<p>Stocks are not money.</p>

<p>The valuation of a company - the market captialisation - is the number of shares multiplied by the share price.</p>

<p>The share price is the price people are willing to trade at right now. It does NOT mean all the shares have been traded at that price.</p>

<p>If a company issues 1 million shares, at a starting price of £10, the market cap is £10 million. They may only sell a few of these shares, so much less than £10 million actually changes hands. If the price rises to £20, only a few of the shares changed hands at that price - but the market cap is reflected in all the shares, and is now £20 million. People have commented on the <a href="https://m.signalvnoise.com/press-release-basecamp-valuation-tops-100-billion-after-bold-vc-investment-c221d8f86ad7#.ib4kf791q">flaws</a> in this methodology.</p>

<p>The same happens in a crash. Only a fraction of the shares actually change hands, but the media report on the change in the market cap.</p>

<p>If you want an analogy, consider a house burning down. You buy the house for £200,000. Then it sadly burns down (and without insurance). It is now worth £0. However, no money has been created or destroyed; it's a loss of value of an asset.</p>

CC BY-SA 3.0
2016-09-07T09:29:33.647Z
You did not answer the question about how money disappears.
Mick
CC BY-SA 3.0
2016-09-07T09:35:04.287Z
@Mick - The money does not disappear - the OP has a misconception. You should revoke your downvote, it is petty.
paj28
CC BY-SA 3.0
2016-09-07T09:35:43.310Z
You are factually incorrect - read my answer in full, including the edit.
Mick
CC BY-SA 3.0
2016-09-07T09:40:26.777Z
@Mick - which bit of my answer is factually incorrect? Your answer is talking about the knock-on effects of a crash. You may well be right, but I don't think that's what OP is asking about. It sounds like they have a misconception that market captialisation is actual money, and my answer corrects that.
paj28
CC BY-SA 3.0
2016-09-07T09:49:58.537Z
You are correct in stating that shares are not money. But the fact that money does indeed literally disappear during a crash is so little known and yet so unbelievably important that I feel duty bound to be forceful in correcting this lack of knowledge. Also it's not just a knock-on effect - the money disappearing will start to happen right at the instant of the crash.
Mick
CC BY-SA 3.0
2016-09-07T10:05:19.193Z
@Mick - You still haven't said where my answer is factually incorrect
paj28
CC BY-SA 3.0
2016-09-07T10:36:44.940Z
"factually incorrect" was with regard your comment "The money does not disappear".
Mick
CC BY-SA 3.0
2016-09-07T10:44:12.777Z
@Mick - depends how you read "the money". The question refers to loss of market cap
paj28
CC BY-SA 3.0
2016-09-07T10:54:44.487Z
I agree that there is not a one to one correspondence between loss of market capitalisation and the loss of money supply (as is perhaps implied by the poorly written articled linked to in the OP).
Mick
CC BY-SA 3.0
2016-09-07T07:54:39.703Z
2016-09-07T07:54:39.703Z
paj28
<p>The assessed value of the stocks goes down.</p>

<p>Non-stock related example: If my prized family portrait is assessed at 1000 dollars, and is later reassessed at 250 dollars.  That value is lost, 1000-250=750 dollars lost. No money ever went anywhere, but I, and as result all of society, is now poorer by $750. This loss is because we believed the painting was worth a lot, and we were wrong.  </p>

CC BY-SA 3.0
2016-09-14T17:06:47.117Z
Doesn't that depend on your interpretation of probability? A change in information leads to the conclusion a previous price was wrong (from the omniscient perspective), and the new price is...  arguably less wrong.
RegressForward
CC BY-SA 3.0
2016-09-15T14:17:49.200Z
Unfortunately, my instincts don't seem to see the situations as different. In the second case, I simply assess that were wrong about it going up in flames.  One is a bigger price adjustment than the other, though.
RegressForward
CC BY-SA 3.0
2016-09-08T16:21:58.567Z
2016-09-08T16:21:58.567Z
RegressForward
<p>If the stock market lost say 10billion dollars in value, it does <em>not</em> mean that 10billion dollars literally disappears (despite what the poorly written document you linked to suggests). But it is true that <em>some</em> money may have literally disappeared. This is because many shares are purchased with money borrowed from banks ("margin debt"). If the net amount of borrowing for share purchases went down i.e. some money was repaid, then that repaid money <em>did</em> literally disappear. This is all to do with how <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf" rel="nofollow noreferrer">fractional reserve banking</a> works - "Just as taking out a new loan creates money, the repayment of bank loans destroys money".</p>

