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To look at the Great Depression, you need to look back further in time... to WWI.
Following The Great War, Germany was in debt, largely due to the harsh imposition of reparations as part of the Treaty of Versailles. Germany managed to make payment until 1923, when they just did not have the finances needed to meet the requirements of the reparation.
All went along swimmingly until Germany could no longer afford to pay reparation to the allied forces in 1923. The French reaction was to invade the Rhur area of Germany. This occupation hurt the German economy more than anything else, causing the government to lose the income from the industrial area, as well as paying the workforce, even though they could not continue working.
Through a series of political movements (The Dawes Plan and the Young Plan), money was lent from the USA to Germany. Germany could then pay off the allied forces, France and Great Britain, who could in turn, repay the United States for their losses. They also used this money to help rebuild their country after the devastation of war.
This was fine until the Wall Street Crash in 1929. This crash brought about the beginning of the Great Depression. As the US economy crashed, they recalled all loans from overseas parties. Germany could not afford to pay, and without the money from Germany, France and Great Britain could also not afford to pay. As France and Britain were major colonial powers at the time, their colonies also felt the pinch of having to repay loans that were out of the reach of their countries.
As money was stretched, governments cut back on social spending... and slowly this leached into the wider workforce with lay-offs and unemployment, halting production as not many could afford to purchase things, especially luxury goods.
First, a step back: There is no specific answer as to what caused the Great Depression. However, historians agree that a mixture of domestic and international events led up the the Great Depression greatly affected it. Here are four long term and short term reasons why:
1. Wall Street Crash
The term "roaring 20s" may sound familiar to you. In the 1920s, the stock market was booming. Stock prices were going up, and many investors were under the impression that they were sure to make a profit. Consequently, the value of stocks declined, and in 1929, the stock market crashed.
Farmers were producing far too much food for the level of demand. Also, factories were producing more products, but this rise was not met by the wages, which were rising slower. Few workers could actually purchase their own products.
3. War debt
European nations still owed the Unites States money from WW1. Many of their economies had no way of paying the US back though.
4. Bank Failures
Many banks went bankrupt, and people rushed to withdraw their money. The banks had little money to loan out, deepening the economic crisis.
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