One can say it all began with World War I, but even pre-1914 cyclical economic conditions set the world stage for a slight depression in 1920-21. This made it even more difficult for the European countries to recover from the devastation they encountered in the Great War. Europe was already falling behind the United States, and the war greatly accelerated this trend. During WWI the US and the USSR became self-sufficient, and other markets

Before WWI, the United States was a debtor nation. We owed vast sums of money to Europe, especially Britain. During the war Europe was not only forced to liquidate their U.S. investments, but to take on debt as well. This established the United States as the prime creditor in the world. In fact, we financed eighty percent of the post-war relief. After the war, the European countries had a heavy trade deficit, making it impossible for them to pay us back. As a creditor, we should have imported more than we exported, allowing these nations to reduce the debt. We had become self-sufficient, however, and maintained an isolationist stance, allowing very few imports. This forced countries to develop a surplus in trade with other nations before they could pay us back. Since very few countries could do this we had to continually loan out money to help them rebuild their economies to pay us back. The destabilizing effect of this loan cycle will be discussed later.

Even the Federal Reserve Board hurt the situation more than it helped. The saturation of the consumer market and a relatively high level of structural unemployment should have caused a natural decrease in prices. The FRB, however, didn't want this to happen, so they expanded credit that ended up in a violent readjustment. The actions of the FRB created a stock market and property boom that merely served to fuel speculation. It appears, that if the FRB had allowed deflation to occur the decline in prices would have allowed the standard of living to go up and might have increased consumption.

Political factors caused by the war also hurt Europe's ability to recover. The redrawing of political boundaries created new states with little regard to economic viability. These small states attempted to be self-sufficient by increasing exports and setting high tariffs, but they had to borrow heavily to do so. Increasing population was another factor to contend with, forcing these countries to spread out their already low incomes. Finally, increased trade and population movement barriers caused by the war compounded Europe's economic problems.

The economic climate of the time was one of excessive optimism. Most people, including investors that should have known better, felt that there would be no end to the expanding economy. Lenders in the U.S. actually went out and solicited borrowers. They were ready to loan to anyone. One of the main short-term causes of the 1929 crash was overspeculation. The common trend was to throw as much money into the stock market as possible because it was a sure bet. Even brokers ignored th

Some topics in this essay:
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