Answer:
Many people tell you that the Great Depression started with the stock market crash in October 1929, but a) that isn't true, and b) it leads people to mistake correlation with cause. What we think of as the Great Depression did begin after the stock market crash but not because of it.
So what did actually cause the Depression? Well that's a big question and it's one that economists have struggled with ever since. They want to find out so they can keep it from ever happening again. No pressure, economists.
Only 3% of Americans actually owned stock, and the markets recovered a lot of their value by 1930, although they did then go down again because, you know, there was a depression on. And even though big banks and corporations were buying a lot of stock, much of it was with borrowed money known as margin buying, and all of that still was not nearly a big enough iceberg to sink the world's economy.
But if I had to name a single cause of the Great Depression, it might be America's weak banking system. Alright, let's go to the Thought Bubble.
Although the Federal Reserve System had been created in 1913, the vast majority of America's banks were small, individual institutions that had to rely on their own resources. When there was a panic and depositors rushed to take money out of the bank, like they do in the obscure art house movie Mary Poppins, the bank went under if it didn't have enough money on reserve.
So, in 1930, a wave of bank failures began in Louisville that then spread to Indiana, Illinois, Missouri and, eventually, Arkansas and North Carolina. As depositors lined up to take their money out before the banks went belly-up, banks called in loans and sold assets. Ultimately, this meant that credit froze up, which was what really destroyed the economy.
A frozen credit system meant that less money was in circulation and that led to deflation. Now, you're probably thinking, 'Big deal - deflation can't be as bad as inflation, right?' No. Deflation is much worse, as anyone who has ever slept on an air mattress knows. When prices drop, businesses cut costs mainly by laying off workers. These workers then can't buy anything so inventories continue to build up and prices drop further.
Banks weren't lending money, so employers couldn't borrow it to make payroll to pay their workers, and more and more businesses went bankrupt, leaving more and more workers unable to purchase the goods and services that would keep the businesses open.
So if we have to lay the blame for the Great Depression on someone, we can blame the banks, which isn't completely wrong, and it gives us a chance to shake our fists at Andrew Jackson whose distrust of central banking got us into this mess in the first place.
Step-by-step explanation: