Financial Markets & Institutions

Essay by kenameiUniversity, Master'sA+, January 2005

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During 1920/21 widespread deflation in the value of US farms, on average 50%, led to record numbers of farm foreclosures. Banks responded by radically tightening lending polices, effectively ceasing to draw new loans to legitimate customers and businesses. Farm foreclosures weakened the balance sheets of hundreds of rural banks leading to a epidemic of Bank failures averaging 600 per year throughout the 1920s and predominately in the agricultural regions of the US (L B Thomas 1997).

Sharp reductions in US import levels impacted world markets, driving down demand and prices. Worst affected in Australia were primary producers who experienced declines in export values of up to 40% over the period 1929 to 1932 (Gregory & Butlin 1988). Australia exposure to fluctuations in demand for primary products was exuberated by the relatively high degree of wool and wheat that made up the balance of exports.

Both these commodities experienced sharp declines in demand and price, with wheat prices experiencing further downward pressures due to large stockpiles being released onto the international market post 1929, and sold for whatever they would fetch (Schedvin 1970).

Australia during the 1920s had concentrated investment into the urbanisation of the coastal cities, drawing funds away from the rural sector and into industrial and manufacturing areas, World War 1 added further stimulus to this shift. The Australian Government and its public servants were under pressure to commit massive amounts of resources into the creation of urban assets and industry infrastructure such as railways and communication networks.

These were typically funded by loans secured in London, which suffered due to the instability of the London money market. The Australian authorities were reluctant to take decisive action due to political tensions at the time. The problem was further compounded...