Main Causes Of The Great Depression Essay

, Research Paper

Main Causes of The Great DepressionThe Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtuallyall of theindustrialized world. The depression began in late 1929 and lasted for about a decade. Many factorsplayed a role in bringing about the depression; however, the main cause for the Great Depression was thecombination of the greatly unequal distribution of wealth throughout the 1920’s, and the extensive stockmarket speculation that took place during the latter part that same decade. The maldistribution of wealthin the 1920’s existed on many levels. Money was distributed disparately between the rich and themiddle-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 keptthe 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 realizedincome 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 doneby the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom42%(end note 2). That same top 0.1% of Americans in 1929 controlled 34% of all savings, while 80% ofAmericans had no savings at all(end note 3). Automotive industry mogul Henry Ford provides a strikingexample of the unequal distribution of wealth between the rich and the middle-class. Henry Ford reporteda 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 yea!r! This maldistribution of income between the rich and the middle class grew throughout the 1920’s. Whilethe disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed astupendous 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 theincreased manufacturing output throughout this period. From 1923-1929 the average output per workerincreased 32% in manufacturing(end note 8). During that same period of time average wages formanufacturing jobs increased only 8%(end note 9). Thus wages increased at a rate one fourth as fast asproductivity increased. As production costs fell quickly, wages rose slowly, and prices remainedconstant, the bulk benefit of the increased productivity went into corporate profits. In fact, from1923-1929 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. CalvinCoolidge’sadministration (and the conservative-controlled government) favored business, and as a result the wealthywho 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 taxesdramatically(end note 11). Andrew Mellon, Coolidge’s Secretary of the Treasury, was the main force behindthese and other tax cuts throughout the 1920’s. In effect, he was able to lower federal taxes such that aman with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,000(end note12). Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. In the1923 case Adkins v. Children’s Hospital, the Supreme Court ruled minimum-wage legislationunconstitutional(end note 13). The large and growing disparity of wealth between the well-to-do and the middle-income citizens made theU.S. economy unstable. For an economy to function properly, total demand must equal total supply. In aneconomy with such disparate distribution of income it is not assured that demand will always equalsupply. Essentially what happened in the 1920’s was that there was an oversupply of goods. It was notthat the surplus products of industrialized society were not wanted, but rather that those whose needswere not satiated could not afford more, whereas the wealthy were satiated by spending only a smallportion of their income. A 1932 article in Current History articulates the problems of thismaldistribution of wealth:”We still pray to be given each day our daily bread. Yet there is too much bread, too much wheat andcorn, meat and oil and almost every other commodity required by man for his subsistence and materialhappiness. We are not able to purchase the abundance that modern methods of agriculture, mining andmanufacturing 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 purchaseconsumer goods such as food, clothes, radios, and cars. These were the poor and middle class: familieswith incomes around, or usually less than, $2,500 a year. The bottom three quarters of the population hadan aggregate income of less than 45% of the combined national income; the top 25% of the population tookin more than 55% of the national income(end note 15). While the wealthy too purchased consumer goods, afamily earning $100,000 could not be expected to eat 40 times more than a family that only earned $2,500a 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 toremain 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 tosatisfy all their needs was to let those who wanted goods buy products on credit. The concept of buyingnow and paying later caught on quickly. By the end of the 1920’s 60% of cars and 80% of radios werebought on installment credit(end note 16). Between 1925 and 1929 the total amount of outstandinginstallment credit more than doubled from $1.38 billion to around $3 billion(end note 17). Installmentcredit allowed one to “telescope the future into the present”, as the President’s Committee on SocialTrends noted(end note 18). This strategy created artificial demand for products which people could notordinarily afford. It put off the day of reckoning, but it made the downfall worse when it came. Bytelescoping the future into the present, when “the future” arrived, there was little to buy that hadn’talready 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 backpast purchases. The U.S. economy was also reliant upon luxury spending and investment from the rich to stay afloat duringthe 1920’s. The significant problem with this reliance was that luxury spending and investment were basedon the wealthy’s confidence in the U.S. economy. If conditions were to take a downturn (as they did withthe market crashed in fall and winter 1929), this spending and investment would slow to a halt. Whilesavings and investment are important for an economy to stay balanced, at excessive levels they are notgood. Greater investment usually means greater productivity. However, since the rewards of the increasedproductivity were not being distributed equally, the problems of income distribution (and ofoverproduction) were only made worse. Lastly, the search for ever greater returns on investment lead towide-spread market speculation. Maldistribution of wealth within our nation was not limited to only socioeconomic classes, but to entireindustries. In 1929 a mere 200 corporations controlled approximately half of all corporate wealth(endnote 19). While the automotive industry was thriving in the 1920’s, some industries, agriculture inparticular, were declining steadily. In 1921, the same year that Ford Motor Company reported recordassets of more than $345 million, farm prices plummeted, and the price of food fell nearly 72% due to ahuge 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 prosperityof the 1920’s was simply not shared among industries evenly. In fact, most of the industries that wereprospering 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. By1928, with over 21 million cars on the roads, there was roughly one car for every six Americans(end note22). The first industries to prosper were those that made materials for cars. The booming steel industrysold roughly 15% of its products to the automobile industry(end note 23). The nickel, lead, and othermetal 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 evenfaster than the automobile industry itself, for each car would probably need more than one set of tiresover the course of its life. The fuel industry also profited and expanded. Companies such as EthylCorporation made millions with items such as new “knock-free” fuel additives for cars(end note 24). Inaddition, “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 theMayflower (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 constructionindustry benefited tremendously from the automobile. With the growing number of cars, there was a bigdemand for paved roads. During the 1920’s Americans spent more than a $1 billion each year on theconstruction and maintenance of highways, and at least another $400 million annually for city streets(endnote 26). But the automotive industry affected construction far more than that. The automobile had beencentral 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 dol!lars, 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 theconstant growth of the radio market to expand and grow themselves. By 1930, 40% of American families hadradios(end note 28). In 1926 major broadcasting companies started appearing, such as the NationalBroadcasting Company. The advertising industry was also becoming heavily reliant upon the radio both as aproduct to be advertised, and as a method of advertising. Several factors lead to the concentration of wealth and prosperity into the automotive and radioindustries. 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 1920automobiles