Did the Stock Market Crash of 1929 effectively cause the Great Depression, or were there economic factors already in place at that time such that the Greet Depression would have happened anyway, and the Stock Market Crash was just a result of those factors (and made things worse)?

What do "contemporary" (to 1929) economic writers such as Milton Friedman and John Kenneth Galbraith have to say about the connection between the 1929 stock market crash and the Great Depression? Or modern "Depressionists" such as Nouriel Roubini or Jim Grant?

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    This is really a subject on which entire books have been written. The way its phrased, I feel like there's really three questions combined into one here: (a) "Did the Crash of 1929 effectively cause the Great Depression?" (b) "Was the Stock Market Crash a result of economic factors already in place?" (c) "To what extent did the crash made things worse for the Great Depression?"
    – Semaphore
    Commented Jan 21, 2015 at 7:45
  • @Steven Drennon: I have made the question more objective, and hopefully more answerable, by asking for the views of economic writers, and was wondering if the question can be re-opened in its current form.
    – Tom Au
    Commented Jan 25, 2015 at 15:03
  • 1
    "Our great war is a spiritual war. Our great depression is our lives. We’ve all been raised on television to believe that one day we’d all be millionaires, and movie gods, and rock stars. But we won’t. And we’re slowly learning that fact. And we’re very, very pissed off." Commented Jan 26, 2015 at 22:05
  • @TylerDurden Hey, no quoting yourself! ;)
    – Marakai
    Commented Jul 4, 2016 at 4:21

3 Answers 3


Did the Stock Market Crash of 1929 effectively cause the Great Depression?

No. The stock market crash was most likely a serious contributory factor in the onset of the Great Depression. However, it did not "effectively cause" the economy to implode - there were serious pre-existing weaknesses in the late 1920s economy. In fact a recession was already brewing before the stock market had even crashed.

Production of industrial products, for the moment, had outrun consumer and investment demand for them. The most likely reason is that business concerns, in the characteristic enthusiasm of good times, misjudged the prospective increase in demand and acquired larger inventories than they later found they needed. As a result they curtailed their buying, and this led to a cutback in production. In short, the summer of 1929 marked the beginning of the familiar inventory recession.

- Galbraith, John Kenneth. The Great Crash, 1929. Houghton Mifflin Harcourt, 2009.

Although the two events are definitely linked, it is not a cause and effect relationship. It is probably more accurate to call the 1929 crash the start of the era of Great Depression.

People who are not economists often view the Great Crash and the Great Depression as the same event ... In contrast, many economists believe that the two events are at most tangentially related.

- Romer, Christina D. "The Great Crash and the Onset of the Great Depression." The Quarterly Journal of Economics (1990): 597-624.

Were there economic factors already in place?

Economic fundamentals had been declining appreciably months before Black Thursday and Tuesday. Industrial output had been on a steady downward tend since June, and automobile production in particular faced a collapse. Housing construction was down 40% from 1928. Prices and income both dropped after August.

Industrial production fell from 127 in June to 122 in September to 117 in October, 106 in November, and 99 in December; automobile production declined from 660,000 units in March 1929 to 440,000 in August, 319,000 in October, and 92,500 in December.

- Kindleberger, Charles P., and Robert Z. Aliber. Manias, Panics and Crashes: A History of Financial Crises. Palgrave Macmillan, 2011.

By October 1930, the decline had reached 26% in production, 16% in income and 14% in prices. It is thus plausible to argue a recession was already in progress by the time Wall Street buckled. A conventional view is that after years of intense speculation, the bubble was ready to burst.

According to the accepted view of events, by the autumn of 1929 the economy was well into a depression ... A penetrating student of the economic behavior of this period has said that the market slump, "reflected, in the main, the change which was already apparent in the industrial situation."

- Galbraith, John Kenneth. The Great Crash, 1929. Houghton Mifflin Harcourt, 2009.

Even if the contraction had come to an end in late 1930 or early 1931, as it might have done in the absence of the monetary collapse that was to ensue, it would have ranked as one of the more severe contractions on record.

- Friedman, Milton. The Great Contraction, 1929-1933. Princeton University Press, 2008.

Was the Stock Market Crash just a result of those factors?

Whether these economic woes actually caused the 1929 crash is quite disputed. Some argue, for instance, that contemporaries could reasonably have believed the market would soon vigorously rebound. Respected voices at the time had opined that stocks were undervalued, and previous dips proved transient.

There were no reasons for expecting disaster. No one could foresee that production, prices, incomes, and all other indicators would continue to shrink through three long and dismal years ... the crash did not come because the market suddenly became aware that a serious depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell.

- Galbraith, John Kenneth. The Great Crash, 1929. Houghton Mifflin Harcourt, 2009.

Others go further and argue the economic situation was fundamentally sound (typically, arguing that the central bank killed a free market recovery and caused the real Great Depression). This is probably a bit detached from reality, though.

Did the Stock Market Crash . . . made things worse?

While the economic downturn predated the crash, it intensified in its aftermath. Prior to it, the decline in economic metrics could be reasonably dismissed as a temporary dip. The dramatic collapse of stock values created an extreme shock to confidence, and made the once-rosy future seem much less certain. Some writers argue that, in this sense, it helped made the subsequent Great Depression worse.

