Causes Of The Great Depression Essay, Research Paper
The Great Depression was the worst economic slump ever in U.S.
history, and one which spread to virtually all of the industrialized
world. The depression began in late 1929 and lasted for about a
decade. Many factors played a role in bringing about the depression;
however, the main cause for the Great Depression was the combination
of the greatly unequal distribution of wealth throughout the 1920’s,
and the extensive stock market speculation that took place during the
latter part that same decade. The maldistribution of wealth in the
1920’s existed on many levels. Money was distributed disparately
between the rich and the middle-class, between industry and
agriculture within the United States, and between the U.S. and Europe.
This imbalance of wealth created an unstable economy. The excessive
speculation in the late 1920’s kept the stock market artificially
high, but eventually lead to large market crashes. These market
crashes, combined with the maldistribution of wealth, caused the
American economy to capsize.
The “roaring twenties” was an era when our country prospered
tremendously. The nation’s total realized income rose from $74.3
billion in 1923 to $89 billion in 1929(end note 1). However, the
rewards of the “Coolidge Prosperity” of the 1920’s were not shared
evenly among all Americans. According to a study done by the Brookings
Institute, in 1929 the top 0.1% of Americans had a combined income
equal to the bottom 42%(end note 2). That same top 0.1% of Americans
in 1929 controlled 34% of all savings, while 80% of Americans had no
savings at all(end note 3). Automotive industry mogul Henry Ford
provides a striking example of the unequal distribution of wealth
between the rich and the middle-class. Henry Ford reported a personal
income of $14 million(end note 4) in the same year that the average
personal income was $750(end note 5). By present day standards, where
the average yearly income in the U.S. is around $18,500(end note 6),
Mr. Ford would be earning over $345 million a year! This
maldistribution of income between the rich and the middle class grew
throughout the 1920’s. While the disposable income per capita rose 9%
from 1920 to 1929, those with income within the top 1% enjoyed a
stupendous 75% increase in per capita disposable income(end note 7).
A major reason for this large and growing gap between the rich
and the working-class people was the increased manufacturing output
throughout this period. From 1923-1929 the average output per worker
increased 32% in manufacturing(end note 8). During that same period of
time average wages for manufacturing jobs increased only 8%(end note
9). Thus wages increased at a rate one fourth as fast as productivity
increased. As production costs fell quickly, wages rose slowly, and
prices remained constant, the bulk benefit of the increased
productivity went into corporate profits. In fact, from 1923-1929
corporate profits rose 62% and dividends rose 65%(end note 10).
The federal government also contributed to the growing gap
between the rich and middle-class. Calvin Coolidge’s administration
(and the conservative-controlled government) favored business, and as
a result the wealthy who invested in these businesses. An example of
legislation to this purpose is the Revenue Act of 1926, signed by
President Coolidge on February 26, 1926, which reduced federal income
and inheritance taxes dramatically(end note 11). Andrew Mellon,
Coolidge’s Secretary of the Treasury, was the main force behind these
and other tax cuts throughout the 1920’s. In effect, he was able to
lower federal taxes such that a man with a million-dollar annual
income had his federal taxes reduced from $600,000 to $200,000(end
note 12). Even the Supreme Court played a role in expanding the gap
between the socioeconomic classes. In the 1923 case Adkins v.
Children’s Hospital, the Supreme Court ruled minimum-wage legislation
unconstitutional(end note 13).
The large and growing disparity of wealth between the well-to-do
and the middle-income citizens made the U.S. economy unstable. For an
economy to function properly, total demand must equal total supply. In
an economy with such disparate distribution of income it is not
assured that demand will always equal supply. Essentially what
happened in the 1920’s was that there was an oversupply of goods. It
was not that the surplus products of industrialized society were not
wanted, but rather that those whose needs were not satiated could not
afford more, whereas the wealthy were satiated by spending only a
small portion of their income. A 1932 article in Current History
articulates the problems of this maldistribution of wealth:
“We still pray to be given each day our daily bread. Yet there is too
much bread, too much wheat and corn, meat and oil and almost every
other commodity required by man for his subsistence and material
happiness. We are not able to purchase the abundance that modern
methods of agriculture, mining and manufacturing make available in
such bountiful quantities(end note 14).”
