Читать книгу Financial Security For Dummies - Eric Tyson - Страница 28

The economic calamity that lasted a full decade (most of the 1930s) is known as the Great Depression. It was characterized by high unemployment, falling prices (deflation), collapsing stock prices, and mostly inept and wrong government responses.

The stock market crash of this period happened globally. The price declines actually began in Europe in 1928 the year before the U.S. stock market peaked in late 1929. Most European stock markets were down by about 15 percent by the time the U.S. market was peaking. From its peak in 1929 to the bottom in 1932, the U.S. stock market dropped a bone-rattling 89 percent.

The roaring ’20s that preceded the Great Depression was a decade of a strong and expanding economy. U.S. stock prices advanced nearly 500 percent, marking the greatest bull market in U.S. market history, from their 1921 lows to their late 1929 peak. Over this period, the Dow Jones Industrial Average advanced from about 64 to 381.

Many factors led to the economic and financial market disaster known as the Great Depression:

 The record run in stock prices was fueled in part by easy credit conditions for buying stock with borrowed money — known as margin loans. Investors were able to buy stock by putting up only 10 percent of the cost via their own money and borrowing up to 90 percent. Having just a 10 percent equity stake left little margin for a big decline in stock prices, which led to margin calls — forced selling of stock holdings which accelerated the decline once started.

 The Federal Reserve raised interest rates in 1928–1929 to curb speculation in the financial markets. “This action slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe,” according to the St. Louis Federal Reserve. To rein in speculative buying of stocks, the Fed should have raised the stock margin purchase requirement from its low level of 10 percent (note that today it is at 50 percent).

 The Smoot-Hawley Tariff Act passed by Congress and signed into law in 1930 led to a trade war which depressed global trade. The United States slapped 20 percent tariffs on imports to the United States, which set off retaliatory tariffs by many other countries.

 Economic problems and falling stock prices led to depressed consumer confidence and a run on banks. The Federal Reserve failed to step in and act as the lender of last resort, and the resulting bank failures contributed to the further downward economic spiral.

 The Federal Reserve allowed the nation’s money supply to drop 30 percent, which led to an equivalent, deflationary price decline. With all of the previously mentioned economic problems, the Fed added to the misery by allowing the nation’s money supply to shrink 30 percent from 1930 to 1933, which led to an approximate 30 percent deflationary decline in prices. This deflation had the impact of increasing the burden of debt among those who owed money and further harmed the overall economy.

In addition to the stock market being crushed, the unemployment rate in the United States stayed above 10 percent for more than a decade — from 1931 through 1941. In fact, it hit a high of 25 percent in 1933 and was above 20 percent for four straight years around that time.

Over time, economists and others have come to realize how the government’s response caused and greatly worsened the Great Depression. Furthermore, reforms coming out of this period led to the Federal Reserve becoming a “modern central bank” and lender of last resort.