Contrary to popular belief, the Stock Market Crash was NOT
the cause of the Great Depression; but was rather a symptom of the economic conditions
which led to the Depression. There were a number of causes, such as overproduction by
manufacturing concerns, even though inventories were building. There was the belief
(myth) which still rears its ugly head from time to time that the economy had entered a
stage of perpetual growth. Rather than work off inventories, factories continued to
produce, and inventory stockpiles continued to grow until demand was virtually
eliminated. Another cause was lax lending practices by banks. Again, the belief was that
the economy would continue growing; so banks made increasingly riskier loans. When those
loans failed, banks were forced to call other loans which also went into default.
Continuous loan losses caused many banks to close. At a time when there was no FDIC
insurance, those with deposits in a failed bank lost everything. The mere rumor that a
bank was in trouble often caused bank runs which would bring down an otherwise healthy
bank.
A final element was overproduction of agriculture.
Farmers did not understand the relationship between supply and demand; and believed that
when prices declined, the answer was to produce more to make up the difference. Of
course the effect was to push agriculture prices even lower; and many farms went into
foreclosure. Foreclosures, of course were also bad for banks, which hastened their
failure.
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