Three quarters of the U.S. population would spend essentially all of
their yearly incomes to purchase consumer goods such as food, clothes,
radios, and cars. These were the poor and middle class: families with
incomes around, or usually less than, $2,500 a year. The bottom three
quarters of the population had an aggregate income of less than 45% of
the combined national income; the top 25% of the population took in
more than 55% of the national income(end note 15). While the wealthy
too purchased consumer goods, a family earning $100,000 could not be
expected to eat 40 times more than a family that only earned $2,500
a year, or buy 40 cars, 40 radios, or 40 houses.
Through such a period of imbalance, the U.S. came to rely upon
two things in order for the economy to remain on an even keel: credit
sales, and luxury spending and investment from the rich.
One obvious solution to the problem of the vast majority of the
population not having enough money to satisfy all their needs was to
let those who wanted goods buy products on credit. The concept of
buying now and paying later caught on quickly. By the end of the
1920’s 60% of cars and 80% of radios were bought on installment
credit(end note 16). Between 1925 and 1929 the total amount of
outstanding installment credit more than doubled from $1.38 billion to
around $3 billion(end note 17). Installment credit allowed one to
“telescope the future into the present”, as the President’s Committee
on Social Trends noted(end note 18). This strategy created artificial
demand for products which people could not ordinarily afford. It put
off the day of reckoning, but it made the downfall worse when it came.
By telescoping the future into the present, when “the future” arrived,
there was little to buy that hadn’t already been bought. In addition,
people could not longer use their regular wages to purchase whatever
items they didn’t have yet, because so much of the wages went to
paying back past purchases.
The U.S. economy was also reliant upon luxury spending and
investment from the rich to stay afloat during the 1920’s. The
significant problem with this reliance was that luxury spending and
investment were based on the wealthy’s confidence in the U.S. economy.
If conditions were to take a downturn (as they did with the market
crashed in fall and winter 1929), this spending and investment would
slow to a halt. While savings and investment are important for an
economy to stay balanced, at excessive levels they are not good.
Greater investment usually means greater productivity. However, since
the rewards of the increased productivity were not being distributed
equally, the problems of income distribution (and of overproduction)
were only made worse. Lastly, the search for ever greater returns on
investment lead to wide-spread market speculation.
Maldistribution of wealth within our nation was not limited to
only socioeconomic classes, but to entire industries. In 1929 a mere
200 corporations controlled approximately half of all corporate
wealth(end note 19). While the automotive industry was thriving in the
1920’s, some industries, agriculture in particular, were declining
steadily. In 1921, the same year that Ford Motor Company reported
record assets of more than $345 million, farm prices plummeted, and
the price of food fell nearly 72% due to a huge surplus(end note 20).
While the average per capita income in 1929 was $750 a year for all
Americans, the average annual income for someone working in
agriculture was only $273(end note 21). The prosperity of the 1920’s
was simply not shared among industries evenly. In fact, most of the
industries that were prospering in the 1920’s were in some way linked
to the automotive industry or to the radio industry.
The automotive industry was the driving force behind many other
booming industries in the 1920’s. By 1928, with over 21 million cars
on the roads, there was roughly one car for every six Americans(end
note 22). The first industries to prosper were those that made
materials for cars. The booming steel industry sold roughly 15% of its
products to the automobile industry(end note 23). The nickel, lead,
and other metal industries capitalized similarly. The new closed cars
of the 1920’s benefited the glass, leather, and textile industries
greatly. And manufacturers of the rubber tires that these cars used
grew even faster than the automobile industry itself, for each car
would probably need more than one set of tires over the course of its
life. The fuel industry also profited and expanded. Companies such as
Ethyl Corporation made millions with items such as new “knock-free”
fuel additives for cars(end note 24). In addition, “tourist homes”
(hotels and motels) opened up everywhere. With such a wealthy
upper-class many luxury hotels were needed. In 1924 alone, hotels such
as the Mayflower (Washington D.C.), the Parker House (Boston), The
Palmer House (Chicago), and the Peabody (Memphis) opened their
doors(end note 25). Lastly, and possibly most importantly, the
construction industry benefited tremendously from the automobile. With
the growing number of cars, there was a big demand for paved roads.
During the 1920’s Americans spent more than a $1 billion each year on
the construction and maintenance of highways, and at least another
$400 million annually for city streets(end note 26). But the
automotive industry affected construction far more than that. The
automobile had been central to the urbanization of the country in the
1920’s because so many other industries relied upon it. With
urbanization came the need to build many more apartment buildings,
factories, offices, and stores. From 1919 to 1928 the construction
industry grew by around $5 billion dollars, nearly 50%(end note 27).
