods because foreign governments put tariffs on US goods in response to tariffs imposed by the US government. This particularly affected agriculture.
• There was therefore a limit on the amount of surplus goods that could be exported abroad.

Laissez-faire

• The laissez-faire policy of the Republican presidents meant there was no regulation and not enough safeguards in the economy to deal with any future problems.
• This especially applied to the banks and the stock market.
• During the boom, there had been high demand for shares. However, many companies’ share prices had reached unrealistic levels.
• Banks became involved in speculation on the stock market by lending money to stockbrokers. They used the public’s own savings to invest in shares.

The Wall Street Crash

These key issues meant that business profits were decreasing. ���󲹰����DZ�������’ and ����𳦳ܱ����ٴǰ���’ confidence quickly began to erode.

In September and October 1929, the stock market crashed.

• On 24th October, nearly 13 million shares were sold on the Wall Street stock exchange. This was known as ‘Black Thursday’.
• A further 16 million shares were sold on Tuesday 29th October as prices continued to fall. This was known as ‘Black Tuesday’.
• Shareholders lost billions of dollars.
• The rise of speculation during the 1920s meant that many had brought their share on the margin.
• Many speculators were unable to pay their loans from banks back so many banks went bankrupt.
• People with savings in these banks lost all their savings.