Parallels Between The Causes Of The 1929 Wall Street Crash And The Current Credit Crisis
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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 r...
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...wnward spiral towards a downturn. In the last decade the same thing has happened in regards to securitization and over lending by banks to individuals.
The parallels that can be drawn between the two eras can give us a clearer understanding of our current economic crisis. It can also help economists in coming up with solutions as the eras share vital characteristics. However it is just as important to take into account the differences between the two eras, as it would be a mistake to see the eras as an analogy of one another. US society has changed a lot since the 1920s, and the 1920s certainly never witnessed the levels of consumerism that we witness today. However it is perhaps globalization which makes the crisis we face now more complicated to deal with as this has had one of the most profound effects on markets and worldwide trade over the past seventy years.