<p><strong>EDIT:</strong> After the stock market crash of 1929 <a href="https://en.wikipedia.org/wiki/Great_Depression" rel="nofollow noreferrer">the money supply fell by about a third</a>. This was because huge amounts of money that had previously been invested in the stock market was in fact borrowed from banks. <strong>CORRECTION:</strong> I should not have implied that <em>all</em> of the one third reduction in the money supply was caused by a reduction in margin debt, but certainly part of the reduction was.</p>

<p><strong>EDIT:</strong> The idea of the money supply falling after an asset price bubble bursts is not widely reported. After the crash of 2007/8 almost no media outlets have discussed any notion of money disappearing. This is because the media and the general public have little clue that it is even possible for the money supply to decrease. But you can read <a href="https://www.publications.parliament.uk/pa/cm201314/cmselect/cmtreasy/writev/qe/m08.htm" rel="nofollow noreferrer">here</a> the governor of the Bank of England telling UK politicians in Jan 2013 that QE was an effort to counteract the falling money supply: "What we were doing [through Quantitative Easing] is injecting money into the economy, and what the banking sector has been doing is destroying money [as existing loans were repaid]." ... "what we were doing was partially to offset what would otherwise have been an even bigger contraction."</p>

CC BY-SA 3.0
2016-09-07T09:38:25.633Z
The edit is interesting... do you have a link with more info?
paj28
CC BY-SA 3.0
2016-09-07T09:41:25.137Z
Sadly the issue is clouded by the fact that fractional reserve banking is so often misunderstood, even in academic textbooks - see here: http://www.fractionalreserves.com/?page_id=81 You can find many references that will tell you that the money supply fell after the crash - but very few will correctly tell you *why* it fell.
Mick
CC BY-SA 3.0
2016-09-07T09:44:36.377Z
I meant a link about "After the stock market crash of 1929 the money supply fell by about a third."
paj28
CC BY-SA 3.0
2016-09-07T09:56:00.327Z
http://wiki.dickinson.edu/index.php/Causes_of_The_Great_Depression - "From 1929 to 1933, the money supply fell by about 30%."
Mick
CC BY-SA 3.0
2016-09-07T09:56:33.413Z
Why does a crash cause the loans to be repaid? I'd expect the opposite - people would default on the loans
paj28
CC BY-SA 3.0
2016-09-07T10:35:04.920Z
If someone had their borrowed money in the stock market and they got nervous about a possible fall then they would sell their shares and repay their loan (destroying money). If they could not repay their loan then they would default - this *also* destroys money.
Mick
CC BY-SA 3.0
2016-09-07T10:46:35.177Z
This all seems to be highly speculative and the links you've provided cover only the agreed basics, not your speculative claims. You may be right, and I don't have hard facts to dispute this. But my feeling is you are going in the wrong direction here. I think the money contraction was caused by the same causes as the stock market crash. But a pure crash without macro causes, such as the flash crash, would not cause money contraction.
paj28
CC BY-SA 3.0
2016-09-07T10:57:54.987Z
A: Borrowed money has been invested in the stock market (pre-crash). B: less borrowed money is likely to be invested in the stock market (post-crash). Conclusion: A crash results in a loss of money. If you agree with A and B then you can not escape the conclusion.
Mick
CC BY-SA 3.0
2016-09-08T11:11:55.920Z
Let us [continue this discussion in chat](http://chat.stackexchange.com/rooms/45091/discussion-between-paj28-and-mick).
paj28
CC BY-SA 3.0
2017-03-09T22:01:16.017Z
Good answer, surprised no upvotes prior to mine. The key phrase mentioned is "stocks are purchased with borrowed money". I've elaborated on this in my answer.
Sridhar Sarnobat
CC BY-SA 3.0
2017-03-11T03:38:39.103Z
Your answer does not seem to be backed up by the facts.  The Federal Reserve contracted the money supply before the crash and indeed that is almost certainly the source of the crash.  While the crash did alter the money supply, as all credit transactions do, Fed NY floated the system back to normal levels.  It was the political fight between Fed NY and BOG that triggered the reduction in the money supply.  Please cite historical records please.
Dave Harris
CC BY-SA 3.0
2017-03-11T03:39:41.160Z
You didn't answer the actual question asked.  At most this should be an added comment or the extension of a full answer.
Dave Harris
CC BY-SA 3.0
2017-03-11T07:59:15.343Z
@Dave Harris: Link to wikipedia on the great depression added. It will tell you there that the money supply fell. I don't know how you can say I didn't answer the question.
Mick
CC BY-SA 3.0
2017-03-11T15:05:19.847Z
It is well known the money supply fell, but the falling predates the crash by three months.  It is what caused the crash.  The Fed voted to contract it even further after the crash. The short run contraction in the supply due to the crash was halted and reversed by the NY Fed.  You are reversing causation.
Dave Harris
CC BY-SA 3.0
2016-09-07T07:12:41.623Z
2017-03-16T09:37:59.243Z
2017-03-16T09:37:59.243Z
Mick
<p>Here is the narrative that I've arrived at:</p>

