After the horrible tragedy of the Great War, World War One, the North American countries suffered further in the decade called the Great Depression. The Great Depression occured from 1929 to 1939 after the time period known as the Roaring 20s. The Great War ended in 1919 and with the soldiers returning the 1920s were the highlight of the century. The trigger event for the Great Depression was the stock market crash in October 1929 entitled Black Thursday and Black Tuesday.
If you are wondering what caused the Great Depression, here are the highlights:
- The Roaring Twenties led to expanding the economy rapidly and many accumulated wealth during this decade, thus pouring their wealth into the stock market.
- Many were pouring money into the markets with borrowed cash.
- Production declined and unemployment levels were high thus inflating the stock prices
- Wages were low and consumer debt was high
- Agricultural sector was struggling to make amends due to natural causes such as drought
- Banks had large amounts of loans that could not be liquidated
With the highlights above, the perfect storm was created to create a recession which slowed down consumer spending while stock prices remained unrealistically high. In October 1929, when risk averse investors began selling off their overpriced shares, the stock market crashed. With each “crash” that occurs, a wise investor must understand that it is the investors that get nervous and sell that create the circumstances of a crash.
Aftermath of the Stock Market Crash
As many individuals and businesses lost tons of money in the crash, consumer spending dropped and businesses slowed production forcing them to resign workers. When reviewing this time period of history, it is vital to remember that it was a time of industrialization and that factories were the major source of employment. Many folks who borrowed money fell into large sums of debt. Banks struggled to maintain enough cash reserves as they liquidated their loans. The vicious cycle continued!
Main lessons from the Great Depression
- Plan ahead! Anything can happen in this universe and you need to be prepared for unexpected events such as unemployment, fluctuations in prices or interest rates.
- Invest money that you are okay locking in for a certain period of time. Stock markets fluctuate and are not always linear. If you invest in the stock market, build a mindset that this money will grow in the long-term.
- Another important factor is to research and complete your due diligence for the investments you make.
- Understand your finances and assure that you have an emergency fund for scenarios where you may lose your employment. Savings is equally important as investing.
- Review the risks of investing using credit. While this can work out well in healthy economic conditions and if you have a back-up plan of paying off the credit, there are high risks of investing borrowed money.
- Live within your means despite the economic climate. The greatest secret Warren Buffet shares is that the rich remain rich by living below their means. Thus, allocating a monthly budget and understanding what are your necessary expenses.
Many of these lessons can still be applied today in our current climate. The lessons are rudimentary to building wealth and maintaining financial health. Understanding your relationship with money and the risks associated with investing, unemployment, mortgage debt and high uncertainty in the markets is critical to carving your path.
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