Sunday, September 29, 2019

Government Policy Essay

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. 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 ret aliatory 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.

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