What was the 1929 Crisis?

What was the 1929 Crisis?

Occurred between the First and the SecondWarworlds, the 1929 crisis it was one of the most impactful events in Contemporary History. This crisis occurred in September and October 1929, in the United States, when the value of the shares of New York Stock Exchange (to which the world economy was integrated at the time) plummeted, causing its "break" (crash). The crash of the New York Stock Exchange triggered, in turn, the Great American Depression, which lasted until the mid-1930s.

What caused the crisis?

The 1929 Crisis was a consequence of the great expansion of credit through the money supply (issuance of money and bonds) carried out by the Federal Reserve System (sort of US Central Bank) since the early 1920s. In the year of 1929, this expansion had to be stopped by the Government, since the adjustment of accounts had to be done. The Government, then, stopped expanding the money supply and began to operate a policy of restricting loans. Fearing the currency devaluation, many people and companies withdrew their reserves from the banks, starting a process of recession.

Mind Map: Crisis of 1929

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Thursday and Tuesday "black"

The healthiest solution to this problem would be for the Government to control the recession, allowing for freedom of prices and wages, until the market adjusts to the new situation. However, on the contrary, the Government began to exert tight control over prices and wages, in addition to promoting tax increases. This aggravated the recession and, on October 24, 1929, there was the so-called “Thursdayblack”, characterized by the vertical fall of shares due to lack of buyers. A few days later, on October 29, the “third-fairblack”, when several and several lots of bonds were offered for sale on the New York Stock Exchange, in a last desperate gesture, without attracting, however, buyers. Shares of banks and companies were completely undervalued, which led to their bankruptcy and the consequent unemployment of some 12 million Americans.

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Explanation for the crisis from the "boom” of credit offer

We said above that what caused the "1929 Crisis" was expansion (or the boom) credit, made by Federal Reserve System, during the 1920s. Well, to better explain the relationship between this type of financial action and the collapse of the economy, we highlight an excerpt from the work The Great American Depression, by economist Murray Rothbard.

O boom [...] it is actually a ruinously misguided investment period. It is the moment when mistakes are made, because of the interference of bank credit in the free market. The “crisis” comes when consumers come to restore the proportions they want. Depression is actually the process through which the economy fits after the waste and mistakes of the boom, and restore the efficient service of the consumer's wishes. ¹

Rothbard continues:

[…] the expansion of bank credit begins the economic cycle in all its phases: the inflationary boom, marked by the expansion of the money supply and bad investments; the crisis, which comes when credit expansion ends and bad investments become evident; and depressive recovery, the necessary adjustment process through which the economy returns to the most efficient ways of satisfying consumer desires.²

This need to return to the “normality” of economic cycles is what causes crises, according to Rothbard. The 1929 Crisis was so catastrophic because the American Government did not respect the time to readjust the economy, giving vent to the dynamics of the free market, but, on the contrary, interfered even more in this dynamics.

GRADES

¹ROTHBARD, Murray. The Great American Depression. Trans. Pedro Sette-Camera. São Paulo: Ludwig von Mises Brazil Institute, 2012. P. 54.

²ROTHBARD, Murray. Ibid. P. 55.
By Me. Cláudio Fernandes

Would you like to reference this text in a school or academic work? Look:

FERNANDES, Claudio. "What was the 1929 Crisis?"; Brazil School. Available in: https://brasilescola.uol.com.br/o-que-e/historia/o-que-foi-a-crise-1929.htm. Accessed on June 27, 2021.