Was the Stock Market Crash of 1929 a cause or result of the Great Depression?

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).}