The Stock Market Crash

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    How do you respond to the following arguments some textbooks use to explain the crash in 1929 and/or the subsequent depression: buying of stocks using margin loans, American consumerism being driven by credit (buy now pay later), unequal distribution of wealth (rich getting richer and the wages of workers not keeping pace) so when the market crashed the wealthy stopped buying and investing and the masses could not pick up the slack, and overproduction? Thanks for your time.


    It’s well known by economists that it was a deficiency of investment and not consumption that held back production during the Great Depression. Even Keynes knew this and hence, his claim that the animal spirits (over-optimism and over-pessimism) of investors (not consumers) was the root cause of the Great Depression. Moreover, the rich have higher saving rates than the middle-class and poor. Thus, if the downturn made income and more equally distributed, then consumption would be relatively larger. Finally, the bulk of income in a market economy is in the hands of the middle-class. Therefore, aggregate consumption and investment don’t change much when the rich pull back.

    Take a look at Bob Murphy’s book, A Politically Incorrect Guide to the Great Depression.

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