Government Policy Essay

The Wall driveway Crash, which occurred in October 1929, was the stilt selling of shares, which led to a big drop in prices, which prompted encourage selling of shares. In one day, $14 billion was wiped off the pry of the stock foodstuff. This panic selling was triggered by rumours and fears that the stock food market was close to collapse (these rumours were brought about by large share holders, manage Baruch and Kennedy dispose shares, and news of the collapse of the British financial empire which was financed by debt and credit, provided like Americas). But wherefore did a sudden in monstrousice of cartel arrest much(prenominal) large repercussions?The answer lies in the long frontier problems in the parsimoniousness which had created instability and weaknesses in the sparing. Until October 1929 these weaknesses had been masked by the trustfulness of American mass and businesses the high prices of stocks and shares were the result of speculation the doctr ine or confidence that they were worth more than. But as confidence crumbled, in that location was nonhing left to sustain the economy. The key reason why the economy could non sustain itself was because the policies of the g all oernment 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, politics policies were responsible for the diddley market of the 1920s. Firstly, the government of the 1920s had essentially promoted speculation by allowing the federal set aside to keep quest rates low. This encouraged l give uping / borrowing, which meant that millions of Americans were able to debase now, pass later for their consumer goods much(prenominal) as fridges, radios and cars. Similarly, by keeping occupy rates low, the Federal Reserve essentially encouraged lending to those missing the play the stock market, as low interest rates make b uying 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 coronation 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 ethnic music 1929 Roger Babson warned that the existing prosperity was based on a state of judicial decision, not on economic facts. He predicted a crash and massive unemployment but he was criticised as being pessimistic and testifying to cave the countrys wealth. Experts seemed confident that the market was strong and so treat the warnings of economists. If the government had been more careful about lending and listened to the warnings, people would fox only purchased things within their means rather than buying or investment funds in what they couldnt tolerate. Therefore, th ere would not do 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 direct been over valued in order to suffer from a harm of confidence and then a crash in the first place.As comfortably as allowing the Fed to keep interest rates low, government policies too 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 d testify in the last mentioned 1920s, businesses and farmers could not sell their surpluses abroad, which led to a drop in dinero, and a reduction in return with an impact on employment. Therefore, had the government not pursued a protectionist policy in the early 1920s, there would suck up been no loss of employment in the late 1920s, which means production rates would have been maintained, which would have ensured that money was unbroken 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 governments 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 untried Plan), giving them a longer period of time to repay.Whilst in rule 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 fast buck, just like they were in the American get rich ready / 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 ca utilise 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 development their federal powers to police and regulate industry. In a case hear at the Supreme Court the government argued that big businesses were not illegal, so long as some challenger remained. Howeve r, in reality, the trusts wiped out argument 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 get out 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 chanceful situation. What is more, the governments lack of regulation of corporations meant firms like Bethlehem Steel muckle and Electric Bond & Share were not pr so farted from using their profits to suppose 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 couldnt sell their surpluses abroad thanks to the governments tariff policy). As their sales dropped , so did wages and employment, leading to slight money in circulation, less demand and a significantly weaker economy. As the trusts sales dropped, it alike 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 Americas banks controlled 46% of the nations assets. This meant that the stability of the countrys banking system depended on the stability of just 1% of the banks which was a precarious situation (a Crash could see about half of the nations 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 symmetry of the Fed to publically announce that if money bec ame tight because of higher interest rates, his bank (New Yorks National City Bank) would personally pump $25million into the agentive roles 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 on the job(p) 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 countrys 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 l east 50% of the population in a position of serious economic hardship. In particular, agriculture faced significant problems the mid-war Federal create Loan Act had offered farmers loans at lower interest rates in order to buy machinery to help meet war demand, but these loans became exhausting to repay when the demand reduced as the war ended. After humankind War One, prices for wheat dropped from $2.50 a bushel to less than $1 fleece 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 farmers problems even worse by cutting the need for grain previ ously used in alcohol. Ultimately, Americas unequal distribution of wealth should have signalled to the government that its capitalist system was not working and steps should have been taken to extenuate 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 couldnt 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 dividing line Exchange, a mad panic set in. The confidence bubble had dissever 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 rather to the rich / poor divide in American society, the Wall Street Crash would never have happened because there would not have been such ove r-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 gains.