Many people believe different stories about what caused the great depression. Some of these include the stock market crash of 1929, hoarding money, the gold standard, and sticky prices and/or sticky wages. It's because of these that America went through its poorest time ever.
Although there were several reasons why the great depression started, this is the most cited one. However, this crisis did not actually cause the depression. The stock price of a company is only a reflection of the current information of the future income of that particular company. So when that current information changes, such as when interest rates go up, stock prices go down and they begin to tumble. A stock market crash might however cause people to sell their assets and hoard money.
People hoard money because they are afraid of going broke so they sell all of their assets for money, such as stocks going down. For example, they want to have their assets accessible in a transferable form, like money. Hoarding money is not the same as putting money in a savings account, because that is like lending money to someone else to spend. Just hoarding cannot cause a recession or depression. As long as prices and wages go down to compensate for the loss of money in the economy, then there will be no problems. This can even bee seen as a good thing to some, who don't hoard, but would benefit from the lower prices. For a country with a gold standard, the hoarding of money could be disastrous. .
During this time period, America had a 100% gold standard for its money. In other words all cash was backed up by a government promise to exchange it in a specific amount of gold. During this time, one ounce of gold was exchangeable for $20.00. Since the amount of money in the economy is directly related to amount of gold available, the money supply is not very flexile. This also is not a problem as long as prices and wages drop to compensate instantly for the loss of money in the economy.
