Where was the money during the Depression?

Question

During the Great Depression in the U.S., the whole world was going through a depression. It just doesn't make sense to me! I mean, the money had to be somewhere! I realize it wasn't actuall, physical money, but still, it seems to me that if all the countries had less money, then everything would work out, or. . . its this even making sense? I've asked my AP History teacher and my history professor, but I still don't get it!

Answer 1

That's the funny thing. There never really was any money. That's why the Great Depression occurred. All this imaginary property and stock bought on credit and margin suddenly disappeared when the market crashed. Fortunes vanished overnight. There was a guy who made over 50 million dollars with an initial investment of $100 dollars. He just kept investing in these holding companies and then sold when the stock price was high, even though their actual worth was much lower.

Now we have the SEC and FDIC and other agencies which supposedly will prohibit those things from happening ever again. Although a sidebar of importance is that almost 90% of all property owned in the US is bought on credit, including homes, automobiles....

Have a nice day.

Answer 2

Where did the money go? Well the total number of
dollars in coins, bills and bank accounts really did
become a lot smaller. Here's how: When you deposit
money in a bank, that money "exists" in your bank
balance. You can spend it; it's real money.
But the bank is allowed to lend out most of it -- that
doesn't become a debit on your bank balance, though.
You still have the money, and so does the borrower.
The country's money supply went up because the bank
made a loan! (And by the 1930s, this "bank account /
loan" money was most of the money; coins and bills were
a negligible part -- like 5%).

Now when that loan is paid back, that extra money goes
away again; it's back to being just the money shown
in your bank balance. Likewise when the bank writes off
the loan in the case when the borrower is bankrupt.
So in 1929 a snowballing effect started. Nobody wanted
to buy stocks, so people who held stocks couldn't borrow
money and had to pay back their loans or else declare
bankruptcy; ordinary workers who had borrowed money were
mostly out of work and couldn't pay it back (and certainly
couldn't get any bank to lend them more money). So the
amount of outstanding loans decreased rapidly, and that
really did reduce the total number of dollars in existence.

But while the US money supply had roughly doubled from
1920 to 1929, it only fell back by about 35% at the worst
point in the Depression (1932). Still that was enough
to make quite a mess.

Answer 3

There are several factors that influence this.

One is the nature of the stock market. Stocks are, in essence, a share in a company. a very small share, but never the less. When a company makes profit, it reinvests some of it, and the rest is divided among the people that own shares.

However, how much profit you can get from a share is not as important as how much people EXPECT that they can get.

Take for instance the ".com bubble", wich happened a couple of years ago. E-bussiness was quite new, and some companies, (like Yahoo), made huge profits (Because E-bussiness basically generates money out of nothing; All you need is a server and a good concept). Because of this, investors expected E-bussiness to grow, and invested huge amounts of money in all kinds of .com projects.
These did however not deliver; lots of them went bankrupt, having spent millions of dollars on nothing. (Because you can't sell a slightly used 10 mil. $ comercial campaign to cover your losses when the concept doesn't hit.
The result was a small depression, and a setback for the global economy.

In the 1930's the entire stock market was hyped in a similar fashion. Lots of people, even small time savers, invested almost everything in stocks.
The result was that the prices of stocks vastly outgrew what they where [i]actually[/i] worth.
When the bubble burst, the stock prices plumeted. All the money that was used to buy overpriced shares for all intents and purposes disappeared.

Because of this, noone had money to invest in new businesses, or buy the products of the existing businesses.
Normally, a business can issue new stock to raise more money, if they need it, but noone wanted to buy stocks anymore.
Likewise, When businesses when bankrupt, people where unemployed, and had no money to buy commodities, which made more businesses go bankrupt, more people lost their jobs, and so on.
(Hence the "new deal" projects initiated by the US goverment, to get people back in jobs, so that they could start buying stuff again...)

The basic logic of capitalist market economy is reeinvestment; You earn money, and use that money to make more money.
The only thing that limits the growth is, efficiently, the market.
Thus, the economy grows until production exceeds demand, at wich point you get a "crack", and a depression. This depression is usually not severe enough to bring you back to the level of the previous depression, wich means that if you look at a graph of economic growth, it will look like a jagged, but steadily rising, line. (for instance, the where small depressions in the late 70's, late 80', and late 90's....)

The depression in the 30's, however, was especially severe.

Answer 4

Lots of good answers on this threat. I would also add one additional cause that I'm surprised no one has raised.

When the stock market crash occured in 1929 and billions began to evaporate out of the economy, the Federal Reserve TIGHTENED the money supply, rather than loosened it. When times are bad, businesses need borrowing power to keep afloat, yet the Federal Reserve made capital scare when it was most needed. That would be akin to trying to put out a minor brush fire with a can of gasoline.

Case in point? When the DotCom Bubble burst in 2000, trillions evaporated from the American economy. However, there were two important differences in government policy from that of the 1929 Crash: The Federal lowered interest rates to historical lows (And very quickly, as a matter of fact), and the overall tax rates in this country were slashed. As a result, the downturn in 2001-2002 (Actually, it officially began in November 2000) was far, far milder than our 1930s counterpart which was worsened by tight credit, greatly increased personal tax rates, punitive capital gains tax rates and the God-awful Hawley Smoot Tariff Act, which decimated international trade.

Answer 5

the global economy collapsed. It didn't matter if you had money because necessities of life (like food) cost 10-100 times more than it did just months before!

