There are quite a few causes of the Great Depression but the most significant are the long-term factors. The massive cost of World War One had damaged the world’s strongest economies, leaving them debt ridden and weak. Consumer debt also increased dramatically in the 1920’s leading up to the great depression, with the extensive use of credit to buy cars and the vast increase in home mortgages.

When a price deflation happens, people who are in debt are in serious trouble and risked defaulting on their loans and losing their cars, furniture, and even their homes. As the price deflation began, people stopped spending as much in order to cover their loan repayments and avoid losing their houses. As people stopped spending, the economy slowed down, business closed, and jobs were lost. Therefore as there was more unemployment, less people were earning and spending money, so the economy slowed down even more.

What triggered the great depression was the overbought stock market being at an unrealistic level compared with the underlying economy. As the market sharply returned to a realistic level, investors saw the rapid decline and sold their stock making it plunge even lower. Also all the people who had purchased stocks on credit or margin were wiped out sending the stock market into freefall.