Introduction On 24 and 29 October 1929 prices on the New York Stock Exchange collapsed.

The losses among 880 issues were estimated at between $8 billion and $9 billion. The "Great Crash" of 1929 ended a period of tremendous prosperity and inaugurated the Great Depression, but the crash and the Depression were not unprecedented. Since the Civil War, the American economy had suffered periods of depression every eight to twelve years. The last major depression, from 1893 to 1897, had been a period of enormous suffering and wide-spread political unrest; the economy had been through a smaller depression as recently as 1920-1921. Such depressions had been devastating, but often their impact varied by region, with the worst effects being localized. In the 1930s, however, the United States was financially unified as never before. Harvests in California affected markets in New York. Newspapers, magazines, radio, and cinema linked the nation from coast to coast. The dust bowl in Oklahoma was reported in Florida; hurricanes in Florida were reported in Oklahoma. A national media reinforced the perception that the Great Depression was unprecedented in its intensity and depth. Furthermore, after the prosperity and boosterism of the 1920s, the Depression seemed to many an unexpected and incredible calamity. Capitalism itself appeared to fail

The Great Depression 1929 : Background in US

The 1920's was a decade often referred to a the roaring twenties'; a time when successful businessmen were national heroes, land values were booming and the hems on women's skirts were getting shorter than ever before! This was a time when the traditional values of rural America were challenged - women were gaining employment, voting and driving cars. It was a time when a new type of urban centre arose; one based on production, industrial technology and massed population. The average American was busy buying automobiles and household appliances, and speculating in the stock market, where big money could be made.

However. the imbalance between the rich and the poor, with 0.1 percent of society earning the same total income as 42 percent, combined with production of more and more goods and rising personal debt, could not be sustained. The 1920s "boom" enriched only a fraction of the American people. Earnings for farmers and industrial workers stagnated or fell. While this represented lower production costs for companies, it also precluded growth in consumer demand. Thus, by the mid 1920s the ability of most Americans to purchase new automobiles, new houses and other durable goods was beginning to weaken. This weakening demand was masked, however, by the "great bull market" in stocks on the New York Stock Exchange. The ever-growing price for stocks was, in part, the result of greater wealth concentration within the investor class. Eventually the Wall Street stock exchange began to take on a dangerous aura of invincibility, leading investors to ignore less optimistic indicators in the economy. Over-investment and speculating (gambling) in stocks further inflated their prices, contributing to the illusion of a robust economy. The crucial point came in the 1920s when banks began to loan money to stock-buyers since stocks were the hottest commodity in the marketplace. Banks allowed Wall Street investors to use the stocks themselves as collateral. If the stocks dropped in value, and investors could not repay the banks, the banks would be left holding near-worthless collateral. Banks would then go broke, pulling productive businesses down with them as they called in loans and foreclosed mortgages in a desperate attempt to stay afloat. But that doomsday scenario was laughed off by analysts and politicians who argued the U.S. stock market had entered a "New Era" where stock values and prices would always go up. That, of course, did not happen. Stock prices were seriously over-priced (when measured in the actual productivity of the companies they represented) making a market "correction" inevitable. In October 1929 the New York Stock Exchange's house of cards collapsed in the greatest market crash seen up to that time. Students are often surprised to learn that the stock market crash itself did not cause the rest of the economy to collapse. But, because American banks had loaned so heavily for stock purchases, falling stock prices began endangering local banks whose stock-buying borrowers began defaulting on their loans.

The Great Depression 1929 : Background in other countries

The Great Depression that began at the end of the 1920s was a worldwide phenomenon. By 1928, Germany, Brazil, and the economies of Southeast Asia were depressed. By early 1929, the economies of Poland, Argentina, and Canada were contracting, and the U.S. economy followed in the middle of 1929. As Temin, Eichengreen, and others have shown, the larger factor that tied these countries together was the international gold standard.

By 1914, most developed countries had adopted the gold standard with a fixed exchange rate between the national currency and goldand therefore between national currencies. In World War I, European nations went off the gold standard to print money, and the resulting price inflation drove large amounts of the worlds gold to banks in the United States. The United States remained on the gold standard without altering the gold value of the dollar. Investors and others who held gold sent their gold to the United States, where gold maintained its value as a safe and sound investment. At the end of World War I, a few countries, most notably the United States, continued on the gold standard while others temporarily adopted floating exchange rates. The worlds international finance center had shifted from London to New York City, and the British were anxious to regain their old status. Some countries pledged to return to the gold standard with devalued currencies, while others followed the British lead and aimed to return to gold at prewar exchange rates.

This was not possible, however. Too much money had been created during the war to allow a return to the gold standard without either large currency devaluations or price deflations. In addition, the U.S. gold stock had doubled to about 40 percent of the worlds monetary gold. There simply was not enough monetary gold in the rest of the world to support the countries currencies at the existing exchange rates. As a result, the leading nations established a gold exchange system whereby the governments of the United States and Great Britain would be willing, at all times, to redeem the dollar and the pound for gold, and other countries would hold much of their international reserves in British pounds or U.S. dollars.

The demand for gold increased as countries returned to the gold standard. Because the Franc was undervalued when France returned to the gold standard in June 1928, France began to receive gold inflows. The undervalued Franc made French exports less expensive in foreign countries currencies and made foreign imports into France more expensive in francs. As French exports rose and French imports fell, their international accounts were balanced by gold shipped to France. Frances government, contrary to the tenets of the gold standard, did not use these inflows to expand its money supply. In 1928, the Federal Reserve System raised its discount ratethat is, the rate it charged on loans to member banksin order to raise interest rates in the United States, which would stem the outflow of American gold and dampen the booming stock market. As a result, the United States began to receive shipments of gold. By 1929, as countries around the world lost gold to France and the United States, these countries governments initiated deflationary policies to stem their gold outflows and remain on the gold standard. These deflationary policies were designed to restrict economic activity and reduce price levels, and that is exactly what they did. Thus began the worldwide Great Depression.

Reference: www.wikipedia.org The world in depression, 1929-1939 (By Charles Poor Kindleberger) Great Depression ( by Gene Smiley ,professor at Marquette University )