what caused the great depression?


what caused the great depression?

In: Economics

This is a question that historians will endlessly debate. However, I’d argue there are two key elements:

1. The Stock Market crash. This was similar to what happened in 2008. You had a lot of overvalued securities that were ‘adjusted’ to their true value and a lot of people lost a lot of money on paper. What happens when this occurs is that credit markets freeze and businesses can no longer get short-term credit to conduct operations – ultimately leading to the failure of otherwise perfectly healthy businesses.

2. Trade barriers. The Great Depression was a worldwide phenomenon and governments around the world responded by erecting trade barriers. Unlike the stock market crash – which merely reset some paper values to their ‘true’ value – those trade barriers actually destroyed productivity and shrank economies. By responding with heavy tariffs, governments transformed an economic downturn into an economic catastrophe.

While there were also a host of government policies that exacerbated and extended the Great Depression, these were probably the two main drivers.

For the regular person it was mainly because stock prices collapsed (an endless debate) and when people got scared they couldn’t get their money. Back then there was no digital record of your money. It was on a ledger in a bank. People had to buy stock and have it processed (which took time). When the prices started slipping people started trying to sell. The selling overwhelmed the market. That caused a lag and people panicked when prices didn’t go back up. They ran to the bank to collect their money and found the bank had used it as collateral for loans or to invest. Money was physically kept in a bank. They did not have any to return to consumers. Those people literally lost their money. There was no FDIC to protect their cash.