The Crisis of Capitalism

The Wall Street Crash caused the world recession, but although the crash marked the start of an economic crisis, it was not actually the most important cause. It firstly affected the financial system; brokers unable to pay their debts to the banks went bankrupt. The value of shares given as collateral plummeted, undermining the stability of the banks, which then reduced the volume of credit granted to their own customers in order to strengthen reserves. While prices plunged and took company profits with them, loan instalments remained unchanged, thus worsening the conditions of debtors. The first bank failures in 1930 triggered a massive run on the banks, which further aggravated the situation of their assets. To ensure survival, the banks stopped supplying money to business. The financial crisis rapidly reverberated across the real economy, producing a downward spiral of deflation (reduction of the money supply, collapse of demand and prices), also because the monetary authorities and government refrained from intervention. Industry entered a phase of depression. Overproduction then led to a drop in the value of goods, stock and investments. Bankruptcies rose and growing numbers of jobs were lost. As unemployment grew and consumption plunged, demand fell even further, thus completing the cycle of recession. Furthermore, maintenance of the gold standard imposed a restrictive monetary policy, aggravating the liquidity crisis.