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Causes of the great depression The Great Depression was caused by a number of factors all coming together at the same time. The Wall Street stock market crash of 1929 did not actually cause the Great Depression but rather marked the beginning of a deep recession caused by some of the factors discussed below all happening together.
After the First World War, many countries adopted the gold standard for their economies. This meant that the government backed all cash to the value of gold held in reserves and so the supply of money in the economy was heavily constrained by the amount of gold actually available. In the late 1920s, one ounce of gold backed $20. This system worked as long as money was circulating, but if there were to be hoarding of cash on a huge scale, then the circulating money supply would shrink rapidly. The only way a country’s economy could deal with this is for wages and prices to fall in direct proportion to the available money. As the US economy weakened after the stock market crash, the government still had an obligation to keep the contractual rate for the gold in its reserve. The only way to loosen monetary policy would be to leave the gold standard and many countries had to do this in the 1930s. Those countries that left the gold standard earlier tended to recover quicker from the problems caused by deflation.
When many people lost their investments after the Wall Street crash of 1929 and banks began closing, so did confidence drop in the banking system. During the 1930s, more than 9,000 US banks closed and because saving deposits were not insured, investors lost everything they had deposited in those banks. There were runs on banks where people withdrew all their savings as cash and hoarded their money instead. Money withdrawn from savings accounts could no longer be used for lending and hence companies had no way of borrowing money to keep their business operating. The result would be a drop in prices, and then wages, as businesses struggled to keep going. Because people had no money to spend, factory production dropped and many manufacturing workers lost their jobs. The unemployed then had no money to spend, adding to the already perilous economic situation.
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