<p>1) Banks "create" money by lending recursively. This is called the "Multiplier Effect" which is a consequence of the "Fractional Reserve Banking System".</p>

<p><a href="https://i.sstatic.net/iCzj6.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/iCzj6.jpg" alt="enter image description here"></a></p>

<p>This artificial money can only exist if we assume that all lenders will pay back their loans.</p>

<p>2) When there is an economic recession the public stop spending as much (why this happens is another discussion), so borrowers stop getting revenue and default on their loans. The asset (a debt security) issued by the lending bank is now worthless and written off. There is a domino effect in that if that lending bank's assets decrease, the entity that this lending bank itself borrowed from also loses assets. The money that remains is equal to the "real" assets in the system (used to be gold) and this is why the economy is said to "reset" during a recession.</p>

<p>This begs the question of why allow a fractional reserve banking system instead of insisting on a full-reserve banking system. I would guess that it just makes for a very limited economy, even if it results in less spectacular market crashes. Apparently no country in the world sticks to a full reserve banking system.</p>

CC BY-SA 3.0
2017-03-11T03:24:16.337Z
This does not ask the original question.
Dave Harris
CC BY-SA 3.0
2017-03-11T03:25:51.953Z
Explain why not
Sridhar Sarnobat
CC BY-SA 3.0
2017-03-11T03:34:21.290Z
The question was very specific and was not about fractional reserve banking.  While there are, usually trivial, money supply effects from market price changes where margin is present, it is not true that margin is present for all stocks AND it was not assumed in this narrative.  The money supply changes constantly and if this is the only security involved the impact would be so trivial nobody would notice.  I just made a credit purchase for $50 and in doing so changed the money supply, but that is so trivial that it should be ignored.
Dave Harris
CC BY-SA 3.0
2017-03-09T20:58:46.607Z
2017-03-09T22:07:31.463Z
2017-03-09T22:07:31.463Z
Sridhar Sarnobat
<p>I looked it up online (<a href="http://academic.regis.edu/jroth/Money%20and%20Value.html">here</a>), but I find it hard to believe that money literally "disappears".  For example, if I buy 10 stocks of a toaster company for \$100 per share, and then the stock value drops to \$10, I've lost \$900, but the entities I bought from have gained \$900 collectively.  I understand that money is supposed to be an abstract concept, but we should be able to trace where the dollars go. </p>

