Parallels Between The Causes Of The 1929 Wall Street Crash And The Current Credit Crisis

1283 words - 5 pages

The purpose of this essay is to explore the parallels between the underlying factors which led to the 1929 Wall Street Crash and the present Credit Crunch.

The 1929 Wall Street crash was caused by weaknesses in the US economy. After WW1 the USA experienced a decade of economic growth generated by the levels of mass production and industrial growth during the war years. This along with the popular culture of success (the Jazz and party scene) made America appear a hugely prosperous country. However, the glitz and glamour of USA was superficial as very few reaped the benefits of this wealth. There were also many weaknesses to this economic growth as it was not achieved in a wholly sustainable way. This can be compared to the USA of the last decade. The economy has appeared to be healthy and prosperous; however, like the economy of the 1920s, there have been many underlying weaknesses.

The Republican party of the 1920s believed in low taxation on businesses and protectionism, marking a clear break with the Wilson ideas of ‘free trade’. They introduced acts such as the 1922 Fordney-McCumber Tariff, which raised import duties on chemical and farming products and the 1925 Revenue Act which abolished gift tax, halved estate tax and cut maximum surtax from 40% to 20%. Both presidents of the 20s, Harding and Coolidge, very much believed in ‘minimal government’, believing that the government’s role was to balance the budget, reduce taxes and reduce debt. This Republican view was the essential basis of the economic prosperity seen during the period. They allowed businesses to operate within a wall of economic protection. Profits were increasing and pushing the economy and the feeling of ’prosperity’ yet due to the lack of government regulation workers were not seeing this same increase with their wages. Trade Union membership decreased dramatically from 5.1mil-3.6 million in the years 1921-29 showing a growing feeling of helplessness amongst workers as business owners were given more free reign by the government. In other words, the great wealth of America was shared by few. One tenth of the income of the top 1% wealthiest American families was equivalent to the total income of 42% of the lower income families.
During the 1920s speculating on the stock market had become extremely popular. People could make money in a short space of time, and they were encouraged by the fact that up to 75% of the share price could be bought ‘on margin’. This, along with easy credit policies by The Federal Reserve Bank, encouraged speculation and by 1929 loans from banks had reached $6bn. Large sections of the population were also borrowing much more than they could realistically afford. Their ability to pay back their debts depended on their wages (which at this time were not increasing) and many began to struggle and ‘default’ (eg US farmers borrowed $2000 million in mortgages which they could not repay-many were evicted and workers were sacked as a result). This...

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