What caused the Great Depression?

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mkoren eNotes educator| Certified Educator

There were many causes of the Great Depression. One cause was overinvestment in the stock market. Many people sank their life savings into the market. They believed the stocks would continue to rise, and they would make a lot of money. However, these people didn’t research the companies in which they were investing. If they did, they may have found the stock prices were overpriced.

Another factor related to the stock market was how people paid for the stocks they bought. Many people paid on the installment plan. In other words, they bought on margin. They paid about ten percent of the total cost had and then made monthly payments. When stock prices began to fall, brokers called in their debts. People were unable to pay the amount they owed. Stock prices tumbled further, and people lost most of their investment.

The banking industry contributed to the start of the Great Depression. Many banks invested their assets in the stock market. When stock prices fell, banks also lost their investment and couldn’t meet depositors’ demand for the cash they had placed into their accounts. Many banks failed and had to close. Those who had accounts in these banks lost the money that was in their accounts.

The Federal Reserve contributed to the Great Depression. In the 1920s, the Federal Reserve should have raised interest rates to slow investment in the economy and the stock market. Instead, they kept rates low. This encouraged more investment. When the economy collapsed, the Federal Reserve should have lowered rates. Instead, they raised rates making the depression even worse. There are many factors that led to the Great Depression.