Causes of the Great Depression

The causes of the Great Depression in the early 20th century have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises.

The specific economic events that took place during the Great Depression have been studied thoroughly: a deflation in asset and commodity prices, dramatic drops in demand and credit, and disruption of trade, ultimately resulting in widespread unemployment (over 13 million people were unemployed by 1932) and hence poverty. However, historians lack consensus in determining the causal relationship between various events and the government economic policy in causing or ameliorating the Depression. The initial stock market crash triggered a "panic sell-off" that made the stock market go even lower.

Although a common belief is that the Great Depression was triggered by the 1929 crash of the stock market, the stock market in 1929 had reached record fundamental valuations in spite of deteriorating economic conditions such as rising unemployment, overproduction (excess capacity), underconsumption and high debt. The timing of the crash coincided with news that the proposed import tariff on manufactured products was losing support in Congress.

Current theories may be broadly classified into two main points of view and several heterodox points of view.

First, there are demand-driven theories, from Keynesian and institutional economists who argue that the depression was caused by a widespread loss of confidence that led to underconsumption. The demand-driven theories argue that the financial crisis following the 1929 crash led to a sudden and persistent reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money therefore became profitable as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand.

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