GOVERNMENT POLICY WAS THE KEY CAUSE OF THE WALL STREET CRASH. HOW FAR DO YOU AGREE?

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GOVERNMENT POLICY WAS THE KEY CAUSE OF THE WALL STREET CRASH.  HOW FAR DO YOU AGREE WITH THIS VIEW?  

The Wall Street Crash, which occurred in October 1929, was the mass selling of shares, which led to a massive drop in prices, which prompted further selling of shares.  In one day, $14 billion was wiped off the value of the stock market.  This panic selling was triggered by rumours and fears that the stock market was about to collapse (these rumours were brought about by large share holders, like Baruch and Kennedy dumping shares, and news of the collapse of the British financial empire which was financed by debt and credit, just like America’s).  But why did a sudden loss of confidence have such massive repercussions?  The answer lies in the long term problems in the economy which had created instability and weaknesses in the economy.  Until October 1929 these weaknesses had been masked by the confidence of American people and businesses; the high prices of stocks and shares were the result of speculation – the belief or confidence that they were worth more.  But as confidence crumbled, there was nothing left to sustain the economy.  The key reason why the economy could not sustain itself was because the policies of the government had created major faults in the American economy, and in every area of the economy, which meant that what started as mass selling of shares resulted in a major Wall Street Crash.

Firstly, government policies were responsible for the Bull market of the 1920s.  Firstly, the government of the 1920s had essentially promoted speculation by allowing the Federal Reserve to keep interest rates low.  This encouraged lending / borrowing, which meant that millions of Americans were able to buy now, pay later for their consumer goods – such as fridges, radios and cars.  Similarly, by keeping interest rates low, the Federal Reserve essentially encouraged lending to those wanting the play the stock market, as low interest rates made ‘buying on the margin’ attractive.  With as many as 60,000 people involved in buying on the margin (or 10% of American families), and millions more buying now, paying later, the cycle of prosperity and stock market investment was actually based on debt and credit.  Secondly, the government encouraged the Bull market by publically rejecting critics who warned of danger signs in the economy.  For example, In Sept 1929 Roger Babson warned that the existing prosperity was based on a ‘state of mind’, not on economic facts.  He predicted a crash and massive unemployment... but he was criticised as being pessimistic and trying to undermine the country’s wealth.  Experts seemed confident that the market was strong and so ignored the warnings of economists.  If the government had been more careful about lending and listened to the warnings, people would have only purchased things within their means – rather than buying or investing in what they couldn’t afford.  Therefore, there would not have been such over confidence (people believed that high levels of demand, and high volumes of stock market trading proved that the economy was excellent), which means that the stock market would not have been over valued in order to suffer from a loss of confidence and then a crash in the first place.  

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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 ...

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