I got to talk to someone who lived through the Great Depression. One of his first memories was looking out of his window seeing mostly men dressed in felt hats and overcoats, lining up behind a Catholic hospital at a soup kitchen. Even as a small kid, he found it shocking that some people could not afford to buy a bowl of soup. “A nickel might as well have been a piece of gold," he told me. I then asked him what he felt caused the Depression and he said there were obviously several factors; but the most searing one in his memory, without hesitation, was “Stock Market speculation”.  The Great Depression was the largest global economic crisis of the 20th century, lasting over a decade from 1929 until after the start of World War II.  It involved a chain reaction of events, each compounding the damage of the other:  the stock market crash of 1929; the plunge in consumer spending, wages, employment; and the failure of banks.  Each of these calamities was preceded by causal circumstances.  Alone, each of them might not have caused the financial disaster.  Together, they were devastating.  What caused The Great Depression? The major causes, in aggregate were:  1) speculation in the Stock Market and lax margin buying requirements; 2) consumer overspending and buying on installment; and, 3) structural weakness in the banking system which could have been a last line of defense.  Once the downward spiral began, any additional economic challenges, such as farming overproduction or Tariff policies simply added fuel to the fire.

The most well known manifestation of The Great Depression was the Stock Market Crash of October, 1929.  In prior months, the stock market had expanded rapidly through stock speculation, as investors stopped using it to invest in companies and instead were “investing in stock prices”.  The Market had shifted from being a platform for capital investment to essentially a betting casino (Doc F).  Since it was flying higher than other economic indicators such as production and employment, it was overexpanded and due for at least a Correction.  But because people also were buying heavily on margin, and exploiting loose margin requirements, the Market was also over-leveraged. (By buying on margin, investors were able to pay as little as 10% for a stock purchase, with the other 90% being due and payable at some point (Doc G).  Once the bubble burst and stocks started to plummet, people found themselves in greater debt as the margin calls came in.  The plunge continued and the bottom dropped out of the market.


Similar to the stock market crash where people were buying stocks in excess of the true money they had to spend on them, the consumer economy also was highly leveraged and over extended. Consumers increasingly purchased expensive goods on installments and bought them at a rate that was faster than their income (Doc H).  60 percent of all automobiles and furniture were bought on installment. This is a good idea in theory if everyone can pay back their loans:  companies can grow their customer base and revenues sooner, and consumers can acquire and enjoy goods earlier while paying them off a slow, measured pace.  But if you have large numbers of people who are living beyond their means - including people who were counting on stock market gains to fuel their wealth and spending - you have a disaster.  People who were on installment plans usually didn't pay them back, which hurt the economy. Not only were they setting themselves up for individual failure, but businesses had become dependent on endless expansion and thus lacked the financial discipline to NOT extend the credit. (Doc M) The consumers were headed to being bankrupt and then in 3 quarters the inevitable happens. Even at the top end, a luxray goods provider like Gar Woods was drastically slashing their prices. (Doc J). This shows how it wasn't only middle class/working class families struggling; it was happening up and down the economic ladder.

In order to withstand the effects of the stock market and consumer spending collapses, an exceptionally strong banking system would have had to be in place, Unfortunately, the U.S. banking system had an inherent weakness in the large number of independent banks.  A failure of one prompted runs on the others, so the failures spread like dominos.  (Doc L).  In other words, if people wanted to ask the bank for their money back all at once, the bank wouldn't be able to do so because they lacked size and strength.This often forced banks to hand out loans and sell their assets, leading to banking failure.  Why didn’t the banks and the government see this coming?  Because the boom period which preceded the bust created over-optimism instead of the skepticism necessary to prepare protections for the inevitable downward cyclicality.  Prior to the collapse, President Coolidge told the American public, “The requirements of existence have passed beyond the standard of necessity into the region of luxury… The country can regard the present with satisfaction and anticipate the future with optimism.” (Doc B)  This was one year prior to the Great Depression. They didn’t see it coming.  They should have, but they didn’t.  As a result, and ironically, the entire system was unprepared.  The headline on The New York Times highlights the “Unexpected” Torrent of Liquidation that rocked the Markets. (Doc D) People were so blind-sided that this epidemic, to society, WAS ‘unexpected’.  If we had spent more time talking about what could have been done to ensure that this wouldn't happen, I believe this could have been easily prevented.  But the possibility appears to have never even been considered...

The Great Depression was not a single source calamity.  It had its roots in the stock market, in consumer spending, and in the banking system, with additional factors such as Tariff Policy and farming overproductions adding further to the misery.  Professional economists studying the Great Depression may continue to discuss, debate and analyze economic theories.  But for the person to whom I spoke, the Great Depression was a decade long reality of his childhood.  Now in his 90’s, even 80 years later he still clearly remembers what happened as it was so vivid and omnipresent.