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How the Great Depression Affected the Stock Market

 

the great depression

The Great Depression was an extremely severe global economic depression, which took place mainly during the 1930s, starting in the United States and lasting until the World War II. The time period of the Great Depression also varied around the globe; in many countries, it began in 1929 and last until the end of the Second World War. Some countries experienced a short-lived Great Depression, which was brief and ended as soon as the economy recovered. Other countries went through a prolonged Great Depression that left some areas practically destroyed and led to the development of Fascism.

The Great Depression had a profound impact on the stock market. The main reason for this is because the American economy was based largely upon the paper money system and the ability to redeem national money for stock and commodities. With the Great Depression, the value of money deformed significantly and people lost confidence in paper money. This was the start of the stock market crash. It was this market crash which led to the hyperinflation, or increase in the money supply, of the United States which in the end led to the stock market crash of the 1930s.

In the United States, the government tried various measures to control inflation. Initially, the government tried direct control of the money supply through the administration of the Federal Reserve System. Later, the government changed to a flexible price control system called the Treasuries Commission System which allowed flexible exchange rates between currencies. Between the first and the second Great Depression, unemployment reached record levels, causing a great loss in the manufacturing sector of the economy. Ultimately, the GDP fell by about 25% in relation to the increased demand for goods.

In the United States, the government intervened to curb the inflation of the Great Depression by maintaining loose monetary policy. The central banking system made it easier for business organizations to borrow money from the banking system. However, the unemployment and the inflation of the Great Depression resulted in lower economic growth and higher inflation of the 1930s than any other time in the past ten years. The gross domestic product growth in the third year of the Great Depression was less than half of the average for the ten years prior to the war.

In the United States, the gold standard was discontinued as a means of controlling currency rates. Consequently, the government changed the rate of the gold standard and allowed the gold rate to fluctuate on an hourly basis. The result was that money supply decreased while unemployment increased. Ultimately, the stock market crash of 1929 led to the hyperinflation of the Great Depression.

The Great Depression also had a profound effect on the international trade relations between the United States and other countries. The United States was the main holder of export commodities such as steel, coal, wheat, and eventually aluminum. During the downturn, the United States and other exporting nations cut their import tariffs on these products in order to attract trade towards the country. In turn, the United States took on heavy import duties in order to control the imports of steel, aluminum, wheat, and other commodities.

The world war ii led to a temporary rise in the world economy, but the Great Depression lasted almost a decade. The global trade eventually reached its lowest point during the world war ii with the Great Depression still persisting. This period of the great depression has led to the present problem of deflation. Deflation basically is the opposite of inflation, wherein there is a rise in the money supply due to an increase in demand due to increased prices.

When the world war ii came to an end, the gold standard was again introduced with the intention of lifting the economic burden off the United States economy and prevent inflation. However, this time around the United States was not able to prevent an economic collapse which ultimately pushed the government to introduce the new deal. The new deal enabled the federal funds to be re-distributed among all United States citizens thus, stimulating the economy once more.

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