What Caused The Great Depression Of 1932 In The U.S?
Q: What caused the Great Depression of 1932 in the U.S?
A:There were a series of escalating events:
After massive speculation in Wall Street, the market crashed in 1929
The rich people stopped spending money
The people who sold things to the rich lost their jobs
The people who made things to sell to the rich and those who sold to
the rich lost their jobs.
The Federal Government (and many economists) stated that it was a
normal turndown and would level out and rise again (in the long run).
Many of the rich capitalists (lead by the Sec. of the Treasury)
thought it would be good to get wages back to "normal" -- "liquidate
the farmers, liquidate the workers, liquidate everyone"
[] Long answer 99% reduced for usenet: A whole lot of history set it
up.
World War I ended the gold standard ... after the war the world tried
to reinstate the gold standard at pre-war parities which no longer fit
... governments also were much bigger and more nationalistic and
didn't cooperate in managing the gold standard and averting crises as
they did pre-war -- they way they manipulated the standard combined
with the ill-fitting parities lead to systemic world deflation and
economic weakness (on top of the damage the war itself did, etc.) ...
in the US there was too much gold after the war for the parity, which
with the stock market boom and a bunch of other things that lead the
Fed to take adopt a tight money policy, which lead to the Recession of
'29-'31....
[] Short answer: The Fed. It turned the Recession of '29-'31 into the
Great Depressioon by boosting rates in the middle of the recession in
September of '31.
Until then the US economy had been going through a typical-for-the-era
recession much like that of 1921. The consensus among economists and
business forecasters at the time was strong recovery in late 1931 and
1932.
Then, in September, in the midst of the ongoing recession and
deflation, the Fed raised interest rates 2 full points, from 1.5% to
3.5%, a 133% increase. (Can you imagine Alan Greenspan doing *that*?)
It did this to meet its obligations under the gold standard, to stop a
gold outflow.
The result was immediately calamitous. M1 fell at a 25% annual rate
over the next three months, and M2 at over a 35% rate. The sudden
shock to expectations is seen in a historic rush into cash
-- M1 and M2 have never before or since collapsed at this rate. People
fled into currency holdings and commercial deposits at the Fed.
The deflation that had been expected to end instead intensified,
increasing real interest rates by much more than the nominal increase.
People quickly stopped lending in the risky markets because they
they could avoid risk and get a safe positive return from holding
cash, due to the deflation. Borrowers realized that continuing
deflation would make them repay loans at a higher real rate, so they
stopped borrowing. Investment quickly dropped to literally almost
nothing, and a vicious cycle of contraction produced a deflationary
collapse that drove the economy down through 1933.
Interestingly, ome years ago all the best data collected for the
1920s and 30s was run though top econometric computer
models on a supercomputer. The computer predicted imminent strong
recovery in 1931-2, until the Fed raised rates sharply in '31. .
( See: "Forecasting the Depression: Harvard versus