Why Did The Stock Market Crash Of 1930

". By the middle of November, the market had lost about one third of its value, an amount representing $26 billion, or 40 percent of all stock that had existed on the Exchange just a month earlier(Infobase publishing 26) .The stock market crash reduced the aggregate demand substantially as people started to panic and became unaware of their future earnings; therefore uncertainty about future earnings or income resulted in a huge drop in aggregate demand and spending. The extreme stock price variability of this period made people temporarily uncertain about the level of future income. This uncertainty in turn caused consumers to postpone purchases of irreversible durable goods(Romer 602). Investors also became uncertain about selling their products,

People started lining up in front of their banks demanding their savings but banks were unable to give out all of the customer’s savings because it wasn’t available in cash within the banks vaults, as banks usually give out money for loans, mortgages, and so on. As a result, banks started to fail and experiences four banking panics in the fall of 1930, the spring of 1931, the fall of 1931, and the fall of 1932. These all resulted in the collapse of the economy as people became jobless; the workers who were the backbones of the American economy started losing their jobs; the new jobless were not the old-line poor who had always struggled at the bottom of the economic ladder. Many of the newly unemployed had always been solid citizens, middle- class workers such as bank tellers, factory men, female telephone operators, garage mechanics, and office clerks(Infobase publishing 35). People who were living in rural areas started deserting their farms looking for employment opportunities in the cities; they started living in shanty towns thatwere later called ‘Hoovervilles’ after president Herbert Hoover whom was blamed for this worsening

The Federal Reserve had the power to manipulate the money supply in the economy in order to promote economic growth, but during the Great Depression, it had failed to do so. Friedman and Schwartz stated “For it is true also, as we shall see, that different and feasible actions by the monetary authorities could have prevented the decline in the stock of money-indeed could have produced almost any desired increase in the money stock. The same actions would also have eased the banking difficulties appreciably. Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the contraction's severity and almost as certainly its duration” (qtd in Barber 435). Friedman and Schwartz therefore saw the policies pursued by the Federal Reserve as a factor that increased the length and severity of the Great depression, rather than a major cause for it. The Federal Reserve could have used expansionary policies to contract the recession, and it could have acted as a lender of last resort to the failing banks, but they failed to do so. The contractionary monetary policy thus used by the Federal Reserve that lead to the decrease of the money supply in the economy, was thus another factor that contributed to the great depression and why it continued on till