The Great Depression was caused by the gold standard. The initial crash caused a panic, which caused a run on the banks. Banks did not have the cash on hand to

The Great Depression was caused by the gold standard. The initial crash caused a panic, which caused a run on the banks. Banks did not have the cash on hand to return all deposits, and many failed. This was before the FDIC existed, so when banks failed anyone with outstanding deposits just lost their balance. The ripple effect of this disruption through the economy was dramatic, and caused a deflationary spiral. - Many companies and individuals had lost their money and desperately needed cash to meet ongoing obligations. - Many banks had failed, and were not available to make loans. - Banks that hadn't failed were much more cautious about extending loans. - Faith in banks had cratered, and people were far less likely to deposit their money in banks, leading to even the banks that wanted to make loans not having sufficient deposits with which to meet demands for loans. - Without access to loans, many businesses failed, leading to mass unemployment, creating strong downward pressure on wages. - Large numbers of people lost their jobs and couldn't find new ones. They spent down their savings and didn't deposit any new money in banks. - etc. With the value of the dollar rapidly increasing, there was no incentive for banks to loan out their deposits or for investors to risk making investments in a shaky economy. Better to sit on your cash if you had it. This vicious cycle was only eventually broken by the massive federal spending programs of the New Deal, and arguably not until the even more significant spending and hiring programs of WWII. --- So why was the gold standard at the root of the Great Depression? It allowed what should have been limited to a stock market crisis to metastasize into a depression by toppling banks and crippling the availability of dollars. At that point in time very few people owned stocks, so the blast radius of a market crash should have been very limited. But huge swaths of the economy had exposure to banks, and so bank failures had far-reaching impacts. If the federal government had not been constrained by the artificial limitation of the gold standard, it would have been able to step in and provide a liquidity backstop to prevent banks from failing, preventing a financial panic and the knock-on effect of mass bank failure. This is also why something (exactly) like the Great Depression can't happen anymore, it's impossible in a world where the federal government (or its proxy, the Federal Reserve Bank) can extend loans to tide consumer banks over until panic subsides. A stock market crash will not cause consumer banks to fail, people to lose their deposits, lending to cease, and the economy to grind to a halt. And we've seen this in action in the great financial crisis. A financial market crisis threatened the stability of banking in general, lending froze up in response to uncertainty about what banks might be insolvent, and the federal government and federal reserve stepped in with loans, bailouts, and forced consolidation of failing banks to mitigate economic disruption, with the result that the impact of the great financial crisis was far less than that of the great depression.