As well as allowing the Fed to keep interest rates low, government policies also led to a Crash by reducing the ability of American businesses to sell their goods abroad. For example, the Fordney McCumber tariff of 1921, which was designed to protect the prices of American farmers’ goods, actually resulted in retaliatory tariffs from foreign countries. For example, Spain, Germany and France put tariffs on American cars and wheat. As a result, when the American economy did begin to slow down in the latter 1920s, businesses and farmers could not sell their surpluses abroad, which led to a drop in profits, and a reduction in production – with an impact on employment. Therefore, had the government not pursued a protectionist policy in the early 1920s, there would have been no loss of employment in the late 1920s, which means production rates would have been maintained, which would have ensured that money was kept in circulation and shares kept their value.
To make matters worse, by making it harder for European countries to sell their goods in America, the government’s protectionist policy made it harder for European countries to repay the war debts they owed to the USA. To try and rectify this, the government chose to set up the Dawes Plan, whereby it lent Germany $250 million to pay its reparations to Britain and France. In 1929, the government agreed for Germany to restructure its loan repayments to the USA (the Young Plan), giving them a longer period of time to repay. Whilst in principle these actions were supportive, in practice they artificially propped up the German economy, which led to massive investment in Germany ($3,900million was invested after the Dawes Plan) as investors hoped to make a quick buck, just like they were in the American ‘get rich quick’ / speculative economy. This meant that government policy had in fact encouraged investment at home and abroad based on speculation. When investors realised that the returns (values) of stocks at home and abroad were artificially high, it would trigger a loss of confidence and massive sales – i.e. the Wall Street Crash.
Another reason why government policies caused the Wall Street Crash is because the government pursued a laissez faire policy towards businesses and regulation. As a result, the 1920s were characterised by the creation of trusts and corporations – such as US Steel. The government actively ignored anti-trust laws, rather than using their federal powers to police and regulate industry. In a case heard at the Supreme Court the government argued that big businesses were not illegal, so long as some competition remained. However, in reality, the trusts wiped out competition – fixing prices and swallowing up smaller businesses (for every 4 businesses that succeeded in the 1920s, 3 failed). As a result, 1000s of smaller businesses failed, whilst the trusts became ‘captains of industry’, with the knowledge and the money to produce things very quickly and efficiently. This meant the stability of the American economy depended on the actions and profits of a few large companies, such as Insull and Ford, creating a dangerous situation. What is more, the government’s lack of regulation of corporations meant firms like Bethlehem Steel Corporation and Electric Bond & Share were not prevented from using their profits to speculate on the stock market, adding further insecurity (gambling!) to Wall Street. Unfortunately, by the end of the 1920s, many trusts – such as car giants like Ford – were producing more than was needed (and couldn’t sell their surpluses abroad thanks to the government’s tariff policy). As their sales dropped, so did wages and employment, leading to less money in circulation, less demand and a significantly weaker economy. As the trusts’ sales dropped, it also led to fewer stock market investments, which furthered the loss of confidence in Wall Street.
Government policy concerning the regulation of banks and banking was also a key factor in the crash. There were no controls concerning mergers and competition so, by 1929, 1% of America’s banks controlled 46% of the nation’s assets. This meant that the stability of the country’s banking system depended on the stability of just 1% of the banks – which was a precarious situation (a Crash could see almost half of the nation’s assets disappearing!). What is more, the lack of regulation in banking meant that the government did not have complete control over the actions of the Federal Reserve Board. For example, in March 1929, one member of the Fed (Charles A. Mitchell) acted without the agreement of the Fed to publically announce that if money became tight because of higher interest rates, his bank (New York’s National City Bank) would personally pump $25million into the broker’s loan market. This was called the single most irresponsible decision of 1929 as it encouraged lending and gambling on stock market to soar at a time when the economy had slowed significantly. The government also did not regulate individuals working on the stock market – for example, greedy individuals like William Durant and his ‘bull pool’ were able to artificially inflate the market for their own gain, only to sell quickly and leave others with significant losses.
Furthermore, government policies exacerbated the country’s massive unequal distribution of wealth, which itself contributed to the long-term weaknesses in the economy and hence the crash. In 1929, tax returns of 27million families showed that 12 million families were earning $1,500 a year, or less, and another 6 million families were earning less than $1,000 a year. This put at least 50% of the population in a position of serious economic hardship. In particular, agriculture faced significant problems: the mid-war Federal Farm Loan Act had offered farmers loans at lower interest rates in order to buy machinery to help meet war demand, but these loans became difficult to repay when the demand reduced as the war ended. After World War One, prices for wheat dropped from $2.50 a bushel to less than $1; wool from 90 cents to 19 cents. Although the government passed tariffs to relieve these problems, in the long term tariffs made the situation worse because foreign economies put retaliatory tariffs in place. The post-war Agricultural Credits Act funded 12 banks to offer loans to any farmers working co-operatively. However, the Act ultimately meant more smaller farmers became in debt. The larger farmers who could afford the loans squeezed the small farmers out of the market. Prohibition made farmer’s problems even worse by cutting the need for grain previously used in alcohol. Ultimately, America’s unequal distribution of wealth should have signalled to the government that its capitalist system was not working – and steps should have been taken to alleviate the imbalanced spending power. Because the government did not alleviate the situation, the divide grew bigger (making these people dependent on credit / loans, which they couldn’t repay because of their lack of employment) – making the economy more fragile and unstable.
Therefore, in October 1929, when a massive amount of selling began in the New York Stock Exchange, a mad panic set in. The confidence bubble had burst – triggered by a few rumours and fears that the market was going to crash. Had the government not pursued such a laissez faire approach to the management and regulation of banking and business, and had it responded earlier to the rich / poor divide in American society, the Wall Street Crash would never have happened because there would not have been such over-inflated / false confidence; there would have been foreign markets to trade with; and banks, businesses and individuals would have been regulated and acting in the interest of long-term not short-term gains.