But partly also, [the stock market's crash] must have helped to deepen the contraction. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes for a new era had prevailed. It is commonly believed that it reduced the willingness of both consumers and business enterprises to spend.

- Friedman, Milton. The Great Contraction, 1929-1933. Princeton University Press, 2008.

The destruction of consumer and business confidence led to inhibited spending. This created a vicious cycle as production fell together with demand, depressing economic activity even further. >

[T]he stock market crash caused consumers to ... delay current spending on durable goods as they waited for further information about the likely course of economic activity. This decline in spending then drove down aggregate income through a standard Keynesian mechanism (or, conceivably, through effects on the real interest rate and the supply of labor).

- Romer, Christina D. "The Great Crash and the Onset of the Great Depression." The Quarterly Journal of Economics (1990): 597-624.

This does not mean that the Crash of 1929 "effectively" caused the Great Depression. However, it certainly helped worsen its effects, especially in the immediate aftermath.

Thus, while the Great Crash of the stock market and the Great Depression are two quite separate events, the decline in stock prices was one factor causing the decline in production and employment in the United States.

- Romer, Christina D. "Great Depression." (2003).


I am writing as the author of "A Modern Approach to Graham and Dodd Investing. Published in 2004, the book discussed the 1929 crash and predicted another one (which occurred in 2008-2009). It also provided a road map of how "other events" caused the fallout from the 1929 crash to turn into the Great Depression, and why the absence of such events have (so far) failed to produce a similar result this time around. From page 314:

During 1930 and 1931, it looked like what would become the Great Depression would be nothing more than a severe recession. In the fall of the latter year, President Herbert Hoover predicted that 'Prosperity is just around the corner," possibly with good reason. But the seminal event that turned the retreat into a global economic collapse was the collapse of the Credit Anstalt Bank in Austria, which plunged Europe deeper into a decade-long Depression...infecting the United States."

The Credit Anstalt was actually the largest "offshore" bank of Germany, which at the time, was the world's second largest economy, meaning that it was a case of "when Germany sneezes, Europe catches cold."

Here's what DIDN'T happen, this time around.

"The crisis, if it comes, will be in Asia. The "fall guy" could be the Taiwan Trust Bank or the Korea Savings Bank. (These are made-up names to illustrate places where the trouble is likely to occur.) The consequences will be severe for the whole region, but particularly for China" [now the second largest economy in the world].

Furthermore, Ben Bernanke, the outgoing chairman of the Federal Reserve, was a student of the Great Depression, and adopted policies of "quantitative easing" that might have been foolish at some other time, but were peculiarly suited for the "modern 1930s," in contrast to the Fed's tight money policies in the original 1930s. Specifically, the Fed (and the Administration) adopted monetary and fiscal policies that were more akin to those of World War II than to those of the 1930s.

Bottom line: the 1929 Crash was associated with the Great Depression and was certainly a contributing factor, but the modern "redo" showed that that was by no means inevitable. Some bad luck and bad economic policy took an inherently tough situation after 1929 and made it into something far worse.


Well, it certainly was not a result, because it happened well before the "Great Depression" which didn't really get going until 1936. A lot of people think the "Depression" began in 1932, but this is not really true. The bread lines and high unemployment actually did not become significant until 1935-6. Before then the "crisis" was financial, mainly affecting businesses, kind of like 2008, not ordinary people.

There were two major factors in creating the depression: the trade war and taxes. In the 1920s, Congress instituted a series of extremely high tariffs through the Smoot-Harley Act and other measures. This created a global trade war which was very damaging to the world's economy.

During the 1920s, the Republicans controlled Congress and kept taxes low, much lower than they are today. Most Americans, including the wealthiest, had little to no income tax at all. This was very conducive to investment. In 1932, however, the Democrats took control of Congress and instituted extremely high income taxes on rich people, going as high as 95%. Obviously when your tax rate is 95% you basically have two choices: stop working or become a criminal (not report taxes). Many business owners fled the country (like "Rick" in Casablanca) and others simply retired and shut down. This had a devastating effect on the economy. Essentially the economy shut down because everyone with capital stopped investing. It was pointless to build a business if you would just lose all your money to taxes. Businesses like restaurants and jewelry stores practically went extinct. Just buying a wedding a ring became difficult. Larger businesses all contracted and stopped hiring, leading to massive unemployment.

Thus, the 1929 crash was, in a sense "the cause" because it changed the mood in the country, leading to foolish decisions, such as to raise tariffs and tax rates, but the proximate cause was the actual institution of those decisions.

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    That 95% figure wasn't applicable for most because of the high threshold. Also the financial crisis did affect normal people - it's called foreclosure. Generally that answer would benefit from sources.
    – user45891
    Commented Jan 25, 2015 at 21:00
  • The stock market crash did affect ordinary people. In the 1920s, for the first time, the middle class was buying stocks, and they lost their investments when the market collapsed. I believe I learned this from a PBS "American Experience" episode about the Great Depression.
    – Literalman
    Commented Aug 20, 2018 at 18:16

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