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What Caused the Great Depression?

depression economics

In the recent times that I define as the Great Recession, Americas volatile economy has put its citizens through a roller coaster series of situations and events which has left many of us financially crippled and burdened. With a major depression already on the books (the Great Depression) and a recession that does not seem to be improving so much, I feel that in order to avoid another depression we must first take a look at what caused it in the first place.

One of the major causes of the Great Depression was the stock market crash on October 29, 1929, which is also known as “Black Tuesday”. On this day panic struck the nation as stock prices decreased drastically without hope of recovery. Stockholders attempted to sell their stock but no one was buying since everyone was selling. What caused the stock market to crash was believed to be the effects of tight monetary policies that the Federal Reserve had in place at the time. For instance, the Federal Funds rate began to increase in the spring of 1928 and continued to increase through a recession that began in August 1929, leading to the crash in October 1929.

Another major cause of the Great Depression was massive bank failures across the nation. With the stock market crashing, many banks were forced to close since they had already invested large amounts of their client’s savings into the stock market. This lead to crowds rushing to the banks that was still open to withdraw their money, leading to a massive withdrawal of cash. This in turn caused remaining banks to close, forcing those who were unable to withdraw their money in time into immediate bankruptcy.

In relation to the stock market crash and massive bank failures, another major cause of the Great Depression was a sharp decline in the business industry. Since everyone from the rich to the poor for the most part was bankrupt, people rationed spending money which reduced the number of goods being purchased. This forced businesses to cut back on hours and wages for workers which eventually lead to layoffs. With goods going unsold and work cut short, unemployment rose to its peak US history (above 25%) leading to less spending to alleviate the economic situation.

As American citizens, we often wonder if this is the direction we are headed to in the approaching future and at the unpredictable rate the economy is going we may never get a straight answer.

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