After the Great Crash came the Great Depression (Research Paper Sample)
the task was about examining the authenticity of the assertion, \"After the Great Crash came the Great Depression. And, among the problems involved in assessing the causes of the depression none is more intractable than the responsibility to be assigned to the stock market crash\".source..
A paper submitted in partial fulfillment of the award of the degree of
in the faculty of ………………………………………………at…………….
In early 1930s, America was actually a sheer shell of its past, prosperous self. In essence, the nation was in a period of economic resurgence during early 1920s. The general public exposed high spirits of work and for that reason; everyone was overwhelmed by the economic permanence in the country (Farrell 1996). In this case, jobs were abundant, banks were lending loans willingly, and the stock market was considerably stable. However as the saying goes, “what goes up always comes down”, the economic eminence of the invincible country never lasted for long. Unfortunately, the most powerful economy of the time was suddenly brought down during the late 1920s through 1930s.
After years of intense research, it is now adequately established that the sudden boom and bust that took stage during the Great Depression in early 1930s, was as a result of certain ruinously mismanaged monetary policies in the U.S. In other words, the economic down drift experienced during that time was mainly because of unexpected crash of the entire stock market. Strangely enough, the government lagged behind in erecting interventions to curb the impending fiscal discrepancy. This finally led to bank and business failures in the whole nation. It is upon this rationale that this literature seeks to analyze and evaluate the responsibility of the Stock Market Crash in the Great Depression of the 1930s.
Stock Market Crash
Galbraith (2009) asserts that, “among the problems involved in assessing the causes of the depression none is more intractable than the responsibility to be assigned to the stock market crash” (p.171). It is lucid to point out that, throughout the whole 1920s period the overall mood in the U.S was filled with excitement and enthusiasm due to excellent economic strides taken by the nation. Individuals were buying in excess, and there was an exceptional and renewed trust in huge businesses. Most importantly, the availability of the “Credit” in the stock market allowed individuals to make huge purchases even when they had no money. At times people could pay some little amount as initial buying price, after which they would pay back the rest of the amount using gains made from the new goldmine in the stock market. As a result of this innovative system, individuals began to make huge purchases in the stock market. However, this made prices of stocks to keep increasing significantly, and therefore people could become wealthy overnight just by purchasing and selling stocks.
This mere divine cycle in the stock market did not last permanently as in October 1929, the Great Depression emerged which nearly brought the entire American economy into looming extinction. By and large, buyers in the stock market had been used to constantly increasing prices of stocks, and when stock prices took a sudden deviation, most individuals freaked out. Most weirdly, this resulted to a barmy rush by people to sell most of the stocks they owned. Consequently, stock prices started to plummet day by day and as a result, people who had purchased exclusive stocks on credit with an aim of paying back their debt using gains made from selling the same stocks, got involved in huge heaps of debts. Unfortunately, there was no other way of these individuals getting out of the debt they had made initially in the stock market.
In actual fact, nearly all individuals who lost money during the crash never came back to the financial level they were prior to the crash. Regrettably, the crash turned billionaires and multi-millionaires in the stock market into deprived citizens in just a single day. In general, the crash can be regarded as both the end of the incredibly thriving 1920s and the ultimate start of the worst economic depression in the history of United States of America.
Even though the stock market is entirely blamed for the great depression, it is paramount to note that, the entire depression could not be avoided. It was actually not inevitable for a number of reasons. Nonetheless, the drift is mainly attributed to inappropriate policies by the government of the day as discussed in subsequent sections below.
Loose monetary policy enacted in America for a long period of time, alongside the UK within a shorter period of time resulted to a major financial bubble. It created low interest rates that finally aggregated the monetary systems to expand exceptionally. Similarly, there was a boom of asset price, low savings, and escalated consumption alongside investment in the stock market. Accordingly, this led to misallocation of resources and asset prices began to rise thus resulting to an increase in the value of collateral with regard to secured loans. This phenomenon highly encouraged more lending as well as higher leverage, whilst decreasing the perceptible risk faced by both borrowers and lenders. Here, consumer price inflation stayed subdued as relative prices of tradable products fell (Krugman 2013).
In essence, loose economic policy often has detrimental effects on the economic system of a given country. The 1920s asset-price along with credit boom can be regarded as the core cause of the sudden crash in the financial market. In other words, the inability of the government fiscal systems to control the monetary policy during the early 1920s coined the emergence of the mischievous financial crisis.
Basing on this particular policy aspect, it is paramount to note that the depression could actually not be avoided. It was inevitable because; even with robust monetary systems, financial mistakes resulting from policy can always happen. Moreover, conditions that ensured that the stock market avoided grave errors were missing during that time. Therefore, even with appropriate intervention the entire stock market deal was already poisoned and therefore inevitable.
Similarly, financial regulators encouraged the most financial institutions to adopt similar quantitative risk management models in guarding their capital and even assessing risks. Arguably, it is pretty possible that the adopted models were all flawed. In the long run, it was impossible to ascertain the extent of risk adequately. All these resulted into mischievous financial consequences as hereby stated. The overall trial and error process in the risk measurement as well as modeling was actually blunted. In this, institutions adopted the same risk models which meant that, failure in one institution resulted to a possible failure in all other fiscal institutions. This became a potential reason for deviant stocks sales and even illiquidity. Therefore, it made the Great Depression to be inevitable whatsoever.
As a result of the stock market crash, banks across America failed detrimentally. When the stock market was stable, most banks experienced huge booms and as a result the number of banks all over the nation rose from 5, 000 to nearly 30, 000. Individuals trusted banking institutions largely to the extent that they accumulated all their gains from the stock market in unprotected and even uninsured banks. This turned out very much fatal as banks gave out huge amounts of money to other individuals who bout expensive stocks using the money (Krugman 2008).
Not taking note of the impending danger, banks gave out money anyhow so long as one was investing the money in the stock market which was experiencing expeditious returns at the time. Unfortunately, in October 1929 when the stock market crashed, investors streamed into banks in search of their savings in the banks. However, banks had loaned nearly all amounts of money to individuals who traded in the stock market. Consequently, when the stock market crashed, investors had lost all their money in the stock market thus they had nothing to pay back. This brought most banks into bankruptcy states affecting its customers to a larger extent. In review, the aftermath of the stock market crash were very adverse to an extent that the number of all banks across the U.S decreased from 30, 000 to 15, 000 in a period of just 3 years.
The crash of the stock market resulted to business failure. Prior to the Great Depression, America experienced a period of economic prosperity (Rajan 2011). Here, individuals bought durable assets such as houses due to economic resurgence in the stock market. Consequently, there was a higher demand for business goods which resulted to high supply. Nevertheless, the high demand of products led to factories producing products in surplus until the demand for the products significantly felled causing dramatic decrease of product prices. In the long run profits made in business fell significantly leading to bankrupt. Finally, since this business had invested much in the stock market, when the stock market crash took center stage, these businesses never regained their initial status.
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