The Great Depression: Causes and Factors

Questions and Answers

A buildup of debt and speculation in the 1920s

A sudden contraction in consumer spending

They had invested heavily in the stock market and had loaned money to speculators

A surplus of goods Signup and view all the answers

Easy credit and installment buying Signup and view all the answers

A sharp decline in international trade Signup and view all the answers

Study Notes

Post-WWI global economy was fragile and vulnerable to shocks
Many countries, including the US, had experienced a period of rapid economic growth in the 1920s, leading to a buildup of debt and speculation

On Black Tuesday (October 29, 1929), stock prices plummeted, leading to a massive loss of wealth and a sudden contraction in consumer spending
The crash marked the beginning of the Great Depression, but it was not the sole cause

Many banks had invested heavily in the stock market and had loaned money to speculators
When the stock market crashed, banks found themselves with large amounts of worthless stocks and unpaid loans, leading to widespread bank failures

In the 1920s, there was a surge in industrial production, leading to a surplus of goods
However, many Americans were unable to afford these goods, leading to underconsumption and a buildup of inventory

Easy credit and installment buying had encouraged Americans to buy more than they could afford
When the economy began to decline, many people were unable to pay their debts, leading to a credit crisis

The Federal Reserve, the central bank of the US, raised interest rates in 1928 and 1929 to combat speculation, which reduced borrowing and spending
The Fed's response to the crisis was initially inadequate, allowing the economic downturn to worsen

The passage of the Smoot-Hawley Tariff Act in 1930, which raised tariffs on imported goods, is also seen as a contributing factor to the Great Depression
The act led to retaliatory measures from other countries, resulting in a sharp decline in international trade