Economic Instability

 

The Great Depression was the longest, deepest, and most widespread severe economic crisis that took place in the 1930s. The Great Depression originated in the United States but grew to affect the entire world. Although there were many things that contributed to the occurrence of the depression, the most extreme cause was due to economic instability which caused multiple things that contributed to the economic downfall: bank failures, stock market crash, unemployment and high interest rates which led to business failures, and poor economic policies.

 

The United States experienced rapid economic growth in the 1920s, dubbed the Roaring Twenties, which ultimately caused the stock markets to grow past a sustainable point. Unemployment began to rise and stock market values began to drop. The market began showing signs of instability throughout September but bankers encouraged investors to continue investing. The addiction to investing would inevitably come to haunt investors when the United States experienced the stock market crash of 1929 The crash itself only lasted for four days but the effects of the crash lasted many years. The crash began on October 24th, 1929, now dubbed “Black Thursday”. Black Thursday wasn’t the worse of the days, but it marked the beginning of what was to come. At the end of the day, stocks were only down by 2%, however this still alarmed some people because overall the stocks had fallen 20% since their record high on September 3rd, 1929. Seeing the falter in confidence, the three leading banks (Morgan Bank, Chase National Bank, National City Bank of New York) all bought stocks the next day in order to restore confidence within investors. Their plan showed promise when the market closed higher than it started. However, their plan was short lived when the stocks plummeted another 13%. This caused the investors to panic, because they realized that the intervention had failed to bring the stocks up. October 29th, 1929, was the worst and the final day of the stock market crash of 1929. Over 16 million shares were sold on that Tuesday which at the time was worth $14 billion dollars. Over the course of these four days, the stock market dropped about 25%, losing about 30 billion dollars. This was more than the total cost of World War 1 which was the most expensive war in the history of the United States. The stock market crash indicated the end of the prosperity and growth experienced in the Roaring Twenties and the beginning of one of the darkest economic times for the United States.The majority of the American population lost confidence in the United States economy. Without consumer confidence, it’s impossible to have a healthy economy. The stock market crash set the tone and direction of the United States economy for the next decade. Unemployment rose to 25%, wages dropped 42%, economic growth fell 50%, and world trade declined by 65%.

 

The fear and loss of confidence lead to a run on the banks, which is when customers of a bank withdraw their entire savings account in a short time period. This was a problem, however, because the banks did not have the money on hand to give back to everybody and thus many banks were forced to close and when they did reopen, they could only provide 10 cents back for every dollar. Investors abandoned investing in stocks and turned to commodities which caused gold prices to increase. At the time, the United States was on the gold standard, which promised that every dollar had a value of gold. Because of that, people rushed to turn their dollars into gold and the government began to worry that they would run out of gold. In an attempt to save the gold reserves as well as preserve the value of the dollar, the Federal Reserve increased interest rates; however this only made things worse. With higher interest rates, businesses lacked funds to grow and were forced to low off many of their employees in order to continue their business. The Federal Reserve failed to implement the correct economic monetary policy: they opted for a tighter policy, which is the opposite of what the economy needed at the time. Tighter policies meant increased interest rates, prompting businesses to lay off employees and shrink in size, and also made getting loans from banks even harder. The Federal Reserve needed to increase the money supply, however, because of the contractionary policies, they effectively decreased the money supply by 30%.

 

As a whole, the United States economy was never stable to begin with, however America failed to realize this and was also unaware of the harsh consequences that would follow. Lack  The stock market crash caused Americans to worry and ultimately caused many business to go bankrupt and caused people to lose jobs.