Practically everyone has heard about the 1930s Great Depression and how it torn apart the financial structure of the U.S. and the rest of the world as a whole. But why did this depression happen in the first place? What were the main causes of the great depression? Here are some of the important ones.

1. Overinflated Prices

Prices of stocks increased in the 20s, as more and more people bought prices went higher and higher. This helped many common Americans to get rich; the only problem is that the stock’s price could not be justified by the businesses that they were actually backed by.

We were bound to have a pullback at some point in time.

2. Way Too Much Leverage

In addition to the fact that stocks were overpriced, investors used a lot of leverage to buy these overpriced stocks. An average investor with $10,000 could buy $100,000 worth of stocks with that money.

The unbelievable amount of leverage they were able to borrow was just unreal and it meant that investors could lose all of the money in their account from just a small negative move in the market. A larger move meant that they could go into debt and owe more than they had. When the stock market crashed in 1929 this is exactly what happened. Investors had no money to pay lenders so they pulled money out of their banks. This lead to bank failures which lead to panicking and as people pulled more money out of banks more banks went under.

It was an endless cycle that was slowly taking the economy downhill.

3. A World That Was More Interconnected

Another reason the great depression got so bad was that the world was getting smaller and more connected with itself. So something that happened in one part of the planet could affect the rest of the planet. How did it happen?

After the Great War the Europeans needed money to pay for the war and to rebuild themselves. At first they relied on U.S. investors to help lessen the burden. But when the U.S. economy collapsed so did their economies. The U.S. and Europe were major importers so once they stopped consuming products all the countries that depended on exporting to them collapsed as well.

To learn more about the great depression visit this page on the facts on the great depression