The Causes of the Great Depression
The Stock Market Crash
To understand the stock market crash, you need to know what the stock market is. A stock is a small share or part of a company. If you own stocks in a company, you own a small part of that company. The stock market is where stocks in different companies are bought and sold. The people that work there are called stock brokers. Their job is to buy and sell stock for people. The idea is to buy the stocks when they are cheap, and to sell them when they are expensive. It works something like this......
You decide that the Really Cool T-Shirt Company is a good company and that they will make money for you. So, you go ahead and buy 100 shares of stock hoping the company will sell lots of T-Shirts, make lots of profit and make your 100 shares of stock worth more money. What you are doing is called speculating. That means that you are making a guess that the stock you bought will get more expensive and that you will make money. During the 1920s lots of people speculated that the stocks they bought would make them money. Many people who didn't have a lot of money saw how stocks were making money for people and they wanted to try and make some too. How can you buy something if you don't have any money for it? You use credit. In other words, you get what you want now, and you pay for it later. When you do this in the Stock Market it's called buying on margin. Sounds like a good deal doesn't it? Well it was until people got greedy and started over speculating on the stocks. People were buying bad or worthless stocks with the hope they would go up. But, the stocks stopped going up, and started going down. All the people who had bought on credit now owed a lot of money that they didn't have. They were not able to pay back the money for the stocks. People got scared and didn't trust the stock market anymore. Everyone wanted to sell their stocks, but no one was buying them. Without any money, the Stock Market crashed, and lots of people lost everything. So, one cause of the Great Depression was that people over speculated on the Stock Market using borrowed money that they could not repay when the stock prices crashed.
The Federal Reserve
The Federal Reserve is basically a big national bank. Think of it as the 'Banker's Bank'. For example, if I need money, I might go to the Bank of America or BB&T or whatever bank I use. If my bank needs money it would go to the Federal Reserve. One of it's jobs is to help out banks during economic crisis. During the Great Depression, The Federal Reserve did not offer enough help to banks around the country. Without this help, many banks failed. In other words, the banks had to close because they didn't have enough money to stay open. This was important because when the banks closed, not everyone who had deposited money in them was able to get their money back. Some people lost all their money. So, another cause of the Great Depression was that the Federal Reserve failed to prevent the collapse of the banking system.
After the Stock Market crash, the government tried many things to fix the economy. One thing that they did was to charge high tariffs on international goods coming into the country, hoping that people would buy American goods. In other words when other countries sent the stuff they made to the United States to sell, they had to pay a high tax on it. This made the other countries mad, and they did the same to the United States. With everyone charging high taxes, there wasn't very much international trade going on. Instead of helping the economy, this backfired and hurt it even more. So, a third cause of the Great Depression was that high tariffs strangled international trade.