While Americans during this period enjoyed prosperity, other countries, especially Germany, struggled to recover (Rauchway 10-15). Middleclass Americans were exuberantly purchasing luxury goods, such as automobiles and electrical appliances, by financing (Himmelberg 7). However, as the distribution of income and wealth became increasingly more asymmetric, more borrowers were unable to make payments on their loans, and consequently, banks began to go bankrupt (Himmelberg 23-24). By 1928, the economy was slowing, yet, Americans continued to finance their consumption - even invested in stocks by using margin accounts (Rauchway 16). Then borrowed money streamed into the stock market and stock prices catapulted (Rauchway 17). Amid an atmosphere of speculation in the market, the federal government decided to increase interest rates, which pressured foreign central banks to do the same (Richardson "Stock"). The global economy at the time, was linked by the gold standard, and therefore, this created a money shortage, which triggered a world wide recession (Richardson "Stock"). Thus, the combination of overproduction of consumer goods, excessive purchases on margin, a weak banking system, and a looming economic slow down, fomented the stock market to crash …show more content…
To further aggravate the situation, in 1930, President Hoover passed the Smoot-Hawley Tariff, which depressed global consumption even more, for, in retaliation, the European nations created similar tariffs to discourage U.S. exports (Himmelberg 8). Then, to exacerbate the situation, in the latter part of that year, a severe drought developed in the Great Plains, which devastated the farming sector (Himmelberg 8). The afflictions of the farmers inundated the banking sector, and with the dwindling economy, thousands of banks collapsed (Himmelberg 9). Some of these bank closures were results from "bank runs", in which savings were withdrawn by crowds of depositors, due to fear and panic (Himmelberg 10). Several major bank panics occurred during 1930-1933, the first was in Tennessee, when Caldwell and Company, the largest financial company in the South, closed several of its primary banks; sparking a banking panic, which resulted in hundreds of commercial banks to fail (Richardson "Banking"). Then a month later, one of New York City's major banks closed, causing more banks to fail (Richardson "Banking"). It has been established that the Federal Reserve Bank can minimize the damaging effects of these banking panics by lending to member banks and assisting non-member banks (Richardson "Banking"). According to