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 1920s, and the extensive stock market speculation that took place during the latter part of that same decade.
The lack of distribution of wealth in the 1920s existed on many levels. Money was distributed equally 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 stock market was kept artificially high but eventually, lead to large market crashes.
These market crashes, combined with the lack of distribution 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. However, the rewards of the Coolidge Prosperity of the 1920s were not shared evenly among all Americans. In 1929 the top 0.1% of Americans controlled 34% of all savings, while 80% of Americans had no savings at all. Automotive industry mogul Henry Ford is one example of the unequal distribution of wealth between the rich and the middle class.
Henry Ford reported a personal income of $14 million in the same year that the average person’s income was $750. By present-day standards, Mr. Ford would be earning over $345 million a year! This lack of distribution of income between the rich and the middle class grew throughout the 1920s. A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout the 1920s. From 1923-1929 the average output per worker increased by 32%. During that same period of time, average wages for manufacturing jobs increased by only 8%. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits.
The federal government also contributed to the growing gap between the rich and the middle class. Calvin Coolidge’s administration favored business. An example of legislation for this purpose is the Revenue Act of 1926, which greatly reduced federal income and inheritance taxes. Andrew Mellon was the main force behind these and other tax cuts throughout the 1920s. Because of these tax cuts a man with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,000. 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. The large and growing difference in 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. Essentially what happened in the 1920s was that there was an oversupply of goods.
It was not that the surplus products were not wanted, but rather that those who needed the products could not afford more, while the wealthy were satisfied by spending only a small portion of their income. Three-quarters of the U.S. population would spend essentially all of their yearly incomes to purchase 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. 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. Through the imbalance, the U.S. came to rely upon two things in order for the economy to remain on an even level: credit sales, or 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 1920s, 60% of cars and 80% of radios were bought on installment credit. Between 1925 and 1929 the total amount of outstanding installment credit more than doubled. This strategy created a nonrealistic demand for products that people could not usually afford. People could no 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 1920s. The largest 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 when the market crashed in the fall of 1929), this spending and investment would slow to a halt. Lastly, the search for ever-greater returns on investment leads to wide-spread market speculation.
The lack of distribution 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. During World War I the federal government encouraged farmers to buy more land, modernize their methods with the latest in farm technology, and produce more food. This made sense during the war since Europe had to be fed too. However, as soon as the war ended, the U.S. abruptly stopped its policies to help farmers.
Farm and food prices tumbled. The last major instability of the American economy had to do with international wealth distribution problems. While America was prospering in the 1920s, European nations were rebuilding themselves after the damage of war. During World War I the U.S. government lent its European allies $7 billion.
American foreign lending continued in the 1920’s climbing to $900 million in 1924. 90% of this money was used by the European allies to purchase U.S. goods. 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.
The majority of their gold had been sent into the U.S. during and immediately after the war; they couldn’t send more gold without completely ruining their currencies. In the 1920s the United States was trying to be the world’s banker, food producer, and manufacturer, but bought as little as possible from the rest of the world in return.
This attempt to have a “constantly favorable trade balance” could not work for long. If the United States would not buy from our European countries, then there was no way for them to buy from the Americans, or even to pay interest on U.S. loans. The weakness of the international economy certainly contributed to the Great Depression. Europe was dependent upon U.S. loans to buy U.S. goods, and the U.S. needed Europe to buy these goods to do well. From early 1928 to September 1929 the Dow Jones Industrial Average rose greatly. This sort of profit was tempting to investors.
Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them. Buying stocks on margin worked the same way as buying a car on credit. Investors’ craze over the plan of profits like this drove the market to extremely high levels. The exploratory boom in the stock market was based on confidence. In the same way, the huge market crashes of 1929 were based on fear.
Prices had been drifting downward since early September, but generally, people were optimistic. Speculators continued to flock to the market. Then, on Monday, October 21 prices started to fall quickly. Investors became fearful. Knowing that prices were falling, but not by how much, they started selling quickly. This caused the collapse to happen faster. Prices stabilized a little on Tuesday and Wednesday, but then on Black Thursday, October 24, everything fell apart again. By this time most major investors had lost confidence in the market. Once enough investors had decided the boom was over, it was over.
Partial recovery was achieved on Friday and Saturday when a group of leading bankers stepped in to try to stop the crash. But then on Monday, the 28th prices started dropping again. By the end of the day, the market had fallen 13%. The next day, Black Tuesday an unprecedented 16.4 million shares changed hands. These stock market crashes acted as a trigger to the already unstable U.S. economy. Due to the lack of distribution of wealth, the economy of the 1920s was very much dependent upon confidence.
The market crashes damaged this confidence. The rich stopped spending on luxury items and slowed investments. The middle class and poor stopped buying things with installment credit for fear of losing their jobs, and not being able to pay the interest. Industrial production fell by more than 9% between the market crashes in October and December 1929. As a result, jobs were lost, and soon people started failing to pay their interest payment.
Thriving industries that had been connected with the automotive and radio industry started falling apart. Without a car people did not need fuel or tires; without a radio, people had less need for electricity. To protect the nation’s businesses the U.S. imposed higher trade barriers (Hawley-Smoot Tariff of 1930).
Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. Unemployment grew to five million in 1930, and up to thirteen million in 1932. The country spiraled quickly into catastrophe. The Great Depression had begun. Bibliographynone