<p>So how does money just disappear when the stock market crashes?</p>

CC BY-SA 3.0
2016-09-07T14:43:12.007Z
You may need to define "money" first.  Your wealth may have fallen, but that is something else.  The entities you bought from actually have $\$1000$ from you, though whether that is "money" depends on (a) what they did with it and (b) what "money" is.
Henry
CC BY-SA 3.0
2017-03-11T03:25:33.680Z
That link is a bad description of what happens.
Dave Harris
CC BY-SA 3.0
2017-03-11T03:47:22.440Z
In my professional opinion, the most concise and clear answer that is closest to the facts is the one by user7935, based on the question you wrote.  The answers by RegressForward and paj28 were also reasonable, they were just less clear, imho.  You do want to distinguish between wealth and money.  They are different things.  The other posts were descriptions of fractional banking and you did not ask about that.
Dave Harris
CC BY-SA 3.0
2017-03-17T17:36:11.290Z
You buy a painting at a yard sale for \$10. I love it, and would be willing to pay you \$100 for it.  Later, my tastes mature, and I tell you that I'd only pay you \$1 for it.  Did you just lose \$99?  \$90?  \$9?  Actually, you lost nothing except potential future income.
Ask About Monica
<stock-market><money-supply>
When a stock market crashes, how does money just disappear?
Sigiward Larsson
# When a stock market crashes, how does money just disappear?

(Asked by: username_0 on 2016-09-06)

I looked it up online ([here](http://academic.regis.edu/jroth/Money%20and%20Value.html)), but I find it hard to believe that money literally "disappears". For example, if I buy 10 stocks of a toaster company for \$100 per share, and then the stock value drops to \$10, I've lost \$900, but the entities I bought from have gained \$900 collectively. I understand that money is supposed to be an abstract concept, but we should be able to trace where the dollars go.

So how does money just disappear when the stock market crashes?

**Tags:** stock-market, money-supply
> **Comments:**
> **username_1**: You may need to define "money" first.  Your wealth may have fallen, but that is something else.  The entities you bought from actually have $\$1000$ from you, though whether that is "money" depends on (a) what they did with it and (b) what "money" is.  
> **username_2**: That link is a bad description of what happens.  
> **username_2**: In my professional opinion, the most concise and clear answer that is closest to the facts is the one by user7935, based on the question you wrote.  The answers by RegressForward and paj28 were also reasonable, they were just less clear, imho.  You do want to distinguish between wealth and money.  They are different things.  The other posts were descriptions of fractional banking and you did not ask about that.  
> **username_3**: You buy a painting at a yard sale for \$10. I love it, and would be willing to pay you \$100 for it.  Later, my tastes mature, and I tell you that I'd only pay you \$1 for it.  Did you just lose \$99?  \$90?  \$9?  Actually, you lost nothing except potential future income.  

---

## 4 answers

### Answer by username_4 on 2016-09-07. Score: 14

Stocks are not money.

The valuation of a company - the market captialisation - is the number of shares multiplied by the share price.

The share price is the price people are willing to trade at right now. It does NOT mean all the shares have been traded at that price.

If a company issues 1 million shares, at a starting price of £10, the market cap is £10 million. They may only sell a few of these shares, so much less than £10 million actually changes hands. If the price rises to £20, only a few of the shares changed hands at that price - but the market cap is reflected in all the shares, and is now £20 million. People have commented on the [flaws](https://m.signalvnoise.com/press-release-basecamp-valuation-tops-100-billion-after-bold-vc-investment-c221d8f86ad7#.ib4kf791q) in this methodology.

The same happens in a crash. Only a fraction of the shares actually change hands, but the media report on the change in the market cap.

If you want an analogy, consider a house burning down. You buy the house for £200,000. Then it sadly burns down (and without insurance). It is now worth £0. However, no money has been created or destroyed; it's a loss of value of an asset.

