Collapse Of The Stock Market In 1929 Responsible For The Great Depression

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To what extent was the collapse of the stock market in 1929 responsible for the Great Depression?
Topic – Causes of the great depression
Focus – How much was the great crash to blame for the depression that followed
Limitation – Great crash, depression, and other factors within that given time period
Instruction – Give a balanced account and finalise to what extent the stock market collapse was to blame
Traps – Don’t write about causes of the crash, do mention other causes
Hayek: natural cycle of the economy = boom  bust
 Normal healthy economic growth – output goes up leading to real (genuine) prosperity - depends on capital accumulation – investment - K/L rises . Investment depends on saving.  The interest rate coordinates the
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This was a period of economic strength for the United States, as explained by galbraith, Ch.2 ‘Production was high and rising. Wages were not going up much but prices were stable…in 1926, 4,301,000 automobiles were produced. Three years later in 1929, production had increased over a million to 5,385,000…Business earnings were rising rapidly, and it was a good time to be in business.’
The stock market had undergone a period of purchasing on margin. Often, individuals only had to pay ten percent of the price of a stock to purchase it. This allowed for what Galbraith explained as a ‘great speculative orgy’ in which every section of society was taking part in this educated gambling. This purchasing on margin created a great bubble, which was only sustained by the increasing value of the stock. On Thursday, 24 October 1929, the market went into steep decline as investors and individuals alike began sold their stock holding. The state of mass panic had a ripple effect, as people were more inclined to sell their holdings as the prices dropped. This day, later labelled black Thursday, was the trigger for colossal economic downturn that saw a fall in world GDP by fifteen percent between 1929 and 1933. The collapse of the
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Investment depends on saving.  The interest rate coordinates the saving-investment decision.
 Resources are allocated between present consumption and future consumption reflecting preferences of savers.
 When people save it is for some consumption in the future.
 Rate of interest clears the market for loanable funds – it reflects the rate of time preference.
 Cycles can and will occur if the rate of interest (r of i) is not at the right level.
 If Central Bank injects more credit into the economy it pads the supply of savings – artificially enhances it. Then there is too much I.
 The great depression of the 1930s followed the boom of the 1920s - in Hayek - the downturn correcting for past errors and eliminating inefficiencies created in the boom, eventually leading back to full employment equilibrium.
 Injecting money/credit to address the recession would only make the downturn more

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