The Three Causes Of The Great Depression

What caused the Great Depression? According to many economists there were many causes that led to the Great Depression of which any one event did not solely cause the historic event in American history. The effects of the great depression were actually felt greatly worldwide. It also led to many other historical events like the new deal in America but, more significantly it was a direct cause of the rise of extremism in Germany which also led to World War II. I think that there were three major causes that led to the great depression. These causes are the Stock Market crash, failing banks, and a reduction in purchasing across the board, and the.

The Stock Market Crash of 1929 devastated the economy and was a key factor in beginning the

A banking panic happens when customers demand immediate liquidation of all of their money that they have deposited in their bank. The problem arises because generally a bank only holds a fraction of the total money that is supposed to be in all of their customers’ accounts. With the people of the United States losing confidence of the solvency of the banks waves of people demanded all of their money at once which forced banks to liquidate loans to raise the required money to meet all of the demands. This process of immediate liquidation quickly caused the fail of most of the banks. These type of banking panics continued on well through 1933 which spurned President Roosevelt to declare a national “banking holiday”. Banks nationwide were closed down until they were inspected and could prove to the government that they were capable of being solvent. Due to all of the panic caused by the stock market crash and the distrust in the banking system, one fifth of the banks in existence had failed and closed by 1933. “The Federal Reserve did little to try to stem the banking panics. Economists Milton Friedman and Anna J. Schwartz, in the classic study A Monetary History of the United States, 1867–1960 (1963), argued that the death in 1928 of Benjamin Strong, who had been the governor of the Federal Reserve Bank of New York since 1914, was a significant cause of this inaction. Strong had been a forceful leader who understood the ability of the central bank to limit panics. His death left a power vacuum at the Federal Reserve and allowed leaders with less sensible views to block effective intervention. The panics caused a dramatic rise in the amount of currency people wished to hold relative to their bank deposits.” (Pells) This rise in the currency to deposit ratio was a major reason why the money supply sharply declined 31 percent between 1929