Causes of the Great Depression

[luiz]

Nobody mentioned World War One yet. Before WW1, Europe had a huge industrial production. Countries like Brazil (and most of Latin America for that matter) imported pretty much all of their industrialised stuff from there. But during and after the war, everybody had to turn to the US, which became the great industrial supplier of the whole world. The american production grew enormously in this period, to meet all of this demand.

But some years after the war Europe was recovering, and dumping products on the world market again. There was a clear overproduction problem. Some recession would happen anyway, as the economies adjusted to the new post-war reality. But all the protectionism and wrong monetary policies of the US of the second half of the 20's only aggravated the problem and kept the economy going artificially untill it finally collapsed.

It is needless to say that the traditional keynesian explanation (and the prescribed medicine), was for the most part bogus.

 

[Verbose]

European production dropped from 60% of all goods produced worldwide to considerbly less during WWI. The slack was picked up by the US and Japan. Then Europe was rebuilt on primarily US credit (prior to WWI the US was a borrower, not a lender), which means everything goes haywire when the US hits the rocks and credit becomes a lot harder to come by for the Europeans. And then the domino effect says that constriction in one sector, or national economy, forces the next to scale down as well, and voilà, an unstoppably shrinking world economy.

 

[ParkCungHee]

But some years after the war Europe was recovering, and dumping products on the world market again. There was a clear overproduction problem.

Wow, I didn't realize the overproduction explanation was so...mainstream.