Although there were several reasons why the great depression started, this is the most cited one. However, this crisis did not actually cause the depression. The stock price of a company is only a reflection of the current information of the future income of that particular company. So when that current information changes, such as when interest rates go up, stock prices go down and they begin to tumble. A stock market crash might however cause people to sell their assets and hoard money.

During this time period, America had a 100% gold standard for its money. In other words all cash was backed up by a government promise to exchange it in a specific amount of gold. During this time, one ounce of gold was exchangeable for $20.00. Since the amount of money in the economy is directly related to amount of gold available, the money supply is not very flexile. This also is not a problem as long as prices and wages drop to compensate instantly for the loss of money in the economy.

When all of these conditions occur, there is a recession or a depression. Because of the stock market crash, people hoarding money, the gold standard, and sticky prices and wages, America’s economy was hit hard in the 1930’s. They had to learn the hard way what life is like in a depression.

Prices and wages usually change with the shortage

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