> **Comments:**
> **username_5**: You did not answer the question about how money disappears.  
> **username_4**: @Mick - The money does not disappear - the OP has a misconception. You should revoke your downvote, it is petty.  
> **username_5**: You are factually incorrect - read my answer in full, including the edit.  
> **username_4**: @Mick - which bit of my answer is factually incorrect? Your answer is talking about the knock-on effects of a crash. You may well be right, but I don't think that's what OP is asking about. It sounds like they have a misconception that market captialisation is actual money, and my answer corrects that.  
> **username_5**: You are correct in stating that shares are not money. But the fact that money does indeed literally disappear during a crash is so little known and yet so unbelievably important that I feel duty bound to be forceful in correcting this lack of knowledge. Also it's not just a knock-on effect - the money disappearing will start to happen right at the instant of the crash.  
> **username_4**: @Mick - You still haven't said where my answer is factually incorrect  
> **username_5**: "factually incorrect" was with regard your comment "The money does not disappear".  
> **username_4**: @Mick - depends how you read "the money". The question refers to loss of market cap  
> **username_5**: I agree that there is not a one to one correspondence between loss of market capitalisation and the loss of money supply (as is perhaps implied by the poorly written articled linked to in the OP).  

---

### Answer by username_6 on 2016-09-08. Score: 3

The assessed value of the stocks goes down.

Non-stock related example: If my prized family portrait is assessed at 1000 dollars, and is later reassessed at 250 dollars. That value is lost, 1000-250=750 dollars lost. No money ever went anywhere, but I, and as result all of society, is now poorer by $750. This loss is because we believed the painting was worth a lot, and we were wrong.

> **Comments:**
> **username_6**: Doesn't that depend on your interpretation of probability? A change in information leads to the conclusion a previous price was wrong (from the omniscient perspective), and the new price is...  arguably less wrong.  
> **username_6**: Unfortunately, my instincts don't seem to see the situations as different. In the second case, I simply assess that were wrong about it going up in flames.  One is a bigger price adjustment than the other, though.  

---

### Answer by username_5 on 2016-09-07. Score: -1

If the stock market lost say 10billion dollars in value, it does *not* mean that 10billion dollars literally disappears (despite what the poorly written document you linked to suggests). But it is true that *some* money may have literally disappeared. This is because many shares are purchased with money borrowed from banks ("margin debt"). If the net amount of borrowing for share purchases went down i.e. some money was repaid, then that repaid money *did* literally disappear. This is all to do with how [fractional reserve banking](http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf) works - "Just as taking out a new loan creates money, the repayment of bank loans destroys money".

**EDIT:** After the stock market crash of 1929 [the money supply fell by about a third](https://en.wikipedia.org/wiki/Great_Depression). This was because huge amounts of money that had previously been invested in the stock market was in fact borrowed from banks. **CORRECTION:** I should not have implied that *all* of the one third reduction in the money supply was caused by a reduction in margin debt, but certainly part of the reduction was.

**EDIT:** The idea of the money supply falling after an asset price bubble bursts is not widely reported. After the crash of 2007/8 almost no media outlets have discussed any notion of money disappearing. This is because the media and the general public have little clue that it is even possible for the money supply to decrease. But you can read [here](https://www.publications.parliament.uk/pa/cm201314/cmselect/cmtreasy/writev/qe/m08.htm) the governor of the Bank of England telling UK politicians in Jan 2013 that QE was an effort to counteract the falling money supply: "What we were doing [through Quantitative Easing] is injecting money into the economy, and what the banking sector has been doing is destroying money [as existing loans were repaid]." ... "what we were doing was partially to offset what would otherwise have been an even bigger contraction."

