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Posted on 6 April 2011 | 8,729 views

Federal Reserve Policies Sparked the Crash of 1929

Throughout the 1920s, the Federal Reserve System expanded the money supply to provide easy credit for businesses to modernize and expand. This helped the economy boom, but it also encouraged many businesses to overextend their resources.

Concerned about over-speculation, the new President of the Federal Reserve Board Adolph Miller tightened monetary policy and began contracting the money supply in 1928 — set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy.

This hindered many businesses that were accustomed to easy credit. The deflation affected individuals as well, since cash shortages meant that people could no longer spend as they once did and as a result, both production and spending began declining in 1928.

Beginning in 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporation that financed brokers and dealers.

These damaging “Federal Reserve Policies” sparked the “Crash of 1929” on Wall Street which led to panic and the worst stock market crash in history.

The 1929 October crash wiped out billions of dollars of wealth in one day and this immediately depressed consumer buying. The failure set off a worldwide run on US gold deposits (the dollar), and forced the Federal Reserve to raise interest rates into the slump. Some 4,000 banks and other lenders ultimately failed.

The uptick rule, which allowed short selling only when the last tick in a stock’s price was positive, was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear run.

Government policy, not free market capitalism, was primarily responsible for the crash. Government policy would play an even more disastrous role in the aftermath, as President Herbert Hoover would help turn the crash into the Great Depression.

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