Introduction At the end of the second decade of the twentieth century, countries were hi t by a staggering depression in their economies. The severity of this depression was particularly pronounced in the United States. In 1929, October, there was a serious fall of the values of common stock which caused crash of the stock market. In this situation, politicians tried to remain calm and exercise optimism but this was to no avail. The situation worsened and people lost their confidence in the government as they bid the last dollars of their savings goodbye. By the year 1932, an approximate quarter of United States population was unemployed. Factories had been shut down due to the harsh economic climate, banks had failed in their operations and businesses had been closed. As 1933 approached, stock exchange in New York was barely a fifth of its 1929 peak. The Great Depression, as this is what it was called, had a number of causes and a lot of effects on American economy and the world as a whole (Smiley, 2008, p. 1). Causes of the Great Depression The main problem behind the stated Great Depression experienced in the United States in 1929 was the mismatch between the consuming capacity of the population of the United States and the production capacity of the country. After the WWI, the country had undergone a serious revolution in innovative production that had seen its output surpassing the purchasing capacity of the people of the U.S. at the time. The inadequate demand of products was the one that led to closure of businesses and the subsequent failing of banks (Temin, 1991, p. 41). Another contributing factor was the investment habits of Americans at the time. The middle class and the wealthy had actively invested in stock market speculations and real estate. With the collapse of the stock market, the middle class and the wealthy lost billions of dollars to their investment naivety (Amadeo, 2010, p. 1). Analysts have attributed the crash of the stock market and the Great Depression that followed to tight monetary policies instituted by the Federal Government at that time. Some of the mistakes that the Federal Reserve made include the following. The federal government raised their funds rate in1928, in August of the year 1929, the rate was still raising. This culminated in the crash in the stock market that occurred in October the same year. Another mistake was the preservation of the gold value of the dollar by the feds by an increase of interest rates. This is discussed in detail below (Amadeo, 2010, p. 1). Prior to 1929, the Franc and other currencies ware undervalued after adopting floating rates for some time. At the end of WWI, countries with devalued currency wanted to return to the gold standard. On the other hand, courtesy of holding on to a fixed gold value for the dollar, a large number of gold deposits had been made to the United States by investors from a number of countries. With this situation the Great Britain and the United States offered to redeem gold for t pounds and dollars respectively. This led to an increase of gold demand. In the year 1928, the French government lowered interest rates which increased interest rates in America. This led to more gold being shipped to the U.S. Other countries initiated p