The stock market crash of 1929.
Banking panics and monetary contraction
The gold standard.
Decreased international lending and tariffs.
Explanation:
The stock market crash of 1929: During the 1920s the U.S. stock market underwent a historic expansion. As stock prices rose to unprecedented levels, investing in the stock market came to be seen as an easy way to make money, and even people of ordinary means used much of their disposable income or even mortgaged their homes to buy stock. By the end of the decade, hundreds of millions of shares were being carried on margin, meaning that their purchase price was financed with loans to be repaid with profits generated from ever-increasing share prices. Once prices began their inevitable decline in October 1929, millions of overextended shareholders fell into a panic and rushed to liquidate their holdings, exacerbating the decline and engendering further panic. Between September and November, stock prices fell 33 percent. The result was a profound psychological shock and a loss of confidence in the economy among both consumers and businesses. Accordingly, consumer spending, especially on durable goods, and business investment were drastically curtailed, leading to reduced industrial output and job losses, which further reduced spending and investment.
Banking panics and monetary contraction: Between 1930 and 1932 the United States experienced four extended banking waves of panic, during which large numbers of bank customers, fearful of their bank’s solvency, simultaneously attempted to withdraw their deposits in cash. Ironically, the frequent effect of a banking panic is to bring about the very crisis that panicked customers aim to protect themselves against: even financially healthy banks can be ruined by a large panic. By 1933 one-fifth of the banks in existence in 1930 had failed, leading the new Franklin D. Roosevelt administration to declare a four-day “bank holiday” (later extended by three days), during which all of the country’s banks remained closed until they could prove their solvency to government inspectors. The natural consequence of widespread bank failures was to decrease consumer spending and business investment because there were fewer banks to lend money to. There was also less money to lend, partly because people were hoarding it in the form of cash. According to some scholars, that problem was exacerbated by the Federal Reserve, which raised interest rates (further depressing lending) and deliberately reduced the money supply in the belief that doing so was necessary to maintain the gold standard (see below), by which the U.S. and many other countries had tied the value of their currencies to a fixed amount of gold. The reduced money supply in turn reduced prices, which further discouraged lending and investment (because people feared that future wages and profits would not be sufficient to cover loan payments).
The gold standard: Whatever its effects on the money supply in the United States, the gold standard unquestionably played a role in the spread of the Great Depression from the United States to other countries. As the United States experienced declining output and deflation, it tended to run a trade surplus with other countries because Americans were buying fewer imported goods, while American exports were relatively cheap. Such imbalances gave rise to significant foreign gold outflows to the United States, which in turn threatened to devalue the currencies of the countries whose gold reserves had been depleted. Accordingly, foreign central banks attempted to counteract the trade imbalance by raising their interest rates, which had the effect of reducing output and prices and increasing unemployment in their countries. The resulting international economic decline, especially in Europe, was nearly as bad as that in the United States.
