What is stock market speculation great depression

Posted: SatelliteGuy Date of post: 14.07.2017

The fundamental cause of the Great Depression in the United States was a decline in spending sometimes referred to as aggregate demand , which led to a decline in production as manufacturers and merchandisers noticed an unintended rise in inventories.

The sources of the contraction in spending in the United States varied over the course of the Depression, but they cumulated in a monumental decline in aggregate demand. The American decline was transmitted to the rest of the world largely through the gold standard. However, a variety of other factors also influenced the downturn in various countries. The initial decline in U. The s had been a prosperous decade, but not an exceptional boom period; prices had remained nearly constant throughout the decade, and there had been mild recessions in both and The one obvious area of excess was the stock market.

Stock prices had risen more than fourfold from the low in to the peak in In and , the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices. These higher interest rates depressed interest-sensitive spending in areas such as construction and automobile purchases, which in turn reduced production.

Some scholars believe that a boom in housing construction in the mids led to an excess supply of housing and a particularly large drop in construction in and By the fall of , U. As a result, when a variety of minor events led to gradual price declines in October , investors lost confidence and the stock market bubble burst.

As a result, the price declines forced some investors to liquidate their holdings, thus exacerbating the fall in prices. Between their peak in September and their low in November, U. Because the decline was so dramatic, this event is often referred to as the Great Crash of The stock market crash reduced American aggregate demand substantially. Consumer purchases of durable goods and business investment fell sharply after the crash. A likely explanation is that the financial crisis generated considerable uncertainty about future income, which in turn led consumers and firms to put off purchases of durable goods.

Although the loss of wealth caused by the decline in stock prices was relatively small, the crash may also have depressed spending by making people feel poorer. As a result of the drastic decline in consumer and business spending, real output in the United States, which had been declining slowly up to this point, fell rapidly in late and throughout Thus, while the Great Crash of the stock market and the Great Depression are two quite separate events, the decline in stock prices was one factor contributing to declines in production and employment in the United States.

The next blow to aggregate demand occurred in the fall of , when the first of four waves of banking panics gripped the United States. A banking panic arises when many depositors simultaneously lose confidence in the solvency of banks and demand that their bank deposits be paid to them in cash.

Banks, which typically hold only a fraction of deposits as cash reserves, must liquidate loans in order to raise the required cash. This process of hasty liquidation can cause even a previously solvent bank to fail. The United States experienced widespread banking panics in the fall of , the spring of , the fall of , and the fall of Roosevelt on March 6, The bank holiday closed all banks, and they were permitted to reopen only after being deemed solvent by government inspectors.

The panics took a severe toll on the American banking system. By , one-fifth of the banks in existence at the start of had failed. By their nature, banking panics are largely irrational, inexplicable events, but some of the factors contributing to the problem can be explained. Economic historians believe that substantial increases in farm debt in the s, together with U. The heavy farm debt stemmed in part from the high prices of agricultural goods during World War I , which had spurred extensive borrowing by American farmers wishing to increase production by investing in land and machinery.

The decline in farm commodity prices following the war made it difficult for farmers to keep up with their loan payments. The Federal Reserve did little to try to stem the banking panics. Economists Milton Friedman and Anna J. Schwartz, in the classic study A Monetary History of the United States, — , argued that the death in of Benjamin Strong, who had been the governor of the Federal Reserve Bank of New York since , was a significant cause of this inaction.

Strong had been a forceful leader who understood the ability of the central bank to limit panics. His death left a power vacuum at the Federal Reserve and allowed leaders with less sensible views to block effective intervention.

The panics caused a dramatic rise in the amount of currency people wished to hold relative to their bank deposits. This rise in the currency-to-deposit ratio was a key reason why the money supply in the United States declined 31 percent between and In addition to allowing the panics to reduce the U.

Scholars believe that such declines in the money supply caused by Federal Reserve decisions had a severely contractionary effect on output. A simple picture provides perhaps the clearest evidence of the key role monetary collapse played in the Great Depression in the United States.

The figure shows the money supply and real output over the period to In ordinary times, such as the s, both the money supply and output tend to grow steadily. But in the early s both plummeted. The decline in the money supply depressed spending in a number of ways.

