What caused the Great Depression in 1929

The stock market crash of 1929

On "Black Thursday", October 24, 1929, there were massive price losses on the New York Stock Exchange. The next day the crash hit the European stock exchanges. This stock market crash was the prelude to the global economic crisis.

During the First World War, the US had established itself as the leading political and economic power. Americans had every reason to be optimistic about the future of their country. Due to the growing prosperity, a number of small investors also began to speculate on the stock market. It is estimated that one in four US households owned stocks; often also financed by borrowing. The speculative fever fueled the demand for shares and caused the prices to soar. By October 1929, stock values ​​had tripled since 1925.

Speculators on the stock exchanges caused an enormous bubble to develop and stocks to be traded at ever higher values. Some companies took advantage of the share euphoria and threw new shares on the market without investing the capital thus obtained profitably. Other firms were drawn to the stock market by the high demand for stocks, even though they were without a profit. On September 3, 1929, the Dow Jones Index, a key figure for measuring the development of the US stock market, climbed to its record high of 381 points - the Dow Jones had doubled within two years.

After the onset of an economic downturn, there were no further price gains. Warnings from financial circles about the bursting of the speculative bubble were largely ignored. Since there was no further demand for securities, a steady decline in share prices began from October 14, 1929, which ultimately led to panic among investors and the great price slump on October 24. In order to be able to pay off their loans, many investors wanted or had to sell their securities - regardless of the price.

The leading New York banks tried to counter a collapse of the markets by buying support and by taking on canceled loans. Since these measures were unsuccessful, panicked sales continued over the next week and led to a further decline in the share price. Within a week, the Dow Jones Index lost over 50 percent of its value. Efforts were made all over the world to withdraw their money from Wall Street. The American central bank (Fed) did not pump any additional money into the capital market in order to maintain the liquidity of the market. This passive behavior is considered to be one of the main reasons that the crash on the New York Stock Exchange expanded into the "Great Depression" in the USA: From small to large investors, millions of Americans lost their money. The consequence of this economic downturn was the rapid rise in the unemployment rate: in 1932 it was over 25 percent. The most visible signs of the crisis were the impoverishment of large parts of the population and an army of homeless people, as many Americans were no longer able to pay the mortgages due on their homes.

The consequences of the global economic crisis for Germany were no less dramatic. After the European stock markets had also suffered a radical slump on October 25, 1929, "Black Friday", the USA, as the main creditor, withdrew its funds from Europe. The German Reich was hit particularly hard by this, because after overcoming hyperinflation in 1923, the German economy was dependent on foreign investors; about half of the net investment came from the USA. Due to the close financial ties with America, the social and economic effects of the crisis were just as dramatic as in the United States. The already high rate of 1.9 million unemployed in the summer of 1929 rose to almost 5 million in March 1931. In February 1932, the height of the crisis, around 6.14 million people in Germany were finally registered as unemployed.

The collapse of the stock markets was followed by a global banking and credit crisis. In Germany, the collapse of the major bank "Darmstädter und Nationalbank" (Danat-Bank) in July 1931 initiated the banking crisis. Due to the loss of confidence in the financial institutions, there were large gatherings of worried customers in front of banks who wanted to withdraw their savings. As a reaction to the large outflow of deposits and in order to maintain their own liquidity, the banks for their part demanded back customer loans. This led to numerous bankruptcies and bankruptcies of companies.

The radical parties in Germany, the National Socialist German Workers' Party (NSDAP) and the Communist Party (KPD) profited from the effects of the global economic crisis - millions of unemployed, social decline and bitter hardship. They agitated against the republic and democracy with populist slogans. Fewer and fewer Germans trusted the Weimar Republic with a way out of the crisis.

© German Historical Museum, Berlin