What Were the Causes of the Great Depression?

While there is no consensus among economists today when trying to pinpoint the exact causes of the Great Depression, many historians feel the stock market crash of 1929 in the United States was the ultimate cause of the depression. Others, however, contend that the stock market crash was merely a symptom rather than one of the causes of the Great Depression, pointing instead to a series of mounting problems preceding the stock market crash that caused a volatile situation.

Several factors combined to become the causes of the Great Depression. The United States Federal Reserve made a series of decisions that contracted the money supply, and at the same time, banks in the U.S. began failing. Whether these factors caused the stock market crash is up for debate, but eventually the stock market did crash, causing a ripple effect throughout the world. Free markets were affected and monetary values plummeted, and while interest rates also fell, most Americans were feeling enough of a squeeze that they either would not or could not spend their money.

Ultimately, the causes of the Great Depression were numerous, not simply one action or condition that led to collapse. What might have been a less severe recession turned into a depression when consumer confidence plummeted; consumers simply did not want to spend their money, which led to a slowed economy. Further compounded by malfeasance on the part of large banks that ended up collapsing catastrophically, the markets suffered as people felt it would be wise to avoid investments and spending until the markets righted themselves. This led to decreased demand.

Other economists believe the causes of the Great Depression can be traced more toward regulatory mistakes made by governing bodies. As banks began to fail, the Federal Reserve simply watched and waited to see what happened. Some economists argue that the Federal Reserve should have stepped in to stop the larger banks from failing, thereby preventing widespread panic that led to a run on money. Others, however, believe that capitalism itself is designed to fail when too much capital is gained by any single entity. This Marxist view essentially points the finger at the over-accumulation of wealth as a societal issue that must be solved rather than simply an economic one.

These economic issues were not isolated in the United States. The Great Depression spread throughout major markets all over the world, and Europe, too, felt the devastating effects of the depression. Historians and economists often point to World War II as the end of the Great Depression, as jobs were created in manufacturing to create armaments and other necessities for war.