Perhaps most important, because of actual price declines and the rapid decline in the money supply, consumers and businesspeople came to expect deflation; that is, they expected wages and prices to be lower in the future. As a result, even though nominal interest rates were very low, people did not want to borrow because they feared that future wages and profits would be inadequate to cover their loan payments.

This hesitancy, in turn, led to severe reductions in both consumer spending and business investment spending. The panics surely exacerbated the decline in spending by generating pessimism and loss of confidence. Furthermore, the failure of so many banks disrupted lending, thereby reducing the funds available to finance investment.

Some economists believe that the Federal Reserve allowed or caused the huge declines in the American money supply partly to preserve the gold standard. Under the gold standard, each country set the value of its currency in terms of gold and took monetary actions to defend the fixed price. This could have led to large gold outflows, and the United States could have been forced to devalue. Likewise, had the Federal Reserve not tightened in the fall of , it is possible that there would have been a speculative attack on the dollar and the United States would have been forced to abandon the gold standard along with Great Britain.

While there is debate about the role the gold standard played in limiting U. Under the gold standard, imbalances in trade or asset flows gave rise to international gold flows. For example, in the mids intense international demand for American assets such as stocks and bonds brought large inflows of gold to the United States.

Likewise, a decision by France after World War I to return to the gold standard with an undervalued franc led to trade surpluses and substantial gold inflows.

what is stock market speculation great depression

See also balance of trade. Britain chose to return to the gold standard after World War I at the prewar parity. Wartime inflation , however, implied that the pound was overvalued, and this overvaluation led to trade deficits and substantial gold outflows after To stem the gold outflow, the Bank of England raised interest rates substantially. High interest rates depressed British spending and led to high unemployment in Great Britain throughout the second half of the s.

This took place because deflation in the United States made American goods particularly desirable to foreigners, while low income reduced American demand for foreign products. To counteract the resulting tendency toward an American trade surplus and foreign gold outflows, central banks throughout the world raised interest rates.

Maintaining the international gold standard, in essence, required a massive monetary contraction throughout the world to match the one occurring in the United States. The result was a decline in output and prices in countries throughout the world that also nearly matched the downturn in the United States.

Speculation - Wikipedia

Financial crises and banking panics occurred in a number of countries besides the United States. Among the countries hardest hit by bank failures and volatile financial markets were Austria , Germany , and Hungary.

what is stock market speculation great depression

These widespread banking crises could have been the result of poor regulation and other local factors, or simple contagion from one country to another. As in the United States, banking panics and other financial market disruptions further depressed output and prices in a number of countries. Some scholars stress the importance of other international linkages.

Foreign lending to Germany and Latin America had expanded greatly in the mids, but U. This reduction in foreign lending may have led to further credit contractions and declines in output in borrower countries. The effects of reduced foreign lending may explain why the economies of Germany, Argentina, and Brazil turned down before the Great Depression began in the United States. The enactment of the Smoot-Hawley tariff in the United States and the worldwide rise in protectionist trade policies created other complications.

The Smoot-Hawley tariff was meant to boost farm incomes by reducing foreign competition in agricultural products. But other countries followed suit, both in retaliation and in an attempt to force a correction of trade imbalances. Scholars now believe that these policies may have reduced trade somewhat but were not a significant cause of the Depression in the large industrial producers. Protectionist policies, however, may have contributed to the extreme decline in the world price of raw materials, which caused severe balance-of-payments problems for primary-commodity-producing countries in Africa, Asia, and Latin America and led to contractionary monetary and fiscal policies.

Articles from Britannica encyclopedias for elementary and high school students. During the s much of the world faced harsh economic conditions. Many people were out of work, hungry, or homeless. This period is called the Great Depression.

The Stock Market Crash of |

It started in the United States, but it quickly spread throughout the world. United States President Franklin D. Roosevelt, in his first inaugural address, made some attempt to assess the enormous damage: More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return.

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what is stock market speculation great depression

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Department of State - Office of the Historian - The Great Depression and U. Foreign Policy United States History - The Great Depression University of Illinois at Urbana-Champaign - Department of English - Modern American Poetry - About the Great Depression World History International Project - The Great Depression.

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Contact our editors with your feedback. Introduction Economic history Timing and severity Causes of the decline Sources of recovery Economic impact Culture and society in the Great Depression Global concerns Political movements and social change New forms of cultural expression Portrayals of hope.

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