It was speculation, not expansion, that sparked the Great Depression. Expansion was proper as long as it was based on sound value; it was when individuals began to borrow money to speculate in stocks, and businesses used this borrowed money to expand, that disaster occurred. When caught in the squeeze, neither were able to pay their bills.
By the late 1920s, the stock market had inflated completely out of proportion. It was being used as a vehicle for “get rich quick” speculation, rather than long-term growth.
During the pre-depression era, the banking industry, in spite of the Federal Reserve System controls, was generally unregulated. Just as in Dan’s nail bank, few, if any, real controls were enforced. Banks made speculative loans backed by little or no security. They used credit to expand, just as Dan had.
Then, in 1929, the collapse came. First the stock market collapsed, followed by large-scale loan defaults and almost total economic devastation. Shortly thereafter, banks that were thought stable and had been so for decades, collapsed. Unable to recover their deposits, individuals lost their life savings, and companies lost most of their operating capital. Businesses that were heavily credit-oriented were forced out of existence.
Tags: banking industry, Depression Speculation, Federal Reserve System, Federal Reserve System controls, Great Depression, large-scale loan