People lost their jobs and there wasn't such a thing as unemployment insurance or welfare - so if you couldn't work, you would starve to death.

there was no such thing as medical insurance either.

Everyone had money in the stock market in the 1920's and the rules were different back then, so you could invest BORROWED money in stocks. Then the market crashed and everyone's investments were worthless, but they still owed money to someone. They couldn't pay it so lost everything.

The thing that ended the depression was World War II. During the war, everyone had jobs (in the military or building weapons or other support things).

Answer 6

The money vaporized. I know that this sounds strange, but that is what happens to money that is invested in stocks when stocks go south. The increase and decrease of stock prices is money on paper, rather than money that is real. This is why the stock market is so critical to the economy. Its ups and downs affect the mind set of the country, which controls the political atmosphere. The value of money works much the same way: when there is more money in circulation, then inflation is up and the money is worth less. When the government runs short of money, it prints more money, putting more money into circulation and driving its value downward. Modern economics is very complicated and it takes an economist to really understand it all.

Answer 7

Immense amounts of money were lost in the stock markets. Many people "lost" much more than they had invested, because they borrowed the money to invest. They then defaulted on the loans, meaning banks could not cover their deposits. The few banks that did not fail, could no longer afford to extend credit. The few people who had cash hoarded it. The value of everything (houses, food, etc.) fell as the suplly of these things greatly exceeded the ability of people to buy them. The oversupply of Labor drove wages down, which put more pressure on prices, etc.

One thing that brought the scope of the problem home for me was when I was researching the history of some property in my town (CT). I found that virtually all the property in the town had been foreclosed on and much of it was in bank hands from the early 1930s until during or after World War II.

Answer 8

In the US during the 1920's playing the stock market was easy. All you had to do was invest 10% of the value of the stock and the other 90% was a loan. Everyone thought it was easy money because the market would just keep going up.

Along came the stock market crash and all the profits were lost and the stock brokers called in all of the debts. A lot of the wealth had been illusory (paper profits). The ordinary investor who had invested only 10% could not sell to get the money required to repay the margin loans. The stock brokers did not get the full value of the loans on their books.

The amount of capital available to companies to invest in their businesses dropped, the buying power of the consumer nearly vanished as everyone except for the very rich felt very poor.

Less money to spend, or worthless currency means less buying power. Less buying power means lower cash flow to businesses. People lose jobs, even less money. Less money, lower cash flow, more job losses, a vicious cycle.

The economic problems in the US meant less money to buy goods from Europe. This triggered economic problems in Europe and they joined in this vicious cycle.

That doesn't include what was happening in Germany:

In Germany the value of the mark kept dropping because of run away inflation. The inflation was caused by the punitive sanctions placed on Germany after WWI. It took a wheelbarrow full of money to buy groceries.


To answer your question in a simple answer: The perceived money supply during the 1920's was hugely inflated by unrealistic stock market valuations that was then dragged down to inconceivable losses because of the incredible amount of debt created by the 10% margins used by investors. In essence, all of that "monetery value" simply evaporated.

Answer 9

Okay...everyone seems to be discussing the fall of the crash which happened in October of 1929...but the question is about the Great Depression.. But thats not the only thing that caused the Great Depression... ( i had to rejog my memory by looking in my old AP book)

I'll quote first... "Ironically the depression of the 1930's was one of abundance, not want. It was the "great glut" or the "plague of plenty". The Nation's ability to produce goods had clearly out run its capacity to consume. or pay for them.. too much money was going into the hands of a few weathy people...... Not enough was going into salaries and wages." We were producing too much and consuming too little and not paying people enough ( and its not like we could sell it to other countries cause many countries were in their own depression after WWI.)" (From the American Pagaent by Thomas Bailey and David Kennedy)
So what you have is rich people lining their pockets and sometimes re-investing into their business...... stock market crash... those rich people are now allot less rich...so you have commoners without rising wages and not so rich rich people...

Who is left?? you guessed it.. our government... Hoover was known for doing "too little too late"...and his idea of pump priming... was basically take what little money the governement had and give it back to business hoping that they would re invest it in industry (including hiring new people because Unemployment was reaching somewhere like 33%)..Ronald Reagan would rename this idea in the 1980's calling it Supply Side Economics (it worked better the second time around) ..Hoover also built the Hoover Dam with gov't money (many people got angry because you realize that the gov't is now competing with industry to sell power)....... People basically got fed up with Hoover...and FDR was elected...FDR had his "try something" mentality...basically started a number of different programs that would hire the unemployed.. CWA...AAA...NRA (National Recovery Assc not the National Rifle Assc) all that failed at breaking the depression and it was WW2 that got us out...

hope that cleared things up a bit for ya :-D

Answer 10

good question - people may answer, and not really have a real explanation - it might just be, oh this happened that happened - people who write books have to put something - but you have to ask yourself, is it a real explanation - it is quite possible no one knows

most economists these days have thrown up their hands and say i dont know anything ['anymore']

economics is not a science - it is just a lot of ideas - 'maybe this is what's happening' - the material which economics looks at is shifty, and you cant get it unde the microscope, becaue it is ultimately the whole world and people's psychology

and a lot of economics is not objective - money is the most passionate thing - because it buys 'everything' - needs and wants - it is impossible to get down to the elements of economics, the fundamentals

and a professor isnt going to say: i dont know!