Q2. How did the crash in US stock markets trigger the “Great Depression”? Explore its effects.
The onset of Great Depression was caused by a crash in American stock market. There was a huge cash surplus in American economy due to unbalanced trade with world. In the US huge amounts of this cash surplus was in invested in the stock market. investors only had to pay just 10% cash for their stocks as Banks financed the balance at 10-15% interest. Stock prices had inflated valuations which was dangerous for economy. In October 1929, the market crashed, a case of panic psychology running wildly out of control. Investors were in debt to the banks causing more panic selling and by November 13, the stock market had lost half of its value.
This spilled over into the rest of the American economy, which led to a decline in investment and buying. Therefore, production was cut, which caused unemployment. By 1932, industrial production in the United States had fallen by half, national income by 75%, and the value of some stocks from $100 to $.50 per share. Prices of goods fell causing deflation in market. Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same amount. This led to the collapse of 5000 American banks, many of which had over-invested in the stock market. These banks called in loans from Europe, whose economies were already unstable and overly dependent on American loans. The result was a worldwide depression spreading from America and Europe to the rest of the world that was tied into their economies.
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