16B: Causes of Great Depression

Impact of tariffs on world trade – high tariffs such as the Smoot-Hawley Tariff were detrimental to foreign trade.  As foreign trade decreased the ability of European countries to repay debt they owed the U.S. after WWI became difficult. 

Stock market speculation – Buying on margin required buyers to purchase only 10 % of a stock’s value. This led to rampant speculation, which inflated stock prices. When stock prices fell buyers did not have money to cover the losses.

Bank failures – when the stock market crashed millions of people fled to the bank (“Run on the banks”) and withdrew all their funds.  As funds were redrawn the American dollar become less and less insured. 

Business failures – as the world faced economic uncertainty, a decline in the monetary value of currency, and stock market failures, businesses failed and led to widespread unemployment. 

The monetary policy of the Federal Reserve System – indirectly the federal government sets interest rates because it loans money at a base rate, to commercial banks. In 1928 and 1929, the Fed raised interest rates to limit Wall Street speculation.