<P> Banks began to fail in October 1930 (one year after the crash) when farmers defaulted on loans . There was no federal deposit insurance during that time as bank failures were considered quite common . This worried depositors that they might have a chance of losing all their savings, therefore, people started to withdraw money and changed it into currency . As deposits taken out from the bank increased, the money supply decreased because the money multiplier worked in reverse, forcing banks to liquidate assets (such as call in loans rather than create new loans .) This caused the money supply to shrink and the economy to contract and a significant decrease in aggregate investment . The decreased money supply further aggravated price deflation, putting further pressure on already struggling businesses . </P> <P> The US government's commitment to the gold standard prevented it from engaging in expansionary monetary policy . High interest rates needed to be maintained, in order to attract international investors who bought foreign assets with gold . However, the high interest also inhibited domestic business borrowing . The US interest rates were also affected by France's decision to raise their interest rates to attract gold to their vaults . In theory, the U.S. would have two potential responses to that: Allow the exchange rate to adjust, or increase their own interest rates to maintain the gold standard . At the time, the U.S. was pegged to the gold standard . Therefore, Americans converted their dollars into francs to buy more French assets, the demand for the U.S. dollar fell, and the exchange rate increased . The only thing the US could do to get back into equilibrium was increase interest rates . </P> <P> The Stock Market Crash of 1929 is often cited as the beginning of the Great Depression . It began on October 24, 1929, and was the most devastating stock market crash in the history of the United States . A lot of the stock market crash can be blamed on over exuberance and false expectations . In the years leading up to 1929, the stock market offered the potential for making huge gains in wealth . As share prices rose, people started to borrow money to invest in the stock market . However, on October 24 (Black Thursday), share prices began to fall and panic selling caused prices to fall sharply . On October 29 (Black Tuesday), share prices fell by $14 billion in a single day, more than $30 billion in the week . The value that evaporated the week was 10x more than the entire federal budget and more than all of what the U.S. spent on World War I. By 1930 the value of shares had fallen by 90% . </P> <P> Since many banks had also invested their clients' savings in the stock market, these banks were forced to close when the stock market crashed . After the stock market crash and the bank closures, people were too afraid to lose more money . Because of the fears of further economic challenge, individuals from all classes stopped purchasing and consuming . Thousands of individual investors who believed they could get rich by investing on margin lost everything they had . The stock market crash severely impacted American economy . </P>

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