Also prospering during the 1920’s were businesses dependent upon
the radio business. Radio stations, electronic stores, and electricity
companies all needed the radio to survive, and relied upon the
constant growth of the radio market to expand and grow themselves. By
1930, 40% of American families had radios(end note 28). In 1926 major
broadcasting companies started appearing, such as the National
Broadcasting Company. The advertising industry was also becoming
heavily reliant upon the radio both as a product to be advertised, and
as a method of advertising.
Several factors lead to the concentration of wealth and
prosperity into the automotive and radio industries. First, during
World War I both the automobile and the radio were significantly
improved upon. Both had existed before, but radio had been mostly
experimental. Due to the demands of the war, by 1920 automobiles,
radios, and the parts necessary to build these things were being
produced in large quantities; the work force in these industries had
been formed and had become experienced. Manufacturing plants were
already in place. The infrastructure existed for the automotive and
radio industries to take off. Second, due to federal government’s
easing of credit, money was available to invest in these industries.
Thanks to pressure from President Coolidge and the business world, the
Federal Reserve Board kept the rediscount rate low.
The federal government favored the new industries as opposed to
agriculture. During World War I the federal government had subsidized
farms, and payed absurdly high prices for wheat and other grains. The
federal government had encouraged farmers to buy more land, to
modernize their methods with the latest in farm technology, and to
produce more food. This made sense during that war when war-ravaged
Europe had to be fed too. However as soon as the war ended, the U.S.
abruptly stopped its policies to help farmers. During the war the
United States government had paid an unheard of $2 a bushel for wheat,
but by 1920 wheat prices had fallen to as low as 67 cents a bushel(end
note 29). Farmers fell into debt; farm prices and food prices tumbled.
Although modest attempts to help farmers were made in 1923 with the
Agricultural Credits Act, farmers were generally left out in the cold
by the government.
The problem with such heavy concentrations of wealth and such
massive dependence upon essentially two industries is similar to the
problem with few people having too much wealth. The economy is reliant
upon those industries to expand and grow and invest in order to
prosper. If those two industries, the automotive and radio industries,
were to slow down or stop, so would the entire economy. While the
economy did prosper greatly in the 1920’s, because this prosperity
wasn’t balanced between different industries, when those industries
that had all the wealth concentrated in them slowed down, the whole
economy did. The fundamental problem with the automobile and radio
industries was that they could not expand ad infinitum for the simple
reason that people could and would buy only so many cars and radios.
When the automotive and radio industries went down all their
dependents, essentially all of American industry, fell. Because it had
been ignored, agriculture, which was still a fairly large segment of
the economy, was already in ruin when American industry fell.
A last major instability of the American economy had to do with
large-scale international wealth distribution problems. While America
was prospering in the 1920’s, European nations were struggling to
rebuild themselves after the damage of war. During World War I the
U.S. government lent its European allies $7 billion, and then another
$3.3 billion by 1920(end note 30). By the Dawes Plan of 1924 the U.S.
started lending to Axis Germany. American foreign lending continued in
the 1920’s climbing to $900 million in 1924, and $1.25 billion in 1927
and 1928(end note 31). Of these funds, more than 90% were used by the
European allies to purchase U.S. goods(end note 32). The nations the
U.S. had lent money to (Britain, Italy, France, Belgium, Russia,
Yugoslavia, Estonia, Poland, and others) were in no position to
pay off the debts. Their gold had flowed into the U.S. during and
immediately after the war in great quantity; they couldn’t send more
gold without completely ruining their currencies. Historian John D.
Hicks describes the Allied attitude towards U.S. loan repayment:
“In their view the war was fought for a common objective, and the
victory was as essential for the safety of the United States as for
their own. The United States had entered the struggle late, and had
poured forth no such contribution in lives and losses as the Allies
had made. It had paid in dollars, not in death and destruction, and
now it wanted its dollars back(end note 33).”
There were several causes to this awkward distribution of wealth
between U.S. and its European counterparts. Most obvious is that fact
that World War I had devastated European business. Factories, homes,
and farms had been destroyed in the war. It would take time and money
to recuperate. Equally important to causing the disparate distribution
of wealth was tariff policy of the United States. The United States
had traditionally placed tariffs on imports from foreign countries in