Stock Market Collapse To Blame For The Great Depression

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
PLAN
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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As the level of capital in the economy continued to inflate, workers, labour in the economy could no longer utilise it all efficiently, greatly increasing costs above the efficient market level. Furthermore, corporate profits soared while wages rose minimally in relation, widening the inequality in the economy. This continued to restrict the level of consumption within the economy relative to its growth, as the rising incomes of higher income earners does not translate into proportional rises in spending. As a result, deflationary pressure and lower levels of growth were occurring, and were masked by the strong growth and returns of the stock market. This is referenced to in Rajan Raghuram’s book, fault lines: how hidden fractures still threaten the world economy. Rajan refers to the governments willingness to generate low cost credit to lower income earners to reduce the income gap, ‘Politicians, always sensitive to their constituents, have responded to these worrisome developments with an attempt at a panacea: facilitating the flow of easy credit to those left behind by growth and technological

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