Stock Market Crash and the Great Depression

In a straightforward narrative, the decline from the 1929 Stock Market Crash to the Great Depression provides an economical, historical and sociological account of boom and bust. The 1920s characterized a stock market boom in the United States as the result of conventional optimism: economists and businessmen believed that the Federal Reserve (newly-founded) would secure the economy, and that the technological progress’ pace assured rapidly increasing expanding markets and living standards.

The attempts of the U.S. Federal Reserve in 1928 and 1929 to increase interest rates to deter stock speculation initiated an initial recession. Caught by a shocker, firms rescinded on their plans for advanced purchase of produced durable goods; firms manufacturing producer durables retracted production; out-of-work consumers and others who feared they may soon be out of employment rescinded on purchases of consumer durables, and firms producing consumer durables had to face decreasing demand as well.

Decrease in prices—deflation—during the Great Depression set in motion various contractions in mass production which resulted in continued decrease in prices. With prices declining at 10% annually, investors were able to calculate that they’d earn less profit investing now than deferring investment until the following year when the dollars would expand 10% further. The collapse of the world monetary system and banking panics cast doubt on the credit of everyone, as well as reinforced the belief that the present was the time to watch and wait. Thus, the slide into the Great Depression, with decreasing prices, declining production and increasing unemployment, persisted throughout the Presidential term of Herbert Hoover.

There is absolutely no wholly satisfactory explanation of the reason the Great Depression occurred when it did. If similar depressions were normally a possibility in a capitalist economy that’s unregulated, then why weren’t there a couple or numerous Great Depressions in the years prior to World War II?

Economists and authors, Milton Friedman and Anna Schwartz, argued that the Great Depression was the consequence of a number of blunders in the monetary policy. However, those controlling this policy during the early part of the 1930s had the erroneous notion they were following similar gold-standard conduct rules as their predecessors. If they were wrong, why did they have the notion they were following footsteps of predecessors? Why was the Great Depression the only one of its kind?

At its lowest, the Great Depression was known to be “collective insanity”. Workers were basically idle due to firms not hiring them to work on their various machines; firms wouldn’t employ workers to work on machines due to the fact they witnessed no market for goods, and there was no market for goods due to the fact workers had no incomes to spend. George Orwell’s account of the Great Depression in Great Britain, ‘The Road to Wigan Pier’, declares, “…several hundred men risk[ing] their lives and several hundred women scrabb[ling] in the mud for hours…searching eagerly for tiny chips of coal” in slagheaps so they could heat their homes. For these men, this painstakingly-gained “free” non-edible resource was “more important almost than food.” All around the men, machinery they had used to mine previously in five minutes more than they were able to collect in a day remained idle.

The Great Crash

The United States stock market surged in the roaring 1920s. Prices spiraled to levels, assessed as a multiple of corporate earnings or corporate dividends, which didn’t make sense in terms of rules of thumb and traditional patterns for valuation. An array of evidence intimates that in September 1929 at the market peak, stock market values at something like forty percent were basic air: prices above essential values for no particular purpose other than the fact a vast cross-section of financial investors assumed the stock market would boost due to the fact it had surged.

By the years 1928 and 1929, the Federal Reserve fretted about the stock market’s high level. It worried that the component of the “bubble” of stock prices may explode suddenly. When the “bubble” component did erupt, pieces of the fiscal system may be revealed abruptly not to be solvent, the network of fiscal intermediation may well be marred, investment may decline, and recession may result. It appeared better in 1928 and 1929 to the Federal Reserve to make an attempt to “chill” the market by allowing borrowing funds for stock speculation costly and difficult by increasing interest rates. They accepted the peril that the lift in interest rates may result in a recession that they yearned could be prevented if the stock market could be “chilled”: every policy option seemed to have the possibility of detrimental consequences.

In subsequent years, economists—Frederick Hayek namely—were to state that the Federal Reserve had initiated the boom of the stock market, the later stock market crash, and the Great Depression by way of “easy money” procedures.

Individuals making these claims for easy policy seem to have invested no time observing the evidence. Weight of evidence and opinion on the opposing side: the fear of the Federal Reserve of disproportionate speculation led this into a much too deflationary course of action in the latter 1920s; in other words, “destroying the village in order to save it.”

The United States economy was already beyond the zenith of the business cycle in October, 1929 when the stock market crashed. Thus, it looks as if the Federal Reserve did go over the top as they raised interest rates too much, and initiate the recession that they were hoping to thwart.

The stock market crash on October 29, 1929 was referred to as “Black Tuesday”. The crash saw U.S. common stocks lose approximately a tenth of their value. Apparently, it was ripe for the erupting of the bubble; the precise reasons why the bubble did burst then are somewhat of a mystery, but more crucial are the various consequences of this erupting of the bubble.

The stock market crash of 1929 vastly augmented to uncertainty of the economy: not one individual at the time knew what its penalties were bound to be. The natural action to take when something you don’t understand has occurred is to stop and wait until the dilemma becomes more transparent. Thus, firms rescind their own plans for continued purchase of producer durable goods. These consumers retract purchases of consumer durables. The boost in lack of certainty created by the crash enhanced the enormity of the initial recession.

A Panic Is Not Always Bad

The first impulse of central banks and governments faced when the harvesting Great Depression began was to take it in stride. Economists, businessmen and politicians (like Secretary of Treasury, Mellon) expected the 1929-1930 recession to be self-restrictive. Previous recessions had come to a close when the chasm between trend and actual production was as vast as in the year 1930. They had the expectation that laborers/ workers with idle hands and various 1920s capitalists with idle machines would attempt to undersell their still-employed peers. Naturally, prices would decline. When the prices declined enough, entrepreneurs made a gamble that even with flaccid demand, production would be equitable at the lower, new wages. Then, production would resume—they supposed.

Throughout this decline—which brought production per employee to a level at 40 percent below which it had reached in 1929, as it saw the rise of unemployment to accept more than ¼ of the U.S. labor force—the U.S. government didn’t even attempt to raise aggregate demand. The Federal Reserve didn’t use operations of the open market to keep money supply from declining.

Instead the sole impertinent systematic usage of operations in the open market was in the opposing direction: to increase interest rates and deter outflows of gold after Great Britain abandoned the standard of gold in the autumn of 1931.

The Federal Reserve assumed it had knowledge what it was accomplishing: that it was allowing the private sector manage the Great Depression in its own manner. It viewed the task of the private sector as the “liquidation” of the economy in the United States. Moreover, it dreaded that expansionary fiscal policy would hinder the needed private-sector readjustment process.

Contemplating the damage of the U.S. economy and his own career in politics, Herbert Hoover wrote acrimoniously in retrospect about the individuals in his own administration who gave advice of inactivity during the downslide:

A theory led by Secretary of Treasury, Mellon, the ‘leave-it-alone liquidationists’ felt that the U.S. government must leave things alone and let the plunge settle itself. Mr. Mellon had one prescription: ‘Liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate’. He assumed that panic was not a bad thing altogether. He declared, “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, and live a moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

However, Hoover was one of the most fervent promoters of the “liquidationism” theory during the Great Depression. Moreover, the unwilling nature to enforce policy to buoy the U.S. economy during the decline into the Great Depression was supported by a vast chorus, and favored by the most esteemed economists.