Is the Stock Market going to crash and cause another Great Depression very soon?

Answer 1

The stock market crash of 1929 did not cause the Depression, the Depression and the Stock Market Crash were caused by the same event. The market just reacted first.

The most probable cause of the crash was the gold standard. Prior to World War I, the world used either a gold, silver or a bimetallic standard. Asia was primarily a silver standard, Europe primarily gold and America bimetallic. South America was mixed.

Money exists and works inside a web of social and financial contracts. The gold standard had varied over the centuries as these contracts changed.

World War I disrupted these contracts, suspending them indefinitely. Further, as war participants spent money, their gold and silver supplies dwindled forcing them to suspend the gold standard and moving to fiat money or what was called a fiduciary standard.

When the War ended countries tried to return to the pre-War standard. The hidden problem was that all of the social contracts which had been in place were gone and new ones existed. Further, the gold and silver reserves no longer reflected the pre-War reality.

This took awhile to impact markets and societies, some sooner than others. The Great Depression as it is called now, or the Great Contraction as it was called by some, was the result of money flowing into the United States, much as money is flowing into China right now. The United States was intact, Europe was rebuilding. Gold was flowing into America.

An increase in the money supply is highly inflationary so the Federal Reserve System quarantined the money. Prior to the Reserve system there would have been price inflation, resulting in gold outflows until prices came down again. The Reserve System stabilized prices, by locking up the gold. Of course by not permitting the gold to flow out, it prevented other nations from meeting their commitments. It was worse though.

In mid-1929 US banks began asking for increased reserves of gold to loan. The Federal Reserve interpreted this as excess growth, of an economy heating up. It wasn't, it was an economy starved of gold. So to cool off the economy it raised rates using open market operations. This made the US more attractive to foreign investors, bringing more gold into the US, but it of course was quarantined. So the price of money, interest, rose when it was needed most, the global supply of money was being locked up in New York, and so the system had become fragile.

In October 1929 money that had been devoted to investment now had to be devoted to consumption, withdrawing money from the stock market. The August 1929 decision had the effect of reducing the money supply by 3% of GDP. National investment at that time was 4% of GDP. That resulted in a 75% reduction in national investment. Within a year there was 24% unemployment because the nation had stopped investing in its future. No new tractor orders, no new machinery orders...nothing...nothing everywhere.

Had the world been on a fiat standard, independent nations could have printed their way out of the contraction.

We are in a somewhat similar position right now, with China quarantining $1,000,000,000 in cash reserves to protect its economy from heating up.

The gold standard, because of its rigidity, forced mass collapse. Banks couldn't meet their gold obligations, firms couldn't afford the higher interest rates, nations couldn't meet their payments and so forth.

The Depression took Hoover and Papin out of power and put Roosevelt and Hitler into power. Neither could have been brought into power without the Depression. The gold standard had been triggering banking collapses throughout American history, that is why it is now gone.

Answer 2

Well, the reason the Stock Market crash helped cause the depression is that it bankrupted many banks and many investors. This led to a run on the banks. Now, there are rules that supposedly separate banks from stock investing. So, theoretically, the value of stocks could fall to zero and it would only effect new issues for investment. Most of the stock market has to do with firms where the stock has already been issued and really they are just playing a game trying to estimate the worth of the company. But the company itself can buy its inputs, sell it's outputs all without regard to other people's perception of its stock (unless it wants to issue new stock to finance an expansion).

A huge stock market crash could reduce current investment to cause a recession, but not a depression, and I am sure the Fed would step in and prevent even that.

Answer 3

The Great Depression was not caused by the stock market crash. It was caused by the Smoot-Hawley Act and the deflation of the money supply by the Feds. Read a good history book.

Note: the stock market crashed in 2002. Now, 5 years later, the U.S. economy is the strongest in its history. Stock market crashes do not cause depressions. Government/political screw-ups do.

Answer 4

it is possible but will not happen. The main cause of the great depression was margian. So many people only put down 10% payments on the stocks they owned. When the stocks plumeted they now owed the 90% original value on a much depreciated stock. With all the stock analysts now people have learned not to do so. Also in this world of instant information people will be able to cover themselves if stocks begin to fall.

Answer 5

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Answer 7

There is currently an underlying crisis here
in America.
Wages are not keeping up with inflation,
which is the main cause of any credit crunch.
Whether this will lead to a "Great Depression"
is any body's guess.
One sure thing: George W. will press the Federal
Reserve to keep dropping interest rates until
the GOP has relinquished the reins to the
Democrats.
Such is politics.

Answer 8

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Answer 9

I don't think so, and also, I think it wasn't just the stock market that caused the great deperssion- unemployed people recieved money from the government (that wasn't backed by anything) and everyone started raising their prices and the stock market was acting crazy- and eveything just- fell apart

Answer 10

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