Essay, Research Paper: Great Depression

American History

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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.

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