I solved a lot of problems with my template today. I got rid of the italics in the footer and sidebar links. I also changed the typeface and the colors some more. I’m working on installing a plugin that will stop all my posts from being displayed on the index page. Man, I love WordPress, though.
The Depression was caused by a series of unwise practices and ideologies that came together at one point, and were sparked by a decision by Herbert Hoover that toppled the house of cards.
All during the ‘20s, the Federal Reserve kept on expanding credit under the influence of monetarism. Monetarism is the belief that money is actually demand itself. If producers make a large number of goods, and the demand for those goods is low, prices decline, and the producers of those goods find it hard to make ends meet. Monetarists said that to help these people, demand should be increased to match the number of goods produced. The way to do that, they said, was to print more money, in other words, inflate the currency. One of the easy and popular ways to do that was to expand credit capability for banks and other institutions.
The boom of the 1920s was largely due to the inflation throughout that period. Families were able to buy all sorts of things based on credit. Companies were able to take out loans to increase manufacturing capacity that would service the perceived extra demand. Construction increased, farms grew more, and the economy seemed to prosper.
Margin buying became very popular as a way to participate in the stock market. Margin buyers bought stock through the way of brokers. However they paid only a margin of the price of the stock to the brokers. The rest of the price was paid by loans. If the price of the stock increased greatly from when he bought it, the margin buyer could sell it and pay the rest of the buying cost, as well as the interest on the loan, and still make a handy profit. This was a highly speculative practice that more and more people were becoming attracted to. The stock market began to be built on shaky loans and promises of the future.
Hoover decided to slow down this practice of buying stocks on margin, so in early 1929 he ordered the Federal Reserve to cut down the supply of credit and increase the rediscount rate. This slowed down the boom, so that prices on the New York Stock Exchange started to fall. On October 24th they came down to the level that margin buyers had bought them at. If the price went too far down below the level that the margin buyers bought the stock at, they would lose their investment, unless they could find the money.
This is where a practice called fractional reserve banking comes in. This way of banking loans out a lot of money, but keeps only a small number of the cash reserves necessary to back the loan in the bank.
As people withdrew money from the banks to pay the price of the stock, fractional reserve banks lost their reserves; they had to call in their loans to get back the money that the depositors had given them. The loaners couldn’t pay back the money, because it wasn’t there. The inflation had created a condition that looked like wealth, but wasn’t. Since the banks couldn’t pay back the money to the depositors, they had to close their doors. This caused a panic with other depositors, who tried to withdraw their savings as well. Thus banks began to close in staggering numbers. People lost their savings. Buyers then had to resort to selling their shares. This selling became rampant on October 24th. As they sold, the price on the stock fell, so that it went below other buyers’ original levels, and the process kept on going on and on, so that the prices plunged into the core of the earth. A stock market crash ensued, which paved the way for the great Depression. Prices fell to unfathomable lows by November 13, 1929.
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