FREE ESSAY ON THE CAUSES FOR THE GREAT DEPRESSION

THE CAUSES FOR THE GREAT DEPRESSION

Causes for the Great Depression
The Great Depression was the worst economic slump ever in U.S. history, and one that
spread to virtually the entire 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
misdistribution 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 misdistribution 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 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%. That same top 0.1% of Americans
in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all.
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 in the same year that the average personal income was
$7505. By present day standards, where the average yearly income in the U.S. is around
$18,5006, Mr. Ford would be earning over $345 million a year. This misdistribution 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 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. 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 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. 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. 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.
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. The end of the
1920's bought 60% of cars and 80% of radios on installment credit. Between 1925 and 1929
the total amount of outstanding installment credit more than doubled from $1.38 billion
to around $3 billion. Installment credit allowed one to telescope the future into the
present, as the President's Committee on Social Trends noted. This strategy created
artificial demand for products that 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 wealth'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
forever-greater returns on investment lead to widespread market speculation.
Misdistribution 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. 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. 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. 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.
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.
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. Starting with the
Fordney-McCumber Act of 1922 and ending with the Hawley-Smoot Tariff of 1930, the United
States increased many tariffs by 100% or more. The effect of these tariffs was that
Europeans were unable to sell their own goods in the United States in reasonable
quantities.
Mass speculation went on throughout the late 1920's. In 1929 alone, a record volume of
1,124,800,410 shares was traded on the New York Stock Exchange. From early 1928 to
September 1929 the Dow Jones Industrial Average rose from 191 to 38139. This sort of
profit was irresistible to investors. 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 stock price leapt from 85 to 420 during 1928, even though it had not
yet paid a single dividend. 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 broker). That makes a return of over 3400%. Investors' craze over the proposition of
profits like this drove the market to absurdly high levels. By mid 1929 the total of
outstanding brokers' loans was over $7 billion; in the next three months that number
would reach $8.5 billion. Interest rates for brokers' loans were reaching the sky, going
as high as 20% in March 1929. The speculative boom in the stock market was based upon
confidence. In the same way, the huge market crashes of 1929 were based on fear.
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, 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. Stocks fell so much, that at many times during the day no buyers
were available at any price.
This speculation and the resulting stock market crashes acted as a trigger to the already
unstable U.S. economy. Due to the misdistribution of wealth, the economy of the 1920's
was one very much dependent upon confidence. The market crashes undermined 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 loosing
their jobs, and not being able to pay the interest. As a result 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 starting defaulting on their interest payment. Radios and
cars bought with installment credit had to be returned. All of the sudden warehouses were
piling up with inventory. The thriving industries that had been connected with the
automobile and radio industries started falling apart. Without a car people did not need
fuel or tires; without a radio people had less need for electricity. On the international
scene, the rich had practically stopped lending money to foreign countries. With such
tremendous profits to be made in the stock market nobody wanted to make low interest
loans. 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.
Bibliography
Works Cited
Troubles during the Great Depression 
Watkins, T. H. The Great Depression: America in the 1930s - New York: 1991 
Meltzer, Milton Brother, Can You Spare a Dime? : The Great Depression 1929-1933 (Library
of American History) -- New York: 1992