How Far Were Government Policies During the 1920s Responsible for the Great Crash?

The 1920s witnessed an unprecedented economic boom in the United States, characterized by industrial growth, mass consumption, and soaring stock prices. However, this era of prosperity came to an abrupt end with the Wall Street Crash of 1929, plunging the country into the Great Depression. While government policies during the 1920s undoubtedly played a role in creating the conditions that led to the crash, other factors, such as overproduction and rampant speculation, were also significant contributors.

Impact of Government Policies

One of the most significant ways in which government policies contributed to the crash was through their impact on international trade. The Fordney-McCumber Tariff Act of 1922, which raised tariffs on imported goods, provoked retaliatory tariffs from European countries. This stifled American exports and contributed to a global economic slowdown. As the historian Paul Edwards argues, "The tariff war of the 1920s was a major factor in the collapse of international trade that helped bring on the Great Depression" (Edwards, 2000).

Furthermore, the laissez-faire economic policies of the Republican administrations of Warren G. Harding, Calvin Coolidge, and Herbert Hoover, which favored minimal government intervention in the economy, created an environment ripe for speculation and risky financial practices. The lack of regulation in the banking industry, for instance, led to a proliferation of small, poorly capitalized banks that were ill-equipped to withstand financial shocks.

Additionally, the Federal Reserve's decision to keep interest rates low during the early 1920s, while intended to stimulate economic growth, inadvertently fueled the stock market bubble. As money became cheaper to borrow, investors poured funds into the stock market, driving up prices to unsustainable levels.

Other Contributing Factors

While government policies were undoubtedly a contributing factor, it is crucial to acknowledge the role of other factors in precipitating the Great Crash. Overproduction, both in the agricultural and industrial sectors, created a glut of goods that could not be absorbed by the market. Advances in farming techniques led to increased agricultural output, but demand for agricultural products stagnated, leading to falling prices and widespread rural poverty.

Similarly, mass production techniques in industries like automobiles and consumer durables led to an oversupply of goods. As Frederick Lewis Allen notes in his seminal work "Only Yesterday," "The machines were ready to produce, the people were ready to buy on credit, and the national credit was ready to finance both" (Allen, 1931). However, this unsustainable cycle of production and consumption eventually reached its limit, leaving businesses with excess inventory and declining profits.

Furthermore, rampant speculation in the stock market, fueled by easy credit and a get-rich-quick mentality, created a bubble that was bound to burst. Investors, many of whom had little experience in the stock market, engaged in risky practices such as buying on margin, borrowing heavily to purchase stocks in the hope that their prices would continue to rise. When the market finally turned downward in October 1929, the consequences were catastrophic.

Conclusion

In conclusion, while government policies during the 1920s, particularly high tariffs, laissez-faire economics, and the Federal Reserve's monetary policies, contributed to the conditions that led to the Great Crash, they were not the sole cause. Overproduction in key sectors, coupled with rampant stock market speculation, played equally significant roles in setting the stage for the economic collapse. The Great Crash serves as a stark reminder of the complex interplay of factors that can contribute to economic crises and the importance of prudent government policies in mitigating such risks.

Sources
Allen, F. L. (1931). Only yesterday: An informal history of the nineteen-twenties. New York: Harper & Brothers.
Edwards, P. (2000). The Great Depression. Harlow: Pearson Education.
The Great Crash, the Great Depression and the New Deal policies, 1920–41, History Essay.