st rates improve the return on investment, resulting in an increase in business investment and an increase in aggregate demand.(2) Several important factors combined to make the 1930s a decade of extreme economic depression. During the 1920s, corporate, bank, and individual participation and speculation in the stock markets was very high. Investors, including banks, could buy stocks on margin, paying only a small percentage (for example, 10%) of the stock's street value. This allowed for a tremendous amount of leveraging and exposure in equity assets with only a moderate cash outlay. In addition, banks could use customer deposits to buy stocks, further driving up share prices and increasing the potential fall in prices. And prices did fall. From October 1929 to the early 1930s, many stock prices lost over 90% of their value. For many Americans, their savings and wealth evaporated almost overnight.As a result of the business downturn, demand for goods and services plummeted, U.S. corporations responded by lobbying Congress for increased protection from the import of foreign-made goods. Congress complied. Led by Congressmen Smoot and Hawley, tariffs averaging 60% were placed on imported goods. Since a tariff acts as a tax, this led to a corresponding increase in the price of these goods to the American consumer. Foreign countries immediately reciprocated, shutting off markets for U.S. exports. Global trade contracted, leading to a further deterioration of the economy.With the economic downturn, incomes and tax payments declined. Believing a balanced budget was of primary importance, President Hoover raised income and corporate taxes, further decreasing disposable incomes and jobs. Stunned by the magnitude and duration of the Depression, classical economists went into a funk. The traditional classical solution to the business cycle - allow prices, wages, and interest rates to adjust and wait it out, was not working. Wages, prices, and inte...
