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The Great Crash of 1929 did not necessarily have to culminate in the Great Depression. In his work The Great Crash, 1929, John Kenneth Galbraith discussed five factors that were key to turning the crash into a depression. For the key causes of the depression, Galbraith included:
The uneven distribution of income. The wealthiest citizens in America saw their income increase dramatically. As average Americans didn't see such a dramatic increase in their income, economic growth became dependent on wealthier citizens spending more money.
The poor structure of America's corporate system. Holding companies and investment trusts had leveraged investments in a growing stock market in order to increase their income dramatically. They were, however, susceptible to reverse leverage. When the market crashed, companies lost more money than they were worth.
The weak structure of America's banking system. Banks used depositors' money to play the stock market, and when the market crashed, they were forced to close their doors. Not every bank played the market like this, but when they closed, depositors rushed to take their money from other banks out of fear that they would close. Banks that had loaned money for legitimate purposes--home mortgages, starting capital for business, etc.--collapsed due to the banking panic.
The state of the foreign balance. During World War I, the US had gone from borrowing more money than any nation in the world to loaning more money than any nation in the world. In that event, America needed to buy more goods from foreign nations. Those nations would use that money to pay off the debts owed to the US. The US responded to the crash by raising the tariff to prevent importation of foreign goods. Nations went into default on their loans to America, driving a global economic crisis. They raised their tariffs on American goods, further hurting farmers trying to export crops to Europe.
The shabby state of economic intelligence. Everyone who was considered an economic expert gave advice that would exacerbate an already bad situation. Tax cuts--recommended by experts, enacted by Herbert Hoover, and believed to increase purchasing power--had no effect on the lower and middle classes. When Hoover urged business owners to maintain wages and keep investing in their businesses, they believed that they had to do these only until it became economically disadvantageous. When it became a problem, they cut wages, reduced investments, and fired workers.
Which one factor was the most important one in turning the Great Crash into the Great Depression?
This question was answered on: Dec 08, 2020
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