What Actually Caused the Great Depression

The chain starts with margin buying. Through the 1920s, investors bought stocks putting down as little as 10 percent cash and borrowing the rest, betting prices would keep rising. When prices started falling in October 1929, brokers issued margin calls demanding repayment. Investors had to sell stock fast to raise cash, and that selling pushed prices down further, triggering more margin calls. This spiral is why the Dow fell so violently: from 381 in September 1929 to 41 by July 1932, an almost 90 percent collapse.

The crash alone didn't cause mass unemployment. It destroyed paper wealth and confidence, which made people and banks act in ways that spread the damage. Banks had invested depositors' money in stocks and in loans to margin buyers who couldn't repay. Rumors that one bank was shaky caused depositors to panic and withdraw cash immediately, a bank run. Since banks kept only a fraction of deposits on hand, lending the rest out, a run could empty a bank's vault and force it to close. Because banks held accounts and loans with each other across a county or region, one failure froze credit everywhere nearby, pulling down healthy banks too. With banks gone, businesses lost credit, cut production, and fired workers.

This American collapse went global because of World War I debts. European nations owed the United States war loans, and Germany owed reparations, partly funded by American loans flowing into Germany. When American banks failed and credit dried up, that money stopped flowing. European economies, already fragile, collapsed too, turning an American banking crisis into a worldwide depression and setting up Unit 7's turn toward New Deal regulation.