I try to learn more in depth about topics that interest me. I was reading about the Great Depression, but it is so hard to understand for me what exactly cause it, as I read it, it feels like a mix of fancy words that don’t tell me much (likely due to my lack of knowledge and english not being my 1st language). So, could anyone explain me in simple words what exactly cause the Great Depression?
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Many different things caused the downturn, but the thing that made it the great depression was deflation.
Rather than making it easier to borrow or lend money in response to the downturn, the US made it harder. This caused a ton of already strained banks to fail and access to borrowing pretty much evaporate across the country. It was a massive policy failure.
What usually causes these crashes is bad debt. People in those days borrowed money to buy shares. The shares went up and up, until suddenly people started to think that the market had peaked and then they all started to sell, so the shares collapsed. Then the people who had borrowed money couldn’t pay it back, which is a financial disaster both for them and the people they borrowed money from.
After that, instead of wild speculation and debt, they went too far in the opposite direction: no-one was willing to risk lending or investing money. They just hoarded what they could. Banks and businesses were going out of business. People lost their jobs. The government lost tax revenue. All these things are a vicious cycle – I lose my job so I can’t afford to buy the things you’re selling so your shop goes out of business and other people lose their jobs and the government can’t afford to help…
One of the things not discussed enough is inflation in the stock market in the 1920s. This article isn’t very long, but it is informative: [https://www.pbs.org/fmc/timeline/estockmktcrash.htm](https://www.pbs.org/fmc/timeline/estockmktcrash.htm). Stock prices aren’t arbitrary. Though pricing a stock is more subjective than other investment vehicles, there does come a time in which stocks are overvalued. The 1920s saw a great overvaluing of stocks as more people were investing post-WWI, and the roaring 20s where thought to be a prosperous time. In fact one way people invested more is by ‘buying on margin’. Buying on margin is a term for buying stock with borrowed money. The idea is you borrow at one rate, let’s say 3%, then you hope to make a greater return, say 8%, and then pay back the loan by selling the stock and keeping that 5% margin as pure profit. But what comes up must come down, and it all came down in a hurry in 1929. Not only did people lose their investments, but those margin buyers also defaulted, straining the financial markets further.
Also around this time the Dust Bowl hit the Midwest. As part of the rush to obtain land, certain lands in the Midwest which weren’t ideal for farming were settled for it in the early 20th century. That land, not ideal to begin with, was overfarmed and by the end of the 20s, the overfarming, coupled with years of poor rainfall, decimated crop yields, which drove farmers to bankruptcy, and strained financial markets further and banks had to foreclose on properties that were effectively worth nothing.
There were other causes as well, but those are two of the major ones.
Just about every country was on the gold standard which tied the value of currency to the price of gold. France and the United States were hoarding gold in preparation for WW2 . This caused deflation up to 33%. As prices fell businesses could either piss off their entire work force by reducing wages or lay off a bunch of people.
Mass unemployment reduced demand further causing deflation. Branch baking laws meant that the banks were vulnerable to local downturns. Bank failures reduced loans, further exacerbating deflation.
ELI5: the combination of factors that would cause hardship together caused the great depression. These factors include – stock market crash, bank runs/bank failings, international trade issues, drought/dustbowl, and hold standard/money issues.
Stock market crash – always an issue this one was particularly problematic since people were buying stock with loans which made it much much worse.
Bank runs – some banks failed and people ran to get their money causing more to fail.
Dustbowl – people made bumper crop after bumper crop. The soils suffered and when farmers couldn’t pay loans they left the land. The drought and unused farm land created huge dust storms and furthered the dustbowl issue.
International trade and money issues – tariffs and retaliatory tariffs hurt the economy. The gold standard resulted in deflation. People horded money instead of investing it. Banks fell so they didn’t deposit money so the banks could invest. This created issues in the economy.
Here are two articles for more in depth explanation. https://www.britannica.com/story/causes-of-the-great-depression
https://www.history.com/news/great-depression-causes
In the late 1920s, there was a stock market bubble. Somewhat like the crypto bubble in 2021-2022, everyone was talking about how you could make quick profits in stocks. Many people took out loans to buy stocks and did not fully understand the risks involved. Using loans to buy stocks (called buying on margin) means you can earn more when stocks rise but also lose more when they fall.
When stocks fell, people were forced to sell quickly to pay back the loans. Many people did not sell in time, and ended up bankrupt and stopped paying their loans. Banks began to fail because of unpaid loans. When people are worried about banks, they often withdraw their savings and hold it as cash (paper money). If enough people withdraw all at one, even a bank with good loans can run out of money and fail.
Over the course of a few years, nearly half of America’s banks failed. The Federal Reserve can lend money to banks with good loans to keep them from failing, but due to a change in the definition of ‘good loans’ (called the Real bills doctrine), they let a bunch of banks fail unnecessarily. Seriously, in a 2002 speech Fed chair Ben Bernanke agreed that bad Fed policy was responsible for turning a stock market crash into the depression.
