Economy 1920-1945 - Causes of WSC 0.0 / 5 ? HistoryAmerica 1860-1975A2/A-levelAQA Created by: CaitlinBCreated on: 07-01-20 19:19 The Banking System = outdated 12 regulatory reserve banks headed by FRB 7 members appointed by president allowed banks to self-regulate without gov. interference problems: reserve banks acted in interest of bankers vs. nation local banks not part of centralised system FRB wanted to keep market buoyant --> favoured low interest rates - many believed encouraged bull market encouraged easy credit 1927 lowered interest rates 4% -> 3.5% 1 of 5 Over-speculation on the Stock Market more buying shares --> ↑ prices --> ↑ bull market amount of trading grew (esp. after Hoover elected 1928) 1928 shares not ↑ as much as previous years companies not selling as much --> ↓ profits less willing to buy their shares --> drop in confidence = warning share prices ↑ again --> greed --> speculation recurred lack of SM regulation by gov. / an agency --> more and more speculation Republican presidents stuck to laissez-faire beliefs successively SM value of stocks: 1925 = $27b Oct. 1929 = $87b summer 1929 - 20 million shareholders in US - prices still ↑ big drop as too high to begin with 2 of 5 Easy Credit easier to buy goods without cash to pay on the spot hire purchase - firms arranged for customers to pay in instalments including buying shares on credit = on the margin FRB encouraged by easy credit policies worked when prices were rising when price rise slowed / decreased --> problems 75% of purchase price of shares = borrowed --> artificially high prices 3 of 5 Loss of Confidence market structure largely maintained by confidence in it 1929 some experts selling shares heavily autumn 1929 prices fell further --> small investors panicked saw drop in prices --> rush to sell shares --> complete collapse of prices --> thousands of investors lost millions of prices historians - rumours as reasons for drop in confidence: FRB about to tighten credit facilities by making it more difficult to borrow many who had made fortunes on SM e.g. Bernard Baruch were selling their stock 4 of 5 Role of the Government inadequate regulation --> easier to borrow pro-business laissez-faire policies (Harding Coolidge Mellon) gold standard GBP sterling = lead currency in international finance 1925 Benjamin Strong (head of US FRB) backed GB decision to return to gold standard Strong kept US interest rates low to support sterling 1927 interest rates lowered again --> increased speculation August 1929 1% increase in interest rates = too little too late 5 of 5
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