Great Depression3 Essay Example For Students

Great Depression3 Essay The Great Depression was the worst economic slump ever in U.S. history, and one which touched virtually all of the industrialized world. The Depression began in late 1929 and lasted for nearly 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 that same decade. The mal-distribution of wealth in the 1920s 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 1920s kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the maldistribution of wealth, caused the Am erican economy to capsize. The roaring twenties was an era when our country prospered tremendously. However, the rewards of the Coolidge Prosperity of the 1920s were not shared evenly among all Americans. According to a study done by the Brookings Institute, the top 0.1% of Americans had a combined income equal to the bottom 42% in 1929. 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 $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 maldistribution of income between the rich and the middle class grew throughout the 1920s. 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 income1. 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%2. The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidges Republican 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, Coolidges Secretary of the Treasury, was the main force behind these and other tax cuts throughout the 1920s. Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. In the 1923 case Adkins v. Childrens Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional3. 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 diversified distribution of income it is not assured that demand will always equal supply. Essentially what happened in the 1920s 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 satisfied could not afford more, whereas 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 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 co mbined national income; the top 25% of the population took in more than 55% of the national income4. While the wealthy also 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 three things in order for the economy to remain on an even keel: credit sales, 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 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 from $1.38 billion to around $3 billion. Installment credit allowed one to telescope the future into the present, as the Presidents Committee on Social Trends noted5. 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 overlooking the future and living for the here and now, when the future arrived, there was little to buy that hadnt already been bought. In addition, people could no longer use their regular wages to purchase whatever items they didnt 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 significant problem with this reliance was that luxury spending and investment were based on the wealthys 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. While the automotive industry was thriving in the 1920s, 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 $2736. The prosperity of the 1920s was simply not shared among industries evenly. In fact, most of the industries that were prospering in the 1920s were in some way linked to the automotive industry or to the radio industry. Cars EssayMass speculation went on throughout the late 1920s. 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 381. 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 dividend15. 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 a t $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 192916. 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, October 29, 1929, or Black Tuesday as it has come to be known, an unprecedented 16.4 million shares changed hands. Stocks fell so drastically, that at many times during the day no buyers were available at any price17. This speculation and the resulting stock market crashes acted as a trigger to the already unstable U.S. economy. Due to the maldistribution of wealth, the economy of the 1920s 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 192918. 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 nations 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 193219. The country spiraled quickly into catastrophe. The Great Depression had begun. Bibliography:Works CitedHicks, John D. Republican Ascendancy, 1929-1933. New York: Harper Row, 1960. Himmelberg, Robert F. The Great Depression and American Capitalism. Boston: D.C. Heath and Co., 1968. McElvaine, Robert S. The Great Depression. New York Times Books, 1984. Meltzer, Milton. Brother, Can you Spare a Dime?. New York: Knopf, 1969. Rublowsky, John. After the Crash. London: Crowell-Collier, 1970. Unstead, R.J. The Twenties. Morristown, New Jersey: Macdonald, 1973