by Alabaster Fastdrone

Created on: August 09, 2007

There were many causes of the Great Depression. In the years leading up to the Depression there are a number of factors that contributed to a great increase in stock market trading. The establishment of the Federal Reserve system in the US, decoupling the value of the dollar from gold and other international issues contributed to the collapse in markets that would ripple through the world financial center and result in widespread unemployment throughout the world.

One explanation is the expansion of money supply that occurred in the 1920's which led to a credit driven boom that could not be sustained. One cause of this inflation was a post WWI attempt to help the British return to the gold standard at pre-war parity. This resulted in a net in flow of gold to the US. This led to inflation in the U.S. as well as Britain, which was the ultimate gold. Due to the inflation of the money supply led to an unsustainable boom in stock and bond prices. Government intervention prevented the markets adjustment and delayed the road to recovery.

Another possibility is overproduction and underconsumption. This was due to the fact that in the consumer sector there was not enough money to purchase the goods that were being supplied. Most of the benefit from this imbalance in supply over demand was invested in the stock market, thus adding to the bubble preceding the collapse.

Bank collapses in Rural sections of the U.S. were also a contributing factor. Farmers that were already in deep debt watched as farm prices began to plummet while their interest rates were skyrocketing. Over mortgaged land and low crop prices resulted in defaults on mortgaged loans and then the failure of many banks through the country. Additionally larger banks failed to maintain adequate reserves on hand to pay customers, and were risking a great deal of funds on the stock market. The bank system was perfectly positioned to tumble like the remaining dice in the years leading up to the 1929 crash.

Many other global issues contributed to the collapse. There were post war deflationary pressures, brought on by the fact that European governments were forced to decouple their currency value from the gold standard to allow them to manufacture enough currency to run their war efforts. There was also a breakdown in international trade. This was in part due to the destruction caused by the European War, as well as the Reparations that many European nations were required to pay after the war.

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