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In your own words, explain the Problems with Credit, Debt, Banking theory. Theory #3: Problems with Credit, Debt, and Banking Caused the Great Depression Although

In your own words, explain the Problems with Credit, Debt, Banking theory.

Theory #3: Problems with Credit, Debt, and Banking Caused the Great Depression Although America prospered greatly during the period following World War I, the economic boom was built on a system of credit [loaned money] and banking that was unstable and highly risky. Farmers were deeply in debt throughout the country, and crop prices were too low to allow them to pay off what they owed to their lenders. Small banks were in constant trouble as their customers defaulted on [failed to pay back] their loans. Large banks were in trouble as well. Although most American bankers were very conservative and careful about who they lent money to, some of the nation's biggest banks were investing recklessly in the stock market or making unwise loans to poorly managed companies. When the market crashed in 1929 and the loans went bad, some banks failed entirely while those that stayed open made the crisis worse by severely limiting the amount of money available to lend and calling in loans that borrowers could not pay. In other words, banks lent out too much money to too many people and businesses who could not pay it back. Additionally, many Americans were borrowing money from banks in order to invest in the stock market, a practice called "margin lending". When the market crashed and stock prices dropped dramatically, investors who had borrowed money to buy stocks and bonds lost everything and could not pay back the original loans they took out. This caused more banks to fail, and in turn contributed to even lower stock prices, resulting eventually in the total destruction of the American economy.

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