What was the main cause of the stock market crash of 1929
What caused the Wall Street Crash of ? | Economics Help
However, a stock market crash could cause people to increase their liquidity preference which might lead them to hoard money. If a country has a gold standard, then hoarding money can make the money supply drop dramatically since a gold standard makes the quantity of money difficult for the government to control. Hall and Ferguson also write that: But a further irony is the fact that the very existence of the Federal Reserve caused banks to wait for the central bank to act and not turn to the solutions they had devised in the face of the banking crises of the nineteenth century.
But even with all that bungling, it is not clear that we can lay responsibility for the Great Depression at the feet of the Fed. In "Did France Cause the Great Depression?
This paper revisits the origins of the Great Depression to highlight the key role played by France. First, how much gold would have been freed up if the United States and France had kept enough only to cover their actual liabilities at their cover ratios? The end of the Great Depression is often marked as Decemberthe same time that America became officially involved in World War II. Did World War II really end the Great Depression, though?
It's useful to note that the economy had been in expansion since June oftwo and a half years before U. A Reassessment of the U. Economy in the s"Robert Higgs argues: This belief is ill-founded, because it does not recognize that the United States had a command economy during the war. From to some macroeconomic performance measures are statistically inaccurate; others are conceptually inappropriate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the well-being of consumers deteriorated.
After the war genuine prosperity returned for the first time since It's easy to see that a war is simply a special case of deficit spending. Whatever the case is for deficit spending as a cure, war spending is clearly much weaker because the spending is not for productive purposes, but for destructive ones, no matter how justified the war might be.
Amazingly, doing nothing often seems to be the correct response. The Depressions of and were both over within a year, even though the Federal government did virtually nothing in response. This page was last updated on June 28, Causes and Cures Introduction It should be noted that all of the cures have been tried and while we seem to be free of Depressions, it's not clear that business cycles have been eliminated.
Causes The Stock Market Crash The Stock Market Crash in October of is often cited as the beginning of the Great Depression, but did it actually cause it?
The answer is no. First, the stock price for a particular company merely reflects current information about the future income stream of that company.
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Thus, it is a change in available information that changes the stock price. When the Fed began to raise interest rates in earlythis began the tumble. In the August issue of The Quarterly Journal of EconomicsChristine D.
Romer writes that "the negative effect of stock market variability is more than strong enough to account for the entire decline in real consumer spending on durables that occurred in late and There are several misconceptions about hoarding money. First hoarding is not the same thing as saving.
If I put my money into a savings account, that money is lent out to someone else who then spends it. Second, hoarding, by itself, cannot cause a recession or depression. As long as prices and wages drop instantly to reflect the lower amount of money in the economy, then hoarding causes no problems. Indeed, what was the main cause of the stock market crash of 1929 can even be seen as beneficial to those who don't hoard, since fluctuating confidence in stock markets money will be able to buy more goods as a result of the lower prices.
This meant that all cash was backed by a government promise to redeem it in a specific amount of gold at the time, one ounce of gold was redeemable for twenty dollars. Because the amount of money circulating in the economy is wholly dependent on the amount of gold available, the money supply is very rigid.
If people start day trading stocks the wall street way pdf hoard money see above the money supply can drop drastically. As noted in the previous section on hoarding, this is not a problem as long as prices and wages drop instantly to reflect the lower amount of money circulating. Hall and Ferguson write: The existence of the gold standard linked economic conditions across countries to a much greater extent than is currently the case, and it is because of this linkage that the Depression was a worldwide event.
Except for minor adjustments, and the temporary suspensions of gold payments during wartimes, the price of gold was held standard from the establishment of the new United States of America in until gold was revalued in In "Gold Standards and the Real Bills Doctrine in U.
Monetary Policy" PDFprofessor Richard Timberlake argues that the gold standard was not responsible for the Great Depression, since the Federal Reserve had not been following a strict gold standard prior to the onset of the Depression. The Smoot-Hawley Tariff Inthe Council of Economic Advisors proclaimed that plus stock market usop Smoot Hawley Tariff Act was "probably one of the most damaging pieces of legislation ever signed in the United States.
Since this occurred after the onset of the Depression, it's hard to see how it could have caused it. However, since the real effect of the increased tariffs was to increase prices and increase price rigidity, it is easy to see how the Act could have exacerbated the Depression.
