What Caused the Great Depression?

December 2, 2014 by Ben Carlson

The price of oil is down nearly 40% in five months, a swift fall in one of the most important and visible commodities in the world. After seeing such a crash in price, investors and pundits are quick to trot out the specific reasons for the decline.

I’ve heard many people this week give the singular reason that oil has fallen so hard so fast. While it makes for a better narrative after the fact, markets rarely move because of a single variable or data point. That would be far too easy.  Usually it’s a confluence of events that gets magnified by leveraged investors and a herd mentality as everyone heads for the exits at once.

Even after the fact it’s difficult to know exactly why the markets behave the way they do. Complex adaptive systems don’t follow a set script.

The biggest case in point of all-time is the Great Depression and the stock market crash of 1929-1932. Consider the stat sheet from this colossal downturn:

The unemployment rate hit nearly 25%

GDP contracted almost 27% (for comparison purposes, it was down only 4.3% in the most recent crisis)

The stock market fell in excess of 85%

This period has been studied by scholars, economists and historians for decades, yet we still can’t find a good answer to the question: Did the stock market crash cause the Great Depression or did the Great Depression cause the stock market crash?

Here’s a list of the most heavily cited reasons:

There was a huge increase in consumer debt in the 1920s as technological innovation advanced at a rapid pace. For the first time ever, people could buy radios, fridges, cars or clothes on credit. It’s estimated that by the end of the 1920s over one-eighth of all retail sales were made on credit.

Margin debt in the stock market was out of control. Speculators had basically taken over the market with an excessive use of leverage. Almost 20% of the total market of listed stocks was purchased on margin loans by 1929.

The Federal Reserve’s overly restrictive monetary policies (Ben Bernanke studied these policies and wasn’t going to repeat their mistakes during the Great Recession).

Declining commodity prices from overproduction due to World War I, which led to tariffs and currency devaluations across the globe.

To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2014/12/caused-great-depresssion/