When banks fail, depositors lose money and businesses cannot get loans. These businesses cannot grow, and the depositors will spend less. This means businesses fire employees, and eventually close stores or factories. Unemployment reached 25% during the depression (compared to 10% during the 2008 financial crisis).
The great depression really runs from 29-40.
And it was WORST from 34-40.
People tend to date it from 29, because they know about the great stock crash of 29, but REALLY, most households didnt get hit from the stock market crash.
However, after the stock market crash, you saw waves of bank runs, which caused loans to dissapear, which slowed down business. Those waves of contraction made people try and save and save, to have a buffer against bad times but when everyone is trying to save money, at the same time, then no-one is spending money, and the overall economy contracts.
Hoover exacerbated this problem, by raising taxes (to balance the budget) causing the feedback loop of
“I dont have enough money->
I will save money ->
everyone is trying to save money->
no-one is spending money->
the economy overall shrinks, and everyone has less money”
To get worse and worse. Really this only got better when the government starting running MASSIVE deficits, to pay for WWII. Then people had money, and were willing to spend it,and the economy grew.
There is no simple answer. Pretty much every financial crisis is a mix of a lot of factors all at once. Some things that contributed:
1. Over supply. Right before the depression hit the economy was booming and manufacturing was running hot. Some attribute this to a combination of the ending of WWI and the 1918 pandemic winding down. This by itself causes, which the US was struggling with before the Great Depression hit. This causes companies to scale down production, which means lost jobs.
2. Events like the Dust Bowl caused massive disruption to the flow of resources in the US, especially food. This caused massive downstream effects to the economy, like the flow of raw materials to factories on the east coast, which leads to lost jobs among other issues.
3. As unemployment increased and companies started to pull back or go out of business, people started to get nervous and started to pull money out of the banks. This basically set off a chain reaction that resulted in more runs on banks and caused the financial sector to collapse. This caused huge issues for businesses because they rely on banks to operate and pay their employees. As these banks got knocked out, entire businesses got wiped out which caused more unemployment.
4. Lack of intervention from the government to keep the financial system working. The government at the time was afraid to bail out the banks (and keep the financial system intact) because they didn’t want to bail out “bad actors,” as in the banks that were taking too many risks that led to their insolvency. The problem is that this also wipes out the deposits of both everyday people and businesses. Businesses, suddenly losing a ton of money, can’t make payroll and have to cease operations or fire people.
5. Lack of liquidity, or money circulating in the economy. This means new businesses can’t get loans to startup. Which means there are no businesses showing up to replace those lost in the earlier stages.
Prior to the Great Depression, the US literally had full blown depressions as often as we have recessions today. There’s a reason we haven’t had another depression after the Great Depression. Namely a shift to having the government intervene during a crisis. One of the things that made the Great Depression so bad was the lack of action early on and letting the system fail. That set off a huge chain reaction that made things much worse. Ever since then, the government has stepped in when necessary to soften depressions into recessions and prevent another full on collapse.
What caused the Great Depression? Many things, but inequality was high on the list. In 1929, the top 1 percent of Americans owned more than half of their country’s wealth. Many of the remaining 99 percent went into debt during the 1920s to support their consumer lifestyles and open businesses.
To make matters worse, wealthy financiers on Wall Street took on risky debts and made risky investments. This recipe for disaster is what cooked up the 1929 stock market crash.
People—mainly in the United States, but also from other parts of the world—responded to the stock market crash in the worst way possible: they panicked. They took all their money out of the banks. Now banks didn’t have enough cash on hand, and the whole crisis got worse.
In the first years of the depression, the global production of goods ground to a halt. American manufacturing declined by 36 percent from 1929 to 1930 and by another 36 percent the following year. International trade fell by 30 percent. As a result, the price of even basic necessities, like wheat and rice, plummeted. Wheat prices fell by 40 percent and rice by 50 percent, globally. The price of coffee, cotton, rubber, and other cash crops fell 40 percent, crippling the economies that produced them. As production and trade declined, factories shut down, and workers lost their jobs. By 1932, around 30 million people were unemployed worldwide.
It was a bit of a domino effect with a lot of different things playing out. This isn’t the exact order things happened, but it’s a decent overview.
* It started with market fears of a downturn. It was on a massive hot run where stocks kept going up in value. This was being propped up by debt. People would essentially take out loans to buy stocks to take part in the rising values.
* Fearing a potential recession after the hot streak, some of the stocks were sold to pay off said debt before things turned. This caused a dip in the market
* The dip triggered a panic and more people sold, crashing the market.
* People got stuck with loans they could no longer pay due to loss stock values
* banks tightened lending, hurting the market more
* Confidence in banks and the market tanked among the public, causing bank runs as people withdrew money before banks ran out. Many banks closed.
* Federal Reserve raised interest rates due to the gold standard, which limited lending even more, which tanked things even more.
* People stopped spending, unemployment skyrockets.
* Gold standard caused problems with foreign trade as countries kept bumping up interest rates in order to maintain their gold standards, but that caused less spending, more market trouble, more unemployment, etc.
* And then to top things off the US midwest (farm country) got hit with a long drought, which when combined with bad farmland practices caused a dust bowl and a reduction in the food supply.
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