Causes of the Crash 1919-1929

Besides lack of government involvement and over-speculation in stocks and real estate, other possible causes of the Great Depression that have drawn attention include a widespread get-rich-quick mentality, overproduction and low prices for farm produce, a belief that national economies naturally decline in predictable patterns, and a large gap in wealth between the rich and common citizens. Each of these possible causes will be explored below. One fact stands out. The "big crash" was a clear warning sign of deep national economic troubles. These problems continued to worsen through 1932, and their effects stubbornly remained for another ten years.

Whose Fault Was It?

Historians and economists have devoted much attention to the consequences of the Great Depression and its worldwide impact during the 1930's.

For many years, however, little energy was devoted to finding the causes of the calamity that so seriously affected the lives of tens of millions of people. The most likely causes identified remain hotly debated into the twenty-first century. They include economic regulation by government, the occurrence of business cycles, the distribution of wealth, public attitudes about money, the unregulated stock market, a slumping agricultural economy, and the struggling international economy. The following factors have each been identified as possible causes.

Chronology:

1776:: British economist philosopher Adam Smith publishes The Wealth of Nations which greatly influenced economists and politicians through the twentieth century.
1792:: The New York Stock Exchange is founded by a group of 24 men under a tree in New York City.
1914–1918:: Widespread war leaves European economies in disarray, while the United States emerges as an industrial leader.
November 1920:: Warren G. Harding is elected president, leading to 12 consecutive years of Republican control of the White House and strongly pro-business government policies.
October 24, 1929:: The first day of panic strikes Wall Street when 12.8 million shares of stock are sold, many at significantly lower prices than their value only a few days earlier. This day became known as Black Thursday.
October 29, 1929:: Wall Street has its only 16 million-share day, with 16,410,000 shares sold. The day became known as Black Tuesday.
March 5, 1933:: The New York Stock Exchange closes until March 14 for a national bank holiday.
June 6, 1934:: Congress passes the Securities Exchange Act to correct the problems leading to the October 1929 stock market crash.

Little Government Oversight of Business

Up through the nineteenth century a prevalent belief was that conducting business represented a basic form of property right that should be protected from any form of government regulation. Related to this belief, many rationalized that unrestricted economic systems would behave like a living organic system in nature. It would regulate itself to maintain a healthy condition. One form of self-regulation was propelled by the self-interest of business owners. British economist Adam Smith had earlier argued that the "invisible hand" of the marketplace would serve as a check and balance system in a nation's industrial economy. Smith contended that humans are driven both by personal passions to compete and succeed and a desire to self-regulate their actions, driven by the human ability to reason and sympathize. Because humans have this capacity to self-regulate, Smith concluded that economic markets should be free of government restraint. In Smith's economic model, the free market would be self-correcting and lead to a steady growth in national economics. Government involvement would only serve to inhibit this growth. Such was the birth of laissez faire government policy (business largely free of government regulation). This perspective was quite revolutionary in contrast to the centrally controlled economies of the feudal period in Europe in which craft guilds were the dominant organization for producing goods.

Smith's theories had been born during a time when small local craft industries dominated. By the late 1920s, about two-thirds of American industry was controlled by large, publicly owned corporations, many of them "holding companies." Holding companies hold the ownership of other corporations and may provide some general direction and management. Mergers of smaller companies formed other large corporations. By 1929 these companies controlled vast empires. Two hundred of the largest corporations owned half of U.S. businesses. The influence of small individual owners who closely watched the course of their companies' operations had diminished significantly. As the Great Depression began unfolding, some question arose whether Smith's "invisible hand" still played an effective role in balancing a modern industrial economy. Considerable control of industry was in the hands of only a few. While the administrations of Presidents Harding, Coolidge, and Hoover believed the rules of Adam Smith still applied, industrialists were no longer playing by those rules. Some alleged that such pervasive widespread corporate control proved detrimental to the continued health of the economy as a whole. They lacked vision to look ahead.

For example, Samuel Insull of Chicago created a complex pyramid of public utility holding companies. Insull ended up controlling an eighth of the electrical power in the United States. His collection of companies was worth almost $3 billion. Insull's empire finally went bankrupt in 1932. He could no longer afford to pay interest on stocks and bonds back to investors because of declining income during the Great Depression. With large numbers of holding companies and corporate mergers dotting the U.S. industrial landscape of the 1920s, economist Adam Smith's model of business owners maintaining a competitive balance in markets no longer seemed to be the case. Owners had become increasingly detached from the social situation influenced by their companies.

Business Cycles

Somewhat related to the Adam Smith belief that a business economy will tend to satisfactorily regulate itself was the belief that business will tend to go through "natural" cycles of decline and expansion. Any governmental intervention in these cycles would tend to disrupt the system's natural operations and enhance any problems. The United States had previously experienced a number of economic panics, slumps, and depressions. These came in 1819, 1837, 1857, 1873, 1893, and 1914. Many people, including President Hoover, believed that the events of October 1929, which dramatically worsened by 1931, were merely part of a regular cycle of downturns that had historically beset the nation's free market economy.