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 unequal distribution of wealth in the 1920’s existed on many levels. Money was distributed disparately etween 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 unequal distribution of wealth, caused the American economy to capsize.
The “roaring twenties” was an era when our country prospered tremendously. Automotive industry mogul Henry Ford provides a striking example of the unequal distribution of wealth etween the rich and the middle-class. Henry Ford reported a personal income of $14 million in the same year that the average personal income was $750. By present day standards, where the average yearly income in the U. S. is around $18,500, Mr. Ford would be earning over $345 million a year! This unequal distribution 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. A major reason for this large and growing gap between the rich nd the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32% in manufacturing. During that same period of time average wages for manufacturing jobs increased only 8%. 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%. The large and growing disparity of wealth between the well-to-do nd 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 rticulates the problems of this unequal distribution 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. ” 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 ncomes around, or usually less than, $2,500 a year. 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. Installment credit allowed one to telescope the future into the present. 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. 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 widespread market speculation. The automotive industry was the driving force behind many other Booming industries in the 1920’s.
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. 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.
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. 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.
In 1926 major roadcasting 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. 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 roblem 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 eason 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.
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 order to protect American business. However these tariffs reached an all-time high in the 1920’s and early 1930’s.
In the 1920’s the United States was trying “to be the world’s banker, food producer, and manufacturer, but to buy as little as possible from the world in return. ” This attempt to have a constantly favorable trade balance could not succeed for long. The United States maintained high trade barriers so as to protect American usiness, but if the United States would not buy from our European counterparts, 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 reliant upon U. S. loans to buy U. S. goods, and the U. S. needed Europe to buy these goods to prosper. Mass speculation went on throughout the late 1920’s. Company earnings became of little interest; as long as stock prices continued to rise huge profits could be made. One such example is RCA corporation, whose tock price leapt from 85 to 420 during. Even these returns of over 100% were no measure of the possibility for investors of the time. Through the miracle of buying stocks on margin, one could buy stocks without the money to purchase them.
Buying stocks on margin functioned much the same way as buying a car on credit. Using the example of RCA, a Mr. John Doe could buy 1 share of the company by putting up $10 of his own, and borrowing $75 from his broker. If he sold the stock at $420 a year later he would have turned his original investment of just $10 into $341. 25 ($420 minus the $75 and 5% interest owed to the roker). That makes a return of over 3400%! Investors’ craze over the proposition of profits like this drove the market to absurdly high levels.
Prices had been drifting downward since September 3, but generally people where optimistic. Speculators continued to flock to the market. Then, on Monday October 21 prices started to fall quickly. The volume was so great that the ticker fell behind. 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, ut 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. Stocks fell so much, that at many times during the day no buyers were available at any price.