The great depression 6 of 6 The contraction



The US economy, with its booming stock market and an attractive interest rate sucked in as much gold in reserves as international investors can’t look at Europe anymore for better yields. The US government, worried that it would suffer the same fate as Britain, continued its deflationary stance by increasing the discount rate even further. The US even stretched out its counter policy by selling massive securities to dampen their value.

The effect of this deflationary stance by the government was not realized until businesses showed signs of trouble as their balance sheets weren’t gleaming anymore. Money is expensive to acquire at more than 5% interest rate, so corporations who mostly hedged future earnings on their loans began reducing investment spending to the extent of laying off its workers. Combined with the government dumping of securities, investors holding huge amounts of stocks began selling. Across the board as the first wave of selling hit the next investor, financial institutions who hedged the value of their stock against their assets are now in trouble of securing their assets as it is now worth less than what they borrowed. People began to panic as they sold their securities; huge foreign funds began withdrawing their stock as well. Since most European investments are hedged in the booming US stock market, their economies fell ever deeper into the depression. There were short recoveries around the world and some countries were less affected such as Japan. But the deliberate deflationary actions of countries and failing banks worldwide worried people to hold on to their cash instead of depositing it on banks. Businesses halted investment spending; a majority of people out of work and further deflationary measures to satisfy the gold standard prolonged the depression. Central banks around the world increased interest rates and even reduced, halted or prevented their money supply to expand just to defend gold parities. Economic activity contracted as the worldwide Great depression began to satisfy their need for gold.

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