The correct answer is 1.
When the Wall Street Crash of 1929 took place it unveiled the existence of intense stock speculation that was decreasing abruptly the price of shares, what motivated their owners to get rid of them as soon as possible in order to recover the money invested, and this selling panic collapsed the market.
Moreover the banking system was extremely undercapitalized due to the lack of financial regulatory measures or guidelines. When the New York’s Bank of the United States shut down the banks runs and panic spread all over the country and there was no firewall contention. Banks started selling assets rapidly to be able to attend the money withdrawals from their customers. Of course, the banks which survived cut their credit supply abruptly.
Moreover, overproduction led to the decrease in the price level and in the profits earned by firms, which on top could not obtain any funding. Many fell into bankruptcy.
