What caused the great depression

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larrygates's profile pic

larrygates | College Teacher | (Level 1) Educator Emeritus

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By the late 1920's many Americans believed that the economy had entered a period of permanent growth rather than cyclical economic activity, a myth that repeats itself all too often in American history. The result was increased speculation and get rich quick schemes which encouraged unnecessary risks. Florida real estate became a hotbed of speculation, with "binder boys" buying up contracts for real estate and selling the contracts on the basis of increased value with no intention of ever closing on the contract. Investment in the stock market also led to wild speculation such that increases in market value were based on speculation alone; a haunting similarity to the recent real estate bubble. The economic policies of Andrew J. Mellon had encouraged savings by the wealthy; but instead of saving, they had joined in the speculation frenzy. Mellon had assumed that the wealthy would invest in consumer goods; when they did not inventories began to increase. Banks made questionable loans which soon became uncollectible, leading to a crisis in the banking industry. Factories and industry continued production of consumer goods even when inventories were at an all time high, expecting the economy to correct itself. When this did not happen, prices began a downward slide.  Finally, the U.S. was still on the gold standard which prevented an increase in the money supply. The only way to stabilize the economy under the gold standard was to allow prices to fall, which led to appalling deflation. With banks losing money on bad loans and increased inventories causing prices to fall, people quit purchasing waiting on still lower prices. This tended to exacerbate the severity of the depression as the economy spun out of control. Symptomatic of the problems with the economy was the crash of October 29, 1929. Speculation had reached such a point that investors suddenly became doubtful of making a profit from higher prices. The market then collapsed suddenly, an indication that the economy was in dire straits.

lalithareddy's profile pic

lalithareddy | High School Teacher | (Level 1) Valedictorian

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It was not just one factor, but instead a combination of domestic and worldwide conditions that led to the Great Depression. As such, there is no agreed upon list of all its causes. Here instead is a list of the top reasons that historians and economists have cited as causing the Great Depression.

The effects of the Great Depression was huge across the world. Not only did it lead to the New Deal in America but more significantly, it was a direct cause of the rise of extremism in Germany leading to World War II.

1. Stock Market Crash of 1929

Many believe erroneously that the stock market crash that occurred on <a href="http://useconomy.about.com/od/glossary/g/Black_Tuesday.htm">Black Tuesday</a>, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.

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