Causes of the Great Depression
Second, there are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve) caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression. Related to this explanation are those who point to debt deflation causing those who borrow to owe ever more in real terms.
Causes of the Great Depression
The stock market crash was not the first sign of the Great Depression. "Long before the crash, community banks were failing at the rate of one per day". It was the development of the Federal Reserve System that misled investors in the 1920s into relying on federal banks as a safety net. They were encouraged to continue buying stocks and to overlook any of the fluctuations. Economist Roger Babson tried to warn the investors of the deficiency to come, but was ridiculed even as the economy began to deteriorate during the summer of 1929. While England and Germany struggled under the strain on gold currencies after the war, economists were blinded by an unsustainable 'new economy' they sought to be considerably stable and successful.