Question

How did rapid expansion of the U.S. economy during the 1920s pave the way for the stock market crash of 1929 and Great Depression of the 1930s? What role did government, private industry, investors, and consumers play in the rise and fall of the financial system?

Answer this question by including more information about the government policy at the time. Talk about Harding and his policies and how they weakened the FTC and Federal Reserve Board. Include information about The Second Industrial Revolution. Mention Henry Ford and the Automobile, how did that change America? Talk about the mechanization of farming. Include the rise of the consumer economy. Growth of purchasing power meant what? You will want to mention investments and loans. Buying on credit and how that impacted the stock market. Lastly, discuss the legacy of WWI. European nations had borrowed so much money from USA, but couldn’t pay it back. Discuss the vulnerability of American banks.

Answer 1

After WW2 ended, people were back from the war in Europe to work in factories spending that money to buy stuff, women also entered the job market so more people had more money in their hands. This is the time when gadgets like the vacuum cleaner and electric washing machine were a hot commodity and since people have a lot of spare money, they started buying then and then came Ford Model T which was the cheapest car in the market, now everyone was buying cars and the ford was making a ton of money, soon everyone who could buy a car had it and now people need something to spend their money on so they started investing and the stock market started to rise, people were buying every stock they lay their eyes on and since everyone was buying stock markets were going only up, people were making so much money that they started borrowing money from banks and banks also lend them since the economy was booming. Soon banks started taking money from people bank accounts more than the reserve ratio to but stocks themselves, even more, now everyone was spending their money on the stock market and not buying real commodities and companies could not justify their stock's rising prices. and since people were not buying commodities production started falling.

The US government also played an important role in this depression, the policy of isolationism in the 1920s following WW1, let to the passage of the 1922 Fordney-McCumber Act which increased the prices of imported goods by imposing heavy taxes on them and furthering the US policy of protectionism. The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. Harding believed that the best way to restore economic prosperity was to raise tariff rates and reduce the government's role in economic activities. His administration's economic policy was formulated by Secretary of the Treasury Mellon, who proposed cuts to the excess profits tax and the corporate tax. The central tenet of Mellon's tax plan was a reduction of the surtax, a progressive income tax that only affected high-income earners. He believed that wealthy people should hold as much capital as possible because they are the main drivers of economic growth.

The federal reserve also couldn't do the task they were meant to. They should have raised the interest rate and instead, they kept it low indicating the banks that the economy is still strong and encouraged them to make more risky loans

The US farms produce massive amounts of food to supply the Allied war effort and this was fueled by the mechanization of farming After the war is over, many farms found themselves overproducing than the market demand which led to falling in prices of farm goods, which lead the farmers to go bankrupt as their machines were bought on credit and now they couldn't afford to pay back the banks.

Europe took a massive amount of loans from the US for the war effort and now that the war is over the US was demanding to get paid back even though all Europian countries were war-ravaged and not in the shape of paying them back.

The banks as discussed above took money from people's accounts rather illegally to buy stocks during the economic boom of the 1920s, and when the panic began and people started withdrawing deposits, banks didn't have money to pay the people. Banks were in so bad condition that some banks only gave 10 cents for every dollar people had deposited in their accounts.

Some say that bank failure caused the great depression and some that depression caused bank failure. It was mainly fear that caused the great depression and Franklin D. Roosevelt famously said that "The only thing we have to fear is fear itself."