FREE ESSAY ON GREAT DEPRESSION

GREAT DEPRESSION

The Great Depression was the worst economic decline ever in U.S. history. It began in late
1929 and lasted about a decade. Throughout the 1920's, many factors played a role in
bringing about the depression; the main causes were the unequal distribution of wealth
and extensive stock market speculation. Money was distributed unequally between the rich
and the middle-class, between industry and agriculture within the United States, and
between the U.S. and Europe. This disproportion of wealth created an unstable economy.
Before the Great Depression, the roaring twenties was an era during which the United
States prospered tremendously. The nation's total 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. In 1929, the top 0.1 percentage of Americans
had a combined income equal to the bottom 42%. That same top 0.1 percentage of Americans
in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all.
Automotive industry tycoon Henry Ford provides an 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. This poor
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-percentage enjoyed an extraordinary 75% increase in per capita
disposable income. These market crashes, combined with the poor distribution of wealth,
caused the American economy to overturn.
Increased manufacturing output throughout this period created this large and growing gap
between the rich and the working class. 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 consequently those that 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. Even the Supreme Court played a
role in expanding the gap between the social/economic classes. In the 1923 case Adkins v.
Children's Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional.
The large and growing disproportion 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 different
distribution of income, it is not assured that demand will 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 satisfied could not afford more, whereas the wealthy were contented
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 a collective income of less than 45% of the combined national income; the
top 25% of the population took in more than 55% of the national income. Through this
period, the U.S. relied upon two things in order for the economy to remain even: luxury
spending, investment and credit sales. One 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. 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 which people
could not ordinarily afford. It put off the day of reckoning, but it made the downfall
worse. By this telescoping, when the future arrived, there was little to buy that had not
already been bought. People could no longer use their regular wages to purchase whatever
items they did not have yet, because so much of their 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 was based upon the
wealthy's confidence in the U.S. economy. If conditions were to take a downturn (as they
did when the market crashed in 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 were exacerbated. 
Poor distribution of wealth within our nation was not limited to only social/economic
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 radio industry or to
the automotive industry. The automotive industry was the active force behind many other
booming industries in the 1920's. By 1928, with over 21 million cars on the roads, there
was roughly one car for every six Americans. 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. Companies such as Ethyl Corporation made millions with items such as new
knock-free fuel additives for cars. In addition, tourist homes (hotels and motels) opened
everywhere. With such a wealthy upper class, many luxury hotels were needed. Lastly, and
possibly most importantly, the construction industry benefited tremendously from the
automobile. With the growing number of cars, there was a big demand for paved roads.
While Americans spent more than a $1 billion each year on the construction and
maintenance of highways, and $400 million annually for city streets, the construction
industry grew by $5 billion dollars, nearly 50%. However, the automotive industry
affected construction far more than that. The automobile had been central 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. 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. These businesses 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 broadcasting 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. Several factors lead to
the concentration of wealth and prosperity into the automotive and radio industries.
First, during World War I both 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 foundation 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. The federal government
favored the new industries as opposed to agriculture. During World War I the federal
government had subsidized farms, and paid 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 the war when war-ravaged Europe had to be fed too. However as soon as the
war ended, the U.S. bluntly 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. Although modest attempts to help
farmers were made in 1923 with the Agricultural Credits Act, farm and food prices tumbled
and farmers fell into debt. The problem with such heavy concentrations of wealth and such
massive dependence upon essentially two industries is similar to the problem with few
people having too much wealth. The economy was reliant upon the radio and automotive
industries to expand, grow, and invest in order to prosper. If those two industries were
to slow or stop, so would the entire economy. The economy prospered greatly in the
1920's. This prosperity was not balanced between different industries, when those
industries that had all the wealth concentrated in them slowed, the whole economy did.
The fundamental problem with the automobile and radio industries was that they could not
expand because 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
large segment of the economy, was already in ruin when American industry fell.
Large-scale international wealth distribution problems was a last major uncertainty the
American economy had to deal with. While America was prospering in the 1920's, European
nations were struggling to rebuild themselves after the damage of war. During World War I
the U.S. government lent its European allies $7 billion, and then another $3.3 billion by
1920. By the Dawes Plan of 1924, the U.S. started lending money to Axis Germany. American
foreign lending continued in the 1920's climbing to $900 million in 1924, and $1.25
billion in 1927 and 1928. Of these funds, more than 90% were used by the European allies
to purchase U.S. goods. The nations to which the U.S. had lent money (Britain, Italy,
France, Belgium, Russia, Yugoslavia, Estonia, Poland, and others) were in no position to
pay off their debts. Their gold had flowed into the U.S. during and immediately after the
war in great quantity; they could not send more gold without completely ruining their
currencies. There were several causes to this awkward distribution of wealth between U.S.
and its European counterparts. Most obvious was the 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 improportionate
distribution of wealth was US tariff policy. 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. 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 to protect American business. If the United
States would not buy from its European counterparts, there was no way for the Europeans
to buy from the Americans, or even to pay interest on U.S. loans. This weakness in the
international economy 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 prosper. By
1929, 10% of American gross national product went into exports. When the foreign
countries were no longer able to buy U.S. goods, U.S. exports fell immediately by 30
percent. Mass speculation went on throughout the late 1920's. In 1929 alone, a record
volume of 1,124,800,410 shares were traded on the New York Stock Exchange. From early
1928 to September 1929 the Dow Jones Industrial Average rose from 191 to 381. 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, although it had not yet paid a single dividend. Through the
miracle of buying stocks on margin, investors' greed pushed them to search for even
higher returns. With such tremendous profits to be made in the stock market nobody wanted
to make low interest loans. Investors' excitement over the proposal of profits like this
drove the market to ludicrously 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. 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. Then on Monday the 28 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 poor distribution 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. Consequently, 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 prosperous 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. 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 closed.
More banks went under. More factories closed. Unemployment grew to five million in 1930,
up to thirteen million in 1932. The Great Depression had begun.