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Strategies & Market Trends : The Stock Market Bubble

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To: Giordano Bruno who wrote (2574)	1/19/1999 7:24:00 AM
From: Kip518	Read Replies (2) of 3339

From: Business Cycles by Lars Tvede THE END OF THE BOOM …At this time, the public interest in railway stocks was as high as ever. But the fact was that overcapacity was developing as too many rushed to gain market share… And then Vanderbilt moved to 1 dollar [from 125 dollars!!] - far below his production cost… This price war was symptomatic of the situation. Prosperity had lasted too long and people had invested in too many businesses that could not pay back the interest… In Europe, the situation was very similar… …This time it began in Austria… On Sep 8, 1873 it reached Wall Street. The 19th of September started calmly, but during afternoon , most of the railway stocks suddenly started to fall… The fall immediately turned into all-out panic in which everybody desperately struggled to find a buyer for their shares. The next morning the doors of the stock exchange never opened… The problem had only one solution… "Increase the money supply!" The Treasury released 13 million dollars for purchasing government bonds, and 10 days later the exchange was reopened. …The panic was the beginning of a depression of a magnitude which America had never seen before. Unemployment in New York rose to 30%, then to 40%, and then to 50%… John Stuart Mills had been right: confidence mattered, and so did speculation. A boom could take place even if stimulated by neither an increase in the money printing nor any external stimulus. It could take place if people reduced their savings, if velocity of money increased, or because of competitive investment. And a bust could appear simply as a reaction to a boom. …it began to look more and more as if instability was an inherent property of the capitalist economy… (reprint from LW discussion group)

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