> **Comments:**
> **username_4**: The edit is interesting... do you have a link with more info?  
> **username_5**: Sadly the issue is clouded by the fact that fractional reserve banking is so often misunderstood, even in academic textbooks - see here: http://www.fractionalreserves.com/?page_id=81 You can find many references that will tell you that the money supply fell after the crash - but very few will correctly tell you *why* it fell.  
> **username_4**: I meant a link about "After the stock market crash of 1929 the money supply fell by about a third."  
> **username_5**: http://wiki.dickinson.edu/index.php/Causes_of_The_Great_Depression - "From 1929 to 1933, the money supply fell by about 30%."  
> **username_4**: Why does a crash cause the loans to be repaid? I'd expect the opposite - people would default on the loans  
> **username_5**: If someone had their borrowed money in the stock market and they got nervous about a possible fall then they would sell their shares and repay their loan (destroying money). If they could not repay their loan then they would default - this *also* destroys money.  
> **username_4**: This all seems to be highly speculative and the links you've provided cover only the agreed basics, not your speculative claims. You may be right, and I don't have hard facts to dispute this. But my feeling is you are going in the wrong direction here. I think the money contraction was caused by the same causes as the stock market crash. But a pure crash without macro causes, such as the flash crash, would not cause money contraction.  
> **username_5**: A: Borrowed money has been invested in the stock market (pre-crash). B: less borrowed money is likely to be invested in the stock market (post-crash). Conclusion: A crash results in a loss of money. If you agree with A and B then you can not escape the conclusion.  
> **username_4**: Let us [continue this discussion in chat](http://chat.stackexchange.com/rooms/45091/discussion-between-paj28-and-mick).  
> **username_7**: Good answer, surprised no upvotes prior to mine. The key phrase mentioned is "stocks are purchased with borrowed money". I've elaborated on this in my answer.  
> **username_2**: Your answer does not seem to be backed up by the facts.  The Federal Reserve contracted the money supply before the crash and indeed that is almost certainly the source of the crash.  While the crash did alter the money supply, as all credit transactions do, Fed NY floated the system back to normal levels.  It was the political fight between Fed NY and BOG that triggered the reduction in the money supply.  Please cite historical records please.  
> **username_2**: You didn't answer the actual question asked.  At most this should be an added comment or the extension of a full answer.  
> **username_5**: @Dave Harris: Link to wikipedia on the great depression added. It will tell you there that the money supply fell. I don't know how you can say I didn't answer the question.  
> **username_2**: It is well known the money supply fell, but the falling predates the crash by three months.  It is what caused the crash.  The Fed voted to contract it even further after the crash. The short run contraction in the supply due to the crash was halted and reversed by the NY Fed.  You are reversing causation.  

---

### Answer by username_7 on 2017-03-09. Score: -2

Here is the narrative that I've arrived at:

1) Banks "create" money by lending recursively. This is called the "Multiplier Effect" which is a consequence of the "Fractional Reserve Banking System".

[![enter image description here](https://i.sstatic.net/iCzj6.jpg)](https://i.sstatic.net/iCzj6.jpg)

This artificial money can only exist if we assume that all lenders will pay back their loans.

2) When there is an economic recession the public stop spending as much (why this happens is another discussion), so borrowers stop getting revenue and default on their loans. The asset (a debt security) issued by the lending bank is now worthless and written off. There is a domino effect in that if that lending bank's assets decrease, the entity that this lending bank itself borrowed from also loses assets. The money that remains is equal to the "real" assets in the system (used to be gold) and this is why the economy is said to "reset" during a recession.

This begs the question of why allow a fractional reserve banking system instead of insisting on a full-reserve banking system. I would guess that it just makes for a very limited economy, even if it results in less spectacular market crashes. Apparently no country in the world sticks to a full reserve banking system.

> **Comments:**
> **username_2**: This does not ask the original question.  
> **username_7**: Explain why not  
> **username_2**: The question was very specific and was not about fractional reserve banking.  While there are, usually trivial, money supply effects from market price changes where margin is present, it is not true that margin is present for all stocks AND it was not assumed in this narrative.  The money supply changes constantly and if this is the only security involved the impact would be so trivial nobody would notice.  I just made a credit purchase for $50 and in doing so changed the money supply, but that is so trivial that it should be ignored.  

---

