What Caused the Great Depression
The Stock Market Crash reflected an economic weakness that proved to be fatal : over confidence in the stock market . Americans found the stock market an avenue for productive investment because of the rapid growth in the stock market . In the belief that the value of stocks will continue to rise , and they can earn a profit from it , even the less fortunate gambled on the stock market .
Investors paid only a small part of the price and borrowed the rest , gambling that they could sell the stock at a high enough price to repay the loan and make a profit. By 1929 , the real GNP is up 38 percent. Americans focused on getting rich ‘ and enjoying this prosperity . This has seemed to benefit the economy because industries produced vast quantities of goods to meet the growing demand for consumerism . However , the industry boom will continue as long as people can consume all the goods that these industries have produce. ncome is not distributed evenly and as such , a large majority of people cannot afford to buy the goods promoted by advertisements . Credit was therefore introduced to allow people to purchase the goods they wanted . The time came when people have accumulated enough debt that they can no longer afford to buy newer products . People have to stop spending all together because much of their income goes to paying for the old products they have purchased using credit .
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Hence , the supplies and goods of industries can no longer be sold and started to pile up which resulted to a collapse in the industries. The American Smoot-Hawley Tariff Act of 1930 which adopted a protectionist trade policy made the situation worse. It was seen as a purely domestic measure to prevent the further fall of prices , but it provoked immediate retaliation by other governments and contributed to the contraction of international trade.
Thus , the protectionist trade policy of the United States paved way for other countries to adopt the same policy making it difficult to trade and causing American exports to decline sharply. The United States became the leading creditor of European countries struggling to pay debts and reparations incurred during the war American bankers lent heavily to borrowers from Europe who had difficulty paying because of economic downturns and out of difficulty marketing their goods in the foreign market .
This situation has affected the international banking structure . Many banks also gave loans to people and businesses within the country that cannot afford to pay back . In addition to this , some banks also gambled in the stock market and as such , when depositors tried to withdraw their savings , the banks no longer have the money to give causing depositors to panic and demand for their cash . This caused the collapse of many banks and consequently the loss of savings of millions of people.