Business Cycle Essay

1542 words - 7 pages

Analysis and Argument Essay on ‘Black Tuesday’ Stock Market Crash
Financial systems both money markets and capital markets all across the world have always been susceptible to shocks of varying proportions. The stock markets for instance are very vulnerable to daily variations in the forces of demand and supply. That is, when supply of a given stock outweighs its demand, the price of that stock is expected to fall and when demand outstrips supply, the price is expected to rally. Though these changes are viewed as normal, at times the prices plummet to a level that it sets in a wave of panic among the investors (Rothman, Par 1). These panicking investors rush to ...view middle of the document...

These excess reserves were passed over to the clients as loans to purchase stocks. During that period, the financial markets were not well regulated and this created a lot of loopholes of which the financial institutions could use to make more profits. These overly liberal credit policies encouraged Americans to take too much debt in order to invest more heavily on stocks in the 1920s (Latson, Par 5 ).Besides there were evident weaknesses with the financial system at that time which are believed to have contributed to the near collapse of the stock markets. Some of the weaknesses may have included policy errors by the federal reserves, risky business models of banks, over optimism of the investors and so on. These factors are believed to have blinded economists from detecting what could go wrong.
Lancaster outlines that during the 1920s stock markets had undergone a rapid expansion period reaching its peak in august 1929 after a period of wild speculation. After that production declined and unemployment rose leaving stocks in great excess of their real value (par 4). This triggered the beginning of the gradual fall of stock prices. This decline is a believed to have been catapulted with low wages, proliferation of debt, struggling agricultural sector and excess large bank notes that could not be liquidated. In the next two months leading up to October the bourse had already shed about 40% of its value. In the week leading up to the crash major bankers had exuded confidence that the falling prices being experienced were just temporary .On that fateful Tuesday investors exchanged a record 16,410,030 shares on the New York Stock Exchange (NYSE) in a single day. That resulted into billions of dollars lost and thousands of investors wiped thus the name black Tuesday.
According to Rothman, the black Tuesday was just the beginning of the worst period in the American economic history. She claims the policy makers of that time floundered while economists were confused on what action to take (par 2). This stock market crash is believed to be one of the major triggers and the immediate precursor to the great depression (1929-1939). Lancaster explains that the federal reserves bank may have contributed a great deal to the great depression and the stock market crash. In years leading up to the great depression, the federal reserves bank had created excess reserves which were not backed by gold first to increase reserves of the American banks and secondly to stop the gold flight from the Britain to the United States and help the dwindling fortunes of the Britain’s economy(par 11). These actions of the federal reserves are also believed to have contributed heavily to the crash and the depression.
Periods after the stock market crash were the defining moments of the study of economics. Different schools of thoughts came up with theories on how to handle future financial crisis. Fisher, a believer in market economics, argued that monetary policy could...

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