What caused the Great Depression?

The 1929 stock market crash is the famous starting gun, but it was the trigger, not the underlying disease, and treating it as the sole cause misses why an ordinary market panic became a decade-long global depression. The crash wiped out fortunes and shattered confidence, but the economy might have recovered from that alone. What turned a sharp downturn into the Great Depression was a cascade of deeper failures compounding each other: waves of bank failures in which thousands of banks collapsed and took people's savings with them (there was no deposit insurance yet), causing the money supply to contract severely, a shrinkage many economists, notably Milton Friedman, blame heavily on the Federal Reserve for failing to counteract. As banks failed and fear spread, people and businesses stopped spending and investing, demand collapsed, factories closed, unemployment soared toward 25 percent, and the whole system spiraled downward.

Other factors deepened and spread it: overproduction and underlying weaknesses in agriculture and industry during the 1920s, a badly unequal distribution of wealth that left too little purchasing power in most hands, the Smoot-Hawley Tariff of 1930 that raised trade barriers and triggered retaliation, choking international commerce, and the gold standard, which constrained governments from responding and helped transmit the collapse worldwide. So the Great Depression had no single cause; it was a systemic failure in which a stock crash, banking collapse, monetary contraction, evaporating demand, structural weaknesses, and policy mistakes reinforced one another into a self-perpetuating catastrophe. That lesson, that letting banks fail and the money supply collapse turns recessions into depressions, directly shaped the aggressive government responses to later crises, including 2008.