To begin with, my question is NOT about the reasons of "the great depression" or "market crash" which led to the great depression.

Rather, my question is about the reasons for the 'excessive cash liquidity' which resulted in 'market crash in 1929'. Traditional patterns tends to reflect cash liquidity distribution somewhat even across different sectors. How liquidity during 1920's in USA stands different was that, the sectors like Consumer Price Index is constantly DEFLATIONARY in the same decade when share market(and only share market) was extremely inflationary.

1970's : CPI inflationary : Other sectors inflationary(caused bubble burst)

1990's : CPI inflationary : Tech market inflationary(caused bubble burst)

2000's : CPI inflationary : Housing market inflationary(caused bubble burst)

1920's : CPI DEFLATIONARY : Equity market inflationary(caused bubble burst)

To simplify, my question is, what caused 1920's stock market inflation(presumably due to excessive liquidity) at the same time period when CPI was DEFLATIONARY(enough money was not present/spend in sector).

I am not educated in economics. I follow the subject only because it interests me. I work in a totally different field of study and thereby please excuse my ignorance about the subject for where ever I went wrong :)enter image description here.

thanks in advance.

  • $\begingroup$ This is more of an essay than a question. People disagree over what exactly happened in the 1920s and 1970s, so it is extremely hard to answer. I’d recommend deciding what your core question - which is one sentence - and cut down the question to be solely about that core. $\endgroup$ – Brian Romanchuk Apr 13 at 12:45
  • $\begingroup$ @BrianRomanchuk. To simplify, my question is, what caused 1920's stock market inflation(presumably due to excessive liquidity) at the same time period when CPI was DEFLATIONARY(enough money was not present/spend in sector). This is my core question. Essay is to set the context. I didn't mean to state anything, rather would like to understand what puzzled me. $\endgroup$ – invester Apr 13 at 14:08
  • $\begingroup$ @BrianRomanchuk I have heard people disagreeing about the causes of Market crash. But that is not my question. My question is about the thoughts on why there was difference of liquidity distribution in different sectors before the crash. This part I haven't heard anybody discussing. Maybe I have been looking at wrong places, if so please direct me to some work where this part is targeted. $\endgroup$ – invester Apr 13 at 14:16
  • $\begingroup$ The entire premise that the CPI was falling in the 1920s is incorrect: fred.stlouisfed.org/graph/?g=qI1e There was a recession after WWI, but then the price level was stable. Your notion of “liquidity distribution” does not fit in with modern economics, and just makes the question difficult to deal with. If you want suggestions for further reading, you probably need to start at the beginning, before worrying about the 1920s. $\endgroup$ – Brian Romanchuk Apr 13 at 14:56
  • $\begingroup$ Ok, let me rephrase my question. Let us go by your take on the price stability during 1920s. I assume we can both agree on the inflation durring WW1 caused a monitory contraction during 1920s. If the prices were stable during 1920's due to this monitory contraction, then how did a bubble occurred in stock market, which eventually busted in 1929? $\endgroup$ – invester Apr 13 at 15:22

The inflation data provided are not useful in this context. The average inflation shown is a mixture of the outcome of a post-WWI deflation, recovery, and price stability. One would need to look at more specific periods. FRED CPI data

Equity prices are supposed to equal the discounted value of future earnings/dividends (the dividend discount model). This means that fair value is highly sensitive to expectations about the future. The 1920s was a period of economic dynamism, where many large firms using new technologies became dominant. It is completely unsurprising that stock prices rose during the expansion.

The linkage between monetary tightening and stock prices is a standard feature of Austrian economics and/or financial market commentary, but it is not widely respected among other economic theories.

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  • $\begingroup$ Did you mean Keynesian by saying standard economic theory ? $\endgroup$ – invester Apr 13 at 17:33
  • $\begingroup$ I changed the wording. “Keynesian” is extremely vague, there are the Old Keynesians, New Keynesians (neo-classical), post-Keynesians (heterodox). There’s not a lot of theorists who pin all stock price movements on central bank policy. Austrians might, be even there, the theory has some nuances that internet commentators miss. $\endgroup$ – Brian Romanchuk Apr 13 at 17:47
  • $\begingroup$ Just wanted to understand the thought process. Thanks... $\endgroup$ – invester Apr 13 at 17:54
  • $\begingroup$ Post-Keynesian and New Keynesian economics are completely different schools of thought, and have different thought processes. (I’m a post-Keynesian.) $\endgroup$ – Brian Romanchuk Apr 13 at 17:58
  • $\begingroup$ So according to post-Keynesian thought process, aggregate money supply is not(or not always) related(or proportional) to inflation. Am I correct with this assumption? $\endgroup$ – invester Apr 13 at 18:01

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