Causes of the Stock Market Crash and Great Depression I. The Coolidge Boom and Election of In the late s the US was enjoying one of its greatest periods of prosperity. With the apparent success of Republican economic policies, the Democrats were reduced to bickering amongst themselves.

The eventual Democratic candidate for President in , Al Smith, was rejected by a large segment of his party—he was a Catholic with a strong New York Accent, was against prohibition, and was very much an urban candidate. His accent was terrible for radio and he was immediately disliked by southern democrats, who were mostly rural.

The fact the he was Catholic also hurt him around the country. The Republicans selected Herbert Hoover as their candidate. Hoover was a Stanford University-trained engineer and self-made millionaire who represented classic Republican beliefs and values. Hoover won the presidency easily, the only elected office he ever held. The US economy was at its height when Hoover took office, but only 7 months later, the bubble would burst sending both the US and global economy in to an economic slide and 10 years of depression.

There are many theories about why the US stock market came crashing down in October , and even more about why this crash led to the most severe global depression in modern history. First, what exactly happened? Corporate profits were naturally rising as well, so the value of stocks increased. In February , stocks began a long, steady increase in value. It was made more risky by the fact that the stock market was unregulated.

Big investors would play games with stocks to make them look more attractive than they were—for example, a small group of large investors might buy a low priced stock and then trade it among themselves. People would notice that the stock was being heavily traded and become interested.

Trading Education: Stock Market Crash of and the Great Depression | OptionsANIMAL

When they began to buy, the price would go up and the big investors would pull out their money and take huge profits. The others were stuck with stocks they had paid a lot of money for but which had little relation to the value of the company. Though a few economists warned that the boom could not continue, most believed that it would. The reality was that by , the value of stocks far exceeded the true value of the companies that issued them. In Autumn, , things began to fall apart.

October 24 Black Thursday: Panic—the market nearly collapsed under the burden of a 13 million share-trading day. It became clear that many investors were just trying to get rid of their stocks and get out of the market. The market stabilized, but prices began to fall once again on October Many companies became virtually worthless. This was just the beginning. What caused the stock market crash? It is easy to assume, as many have, that reckless investing and the subsequent over-valuation of stocks caused the stock market crash.

Contemporary econometric studies have shown, however, that the relationship between stock prices and company value were not as out of proportion as many thought—similar valuations are not uncommon and few result in general stock crashes. The stock market crash was caused by a combination of factors that included: Though in the past the crash of was viewed as the cause of the Great Depression, it was not.

It was just an early symptom of the fundamental economic problems that led to the Great Depression.

The crash did clearly lead to a downward economic spiral:. Loss of money caused many people and businesses to go broke;. This caused less spending, making overproduction worse;. Companies laid off workers to keep from going under;. This caused less spending causing many businesses to go under;. This caused less spending see 2 and a downward spiral was created;. A feeling of hopelessness and despair set in and the American people turned to the President for answers.

Initially, he preached the value of Rugged Individualism — that each individual should be responsible for himself. This represented a serious misunderstanding by Hoover of just what had happened and how deep the damage caused by the crash was.

Attention Required! | Cloudflare

The Basic Republican economic philosophy went unchanged—Hoover believed that the federal government had only a small role to play in the recovery. Most of the economic recovery work should be done at the local level by state and local governments. Of course, local government did not have the funds to solve the problems of a worldwide depression.

Hoover himself focused on aid to business, holding a highly publicized conference of business leaders, cutting taxes modestly, and offering aid to farmers and industry. However, he believed that most assistance should be given by private charities and that government should not get into the business of offering direct assistance to the poor.

One area where he did use government power was in the area of Tariff reform. Hoover supported and signed into law the Smoot-Hawley Tariff, which imposed the highest tariffs in American History. Hoover, however, was convinced that his policies would work and refused to do more. Hoover attempted to delay the spending as much as he could, arguing that giving people money for meaningless work was almost as bad as giving them money for doing nothing.

Hoover himself sponsored his only major federal initiative to combat the depression in —the Reconstruction Finance Corporation. The RFC was set up to grant loans to farmers and businessmen to keep them afloat during the hard times. However, most of the money went to large corporations and as there was not enough of it, it had little impact.

