Internal Causes of the Great Depression: Bank Failures, Drought, and Reduced Buying Power

Introduction

The Great Depression of the 1930s is widely regarded as one of American history’s most devastating economic recessions. The root of the decline is still being discussed, with various theories being advanced to explain the depression. This essay should focus on internal causes and evaluate three reasons for the crisis: bank collapses, reduced buying ability, and drought.

Causes of the Great Depression

The banking system’s breakdown was a significant element leading to the Great Depression. The stock market crash 1929 acted as a trigger, prompting people to dispose of their assets in a rush. Nevertheless, many other components also played a part, such as the lack of regulatory oversight, the weak regulation of banks, and the lack of banks’ preparedness to manage the increasing demand for credit (Brownlees et al. 105736).

The fall of the investment system caused many people to lose their jobs. With limited income, consumers had less money to spend on goods and services. This decline in demand led to a slowdown in economic activity (Calomiris et al. 100899). Consequently, the decline in production made businesses cut back, affecting further unemployment and a further reduction in sales.

The severe drought in the Midwestern region of the United States played a significant role in the economic crisis. This situation provoked the production of crops to drop, leading to a rise in prices (Benmelech et al. 543-544). People had minimal resources to purchase necessities, decreasing their buying ability even more.

Conclusion

In conclusion, the Great Depression began because of internal factors, including unexpected bank collapses, significantly reduced trade, and a drought in some regions. The financial structures were weakened by a combination of elements, resulting in a wave of bank closures that stimulated high levels of unemployment.

The decline in purchasing capability led companies to curtail their output, which was associated with more layoffs and an even more significant reduction in purchasing power. The prolonged drought decreased crop yields, leading to a decline in agricultural output and higher food prices, ultimately diminishing people’s buying power. All of these factors played a critical role in the onset of the economic crisis.

Works Cited

Benmelech, Efraim, et al. “Financial Frictions and Employment During the Great Depression.” Journal of Financial Economics, vol. 133, no. 3, 2019, pp. 541-563.

Brownlees, Christian, et al. “Back to the Future: BacktestingSystemic Risk Measures During Historical Bank Runs and the Great Depression.” Journal of Banking & Finance, vol. 113, 2020, pp. 105736.

Calomiris, Charles W., et al. “Interbank Connections, Contagion and Bank Distress in the Great Depression.” Journal of Financial Intermediation, vol. 51, 2022, pp.100899.

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StudyCorgi. (2025) 'Internal Causes of the Great Depression: Bank Failures, Drought, and Reduced Buying Power'. 3 April.

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StudyCorgi. "Internal Causes of the Great Depression: Bank Failures, Drought, and Reduced Buying Power." April 3, 2025. https://studycorgi.com/internal-causes-of-the-great-depression-bank-failures-drought-and-reduced-buying-power/.

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StudyCorgi. 2025. "Internal Causes of the Great Depression: Bank Failures, Drought, and Reduced Buying Power." April 3, 2025. https://studycorgi.com/internal-causes-of-the-great-depression-bank-failures-drought-and-reduced-buying-power/.

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