Explain why government policies had a negative impact on the 1920s economy.
Level
AS Level
Year Examined
2023
Topic
The Great Crash, the Great Depression and the New Deal policies, 1920–41
👑Complete Model Essay
Explain why government policies had a negative impact on the 1920s economy.
The Negative Impact of Government Policies on the 1920s Economy
The 1920s in the United States were marked by rapid economic growth, but also by underlying weaknesses that ultimately contributed to the Great Depression. While various factors played a role, government policies, particularly those of the Republican administrations, significantly contributed to the economic instability of the decade. Their commitment to isolationism, laissez-faire economics, and protectionist trade policies ultimately exacerbated existing problems and created new ones, setting the stage for the devastating economic downturn that followed.
Protectionism and Its Consequences
One of the most damaging policies of the Republican era was protectionism. The Fordney-McCumber Tariff Act of 1922, enacted under President Harding, raised tariffs on imported goods to unprecedented levels. This move, intended to protect American industries from foreign competition, backfired dramatically. European nations responded with retaliatory tariffs of their own, making it extremely difficult for American businesses to sell their surplus goods abroad. This stifled international trade, a crucial engine of economic growth, and contributed to overproduction in the United States. Unable to sell their goods abroad, American businesses were forced to cut back on production, leading to job losses and a decline in purchasing power. This decline in international trade significantly weakened the global economy and made the United States more susceptible to economic shocks.
Laissez-Faire Policies and Financial Instability
The Republican administrations' unwavering belief in laissez-faire economics, characterized by minimal government intervention in the economy, proved equally detrimental. The lack of regulation in the financial sector, particularly in banking, allowed for rampant speculation and risky lending practices. Banks were largely unregulated and free to engage in speculative investments, including the stock market. This created an environment of excessive risk-taking that contributed to the inflated stock market bubble.
Furthermore, the absence of a strong regulatory framework meant that many banks, particularly smaller, local institutions, were ill-equipped to withstand financial shocks. When the stock market crashed in 1929, these banks collapsed en masse, wiping out the savings of millions of Americans. The lack of a federal deposit insurance system at the time exacerbated the crisis, leading to a loss of confidence in the banking system and a sharp decline in investment and spending.
The Role of Low Interest Rates and Margin Buying
While not directly a government policy, the Federal Reserve's decision to maintain low interest rates throughout the 1920s, coupled with the lack of regulation in the financial sector, fueled excessive borrowing and speculation in the stock market. Investors were able to buy stocks "on margin," meaning they only had to put down a small percentage of the purchase price, borrowing the rest from their brokers. This practice inflated stock prices far beyond their actual value, creating a bubble that was unsustainable in the long run. When the bubble burst, the consequences were catastrophic.
Conclusion
The Republican policies of the 1920s, characterized by isolationism, protectionism, and an unshakeable belief in laissez-faire economics, created a perfect storm for economic disaster. While the Roaring Twenties appeared prosperous on the surface, these policies masked deep-seated structural weaknesses in the American economy. The lack of regulation in the financial sector, coupled with protectionist trade policies and readily available credit, fostered an environment of reckless speculation and overproduction. Ultimately, these factors, exacerbated by government inaction, culminated in the stock market crash of 1929 and the Great Depression that followed. The economic turmoil of the 1930s serves as a stark reminder of the critical role government policies play in ensuring economic stability and the potential consequences of unchecked speculation and a hands-off approach to regulation.
**Sources**
Brinkley, Alan. *American History: A Survey*. McGraw-Hill Education, 2015.
McPherson, James M. *Battle Cry of Freedom: The Civil War Era*. Oxford University Press, 2003.
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Government Policies and the 1920s Economy
This essay will argue that government policies in the 1920s, particularly those of the Republican administrations, had a significant negative impact on the economy, ultimately contributing to the Great Depression.
Isolationism and Protectionism
Republican policies of isolationism and protectionism, exemplified by the Fordney-McCumber Tariff Act of 1922, created a trade imbalance that harmed the American economy. While the US sought to sell its surplus goods in Europe, the tariffs imposed on American goods by European countries in retaliation made them too expensive to purchase. This limited trade and reduced demand for American products.
Laissez-Faire Policies and Lack of Regulation
The Republican presidents of the 1920s, Harding, Coolidge, and Hoover, pursued a laissez-faire approach to economic policy, resulting in minimal government regulation. This absence of oversight allowed for unchecked speculation and unstable banking practices. The lack of regulation in the banking sector led to widespread bank failures, leaving depositors with no access to their funds. The largely local and small nature of many banks made them ill-equipped to handle the financial shock of the Wall Street Crash.
Encouraging Speculation and Debt
Low interest rates implemented by the Federal Reserve encouraged speculation in the stock market, particularly the practice of buying on the margin, where investors borrowed money to purchase shares. This fueled a rapid expansion of credit and increased public debt, making the economy more vulnerable to a downturn. The bubble inevitably burst, leading to the devastating crash of 1929.
Conclusion
The Republican policies of the 1920s, characterized by isolationism, protectionism, and a laissez-faire approach to economic regulation, played a key role in creating a fragile and unsustainable economic environment. The combination of limited trade, unregulated banking, and rampant speculation created a perfect storm, making the US economy highly susceptible to a major downturn, which ultimately culminated in the Great Depression.
Extracts from Mark Schemes
Why Government Policies Had a Negative Impact on the 1920s Economy
Republican policies of isolationism and small government led to some negative impacts during the 1920s.
• America tried to sell its surplus goods in Europe. However, the protectionist Fordney-McCumber Tariff Act 1922 had led to European countries imposing tariffs on American goods. This meant American goods were too expensive to buy in Europe and, as a result, there was not much trade between America and Europe.
• The laissez-faire policies of the Republican presidents (Harding, Coolidge, and Hoover) of the 1920s meant that there was little regulation in the economy. Banks were unregulated and even before the crash many went out of business leaving customers with no way of getting their money back. Many banks were small and local rather than national which meant they had no way of dealing with a shock like the Wall Street Crash.
• Low interest rates encouraged share speculation and the practice of buying on the margin. Later in the decade this would form part of a major increase in public debt.
Accept any other valid responses.