The mood of the country shifted during —against Hoover and in favor of a more substantial role for the government. In light of the depression and their unemployment, they wanted the Congress to grant them the bonus early.

The Great Depression - Facts & Summary - rehojuvuyequ.web.fc2.com

They set up camp in D. After failing to convince the group to disband and go home, Hoover instructed the US military to break up the camp by force. They did, killing three veterans in the process. Needless to say, Hoover was not the most popular man in the US by the time the country began to focus on the election campaign of Challenged by one of the most astute politicians in American history, Franklin D.

Roosevelt, Hoover and the entire Republican party was repudiated in the election of Signs of problems with economic fundamentals began to occur even before the stock market crash in Two of the great engines of prosperity of the s—automobile manufacture and sales and construction—began to show weakness in The slowdown in sales of durable goods led to a problem of oversupply—companies continued to manufacture things but there were no buyers.

Eventually, of course, this could not continue and the downward cycle of layoffs and reduced demand would drag the economy down. Another popular explanation of the depression blames bad business practices too common at the time.

US companies had engaged in excessive borrowing to finance the expansion of production at a time when there were a lot of signs that consumption was on the decline. This borrowing probably delayed the onset of the depression but made its impact all the greater once it finally hit—there was much more to lose, especially for the banks, which had lent them the money or the investors who had bought the stock.

Banks share much of the blame for this because their lending policies were too loose and they made many bad loans. Many analysts point to serious problems in the world trading system as the chief cause of the depression.

In , the U. Dynamic effects, to the extent that they existed in the 's, exacerbated the losses. In his assessment of money in U. Friedman believes that government was responsible for the depression. The transmission mechanism was the collapse of the U. He argues that the establishment of a central bank the Fed in the U. When the economy enters a recession, bank assets decline in value.

A liquidity crisis may arise if people worry that their bank may become insolvent rendering their deposits worthless.

Therefore depositors will create a run on the bank in a stampede to get their money out before the bank fails. Before establishment of the Fed, larger banks would lend to smaller banks, at premiums to insure against irresponsible behavior. With the Fed in place, large banks, according to Friedman, waited for the Fed to bail out the small banks, which it never did. Further, the Fed, in a supposedly misguided attempt to slow the stock market boom, tightened the money supply and initiated the decline.

In his view, what would otherwise have been a recession was converted into the Great Depression due to an amateur at the wheel; the amateur being the Fed.

More recently, in part prompted by the behavior of central bankers since the 's, scholars have suggested that the financial collapse was due to tight money around the world whose source lay in the return to the Gold Standard after WWI. A major debate during the 's, on which Keynes had much to say in his tract," The Economic Consequences of Mr.

Comparison between the Great Depression & the Financial Cris by salma ahmed on Prezi

Churchill" then the Chancellor of the Exchequer , was over what the exchange rate par value national currencies should be relative to gold. During the War, governments abandoned gold for fiat money and ran inflation to finance the hostilities. After the War, governments could have either returned to the prewar par, which would have required substantial deflation, or set a new par.

The problem was, nobody really knew where to set it. So set in motion an early debate over purchasing power parity. In the end, Churchill set the British pound higher than Keynes advised. Other countries made similar mistakes. Gold was inappropriately redistributed around the world. Further, governments put domestic concerns ahead of international cooperation and so redistribution was delayed. Finally, some analysts blame the depression on the uneven distribution of wealth that characterized the 20s.

Farmers and workers had wages that were too small to allow them to buy their fair share of goods, and this was the reason that demand was lower than expected and overproduction resulted. Though the government did loan farmers money through the Agricultural Marketing Act of to store their crops until prices went up, it actually hurt the situation because prices did not go up and the farmers were unable to pay the loans back.

Hoover was convinced it was just part of the business cycle and would pass.

The situation would get much worse before it got better, but Hoover would not be the president to manage it. That would be the task of FDR. Causes of the Stock Market Crash and Great Depression. The Coolidge Boom and Election of A. The crash did clearly lead to a downward economic spiral: This caused less spending, making overproduction worse; c.

Companies laid off workers to keep from going under; d. This caused less spending causing many businesses to go under; e. This caused less spending see 2 and a downward spiral was created; f. Causes of the Great Depression A.