Enacting the tariff was exactly the wrong thing to do and about 1, economists signed a petition begging Congress not to pass it. Eventually, 60 other countries passed retaliatory tariffs in response.
The Federal Reserve Board The Fed was ostensibly created to prevent bank panics and Depressions. Is it possible that the Fedwas actually responsible for the Depression? The answer is a qualified no. The Fed took capital one employee stock options actions that, in retrospect, were quite bad.
If the Fed had been a little more careful in expanding the money supply, it good time to buy chinese stocks have prevented the artificial Stock market boom and subsequent crash.
Second, there are indications that the economy was starting to cool off on its own in earlythus making the interest rate hike what was the main cause of the stock market crash of 1929 TBD completely unnecessary and avoiding the subsequent crash. The third mistake the Fed made was in early The Fed raised interest rates, exactly the wrong thing to do during a contraction. Ironically, the country's gold stock was increasing at this point all on its own, so doing nothing would have increased the money supply and helped the recovery.
Hall and Ferguson write that: The Federal Reserve began expressing concern in early and at that time began a policy of monetary restriction in an effort to stem the stock market advance.
This policy continued through May Malinvestment "Malinvestment" is a term coined by the Austrian school of economics to sum up their explanation of the causes of business cycles.
According to this theory, all business cycles are caused by government intervention in the market. Specifically, the central bank the Fed in the case of the U. This money is then invested in capital goods that would not be justified at a market level of interest rates.
Causes and Effects of the Stock Market Crash of Flashcards | Quizlet
The low interest rate cannot be sustained forever without an increase in inflation, so the Fed inevitably has to raise interest rates.
When this happens, the investments that were "justified" under a lower interest rate must be liquidated. Any prevention of this liquidation by further government intervention will simply prolong the re-adjustment and thus exacerbate the recovery. This view is held by very few economists.
For example, if the Federal Reserve Boardincreases the nation's money supply, then prices and wages will tend togo up, reflecting the fact that more money is chasing the same amount of goods and labor. When the Fed does too much of this, it is called inflation.
But what happens if the money supply goes down relative to the amount of goods and labor? Eventually, the price of goods and labor will go down as well in the long run. But in the short run, prices and wages can "stick" at a higher level than the market clearing price or wage.
When this happens, people buy less and employers hire less, thus causing cut backs in production and employment.
There are a number of reasons why prices and wages might stick. One reason is referred to as "menu costs," meaning that it often costs money to change a price. A good example is a restaurant that has to print new menus every time the prices change.
Income Inequality In American Inequality: A Macroeconomic Historyby Jeffrey G. Williamson and Peter H.
Lindert, it is reported that the period of through the first three quarters ofusing any number of income inequality measures, the U. In The Great Depression: Wages grew more slowly than output per worker, which suggests that corporate profits were rising.
This change shows up as rising dividends, which constituted 4. Since 82 percent of all dividends were paid to the top 5 percent of income earners, this clearly helped contribute to the change in income inequality Potter But critics of that view contend that increase inequality of income and wealth is an unlikely candidate to cause an economic decline on the order of the Great Depression. Their criticism of the underconsumptionist view is that it ignores an obvious adjustment mechanism; if deficient demand for goods and services is caused by unequal distribution of income, then the price level would fall to cause the quantity of goods and services demanded to rise.
Underconsumptionists respond that prices could not fall because of various rigidities built into the economic system see, for example, Strikcer However, as economist Arnold Kling explains while reviewing Randall E. Parker's Reflections on the Great Depressiona collection of interviews of economists who lived through the Great Depression: A number of myths that are popular in conventional histories of the Depression are punctured in Parker's book.
Free stock market crash Essays and Papers
For example, the Wikipedia echoes many textbooks in saying"A fundamental misdistribution of purchasing power, the greatly unequal distribution of wealth throughout the s, was a factor contributing to the depression. Monetary Misperceptions Under Construction France In "Did France Cause the Great Depression? Doing Nothing Amazingly, doing nothing often seems to be the correct response. Introduction It should be noted that all of the cures have been tried and while we seem to be free of Depressions, it's not clear that business cycles have been eliminated.