Causes of the Great Depression In 1929 the stock market crashed, triggering the worst depression ever in U.S. history, which lasted for about a decade. During the 1920's, the unequal distribution of wealth and the stock market speculation combined to create an unstable economy by the end of the decade. The unequal distribution of the wealth had several outlets. Money was distributed between industry and agriculture within the U.S. ; in social classes, between the rich and middle class; and lastly in world markets, between America and Europe.
Due to the imbalance of the wealth, the economy became very unstable. The stock market crashed because of the excessive speculation in the 1920's, which made the stock market artificially high (Galbraith 175). The poor distribution of the wealth, excessive speculation, and the stock market crashes caused the U.S. economy to fail, signaling the start of the Great Depression. The 1920's were a time when the American people and the economy were thriving. This period of time was called the "Roaring Twenties". Unemployment dropped as low as 3 percent, prices held steady, and the gross national product climbed from $70 billion in 1922 to nearly $100 billion in 1929 (EV 525).
However, the prosperity of the 1920's was not shared evenly among the social classes in America. A study conducted by the Brookings Institution stated, "78 percent of all American families had incomes of less than $3,000. Forty percent had family incomes of less than $1,500. Only 2.3 percent of the population enjoyed incomes of over $10,000. Sixty thousand American families held savings which amounted to the total held by the bottom 25 million families". (Goldston 26).
The 40 percent of Americans at the lowest end of the economic scale received only 12 percent of the national income by 1929 (EV 549). This mal distribution of income between the rich and the middle class increased throughout the 1920's. A major reason for this large and growing gap between the upper class and the working class Americans was that the manufacturing output increased throughout this period. As the production costs fell, wages went up slowly, and prices for goods remained at a constant. The majority of the benefits created by increased productivity fell into the hands of corporate owners.
The federal government also helped to make the growing gap between the upper and middle classes. President Calvin Coolidge's administration favored business, and as a result, the wealthy invested in these businesses. An example of this type of legislation is the Revenue Act of 1926, which significantly reduced income and inheritance taxes (Goldston 23). The introduction of credit to the American public proved to choke the economy rather than to stimulate it. To make an economy run properly, the total demand must equal total supply. The economy of the 1920's produced an over supply of goods.
It was not that the surplus products were not wanted, but that the people who needed them could not afford the products. The working class spent most of their money on things they needed: food, shelter, and clothes. They also purchased some luxury items, but their income limited them to only a few of these purchases. Meanwhile, the rich were enjoying their increased profits. While the vast majority did not have enough money to satisfy all of their material wants and needs, the manufactures continued to produce surplus goods.
Recognizing that the surpluses could be sold if consumers were financially able to buy them, the concept of buying on credit was established. Credit was immediately popular. Nearing the end of the decade, 75 percent of all automobiles were purchased on credit (EV 526). The credit system created artificial demand for products which people could not usually buy. People could not spend their regular wages to purchase products, because much of their income went toward their credit payments.
The poor distribution of wealth within the U. S extended to entire industries, helping one at the expense of another. The prosperity of the decade was not shared among the industries equally. While the automotive industry was thriving in the 1920's, some industries, such as agriculture, were declining steadily. Most of the industries that were prospering in the 1920's were in some way linked to the automobile or radio industries. The automotive industry was the crutch that supported other industries (Galbraith 7). The first industries to prosper were those that made materials for cars: steel industries and other metal industries, glass, leather, and textile industries.
Oil companies such as Texaco, Gulf, and Atlantic rose by 250 percent in production, and annual oil imports crept up to 76 million barrels (EV 532). Also prospering during the 1920's were businesses dependent upon the radio industry. Radio stations, electronic stores, and electricity companies all needed the radio to survive. By 1930, 40 percent of all Americans had radios (EV 533). In 1926 major broadcasting companies started appearing, such as NBC and CBS. The advertising industry was also becoming reliant upon the radio as a method of advertising.
There are several factors that lead to the prosperity in the automotive and radio industries. First, during World War I both the automobile and the radio were significantly improved upon. Due to the demands of the war, automobiles, radios, and the parts necessary to build these things were being produced in large quantities. The foundation existed for the auto and radio industries to take off.
Second, due to the federal governments easing of credit, money was available to invest in these industries. The government favored the new industries better than the agriculture. During WWI, the government had subsidized farms, and paid high prices for wheat and other grains. They told farmers to produce more food for the war effort. However, as soon as the war ended the U.S. stopped its policies to help farmers. Farmers fell into debt; farm prices and food prices dropped (Personal Interview).
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 is reliant on those industries to expand and grow in order to prosper. If those two industries, the automotive and radio industries, were to slow down or stop, so would the entire economy. When they slowed down, so did the U.S. economy.
The problem with the automobile and radio industries was that they could not expand for the simple reason that people could and would buy only so many cars and radios. When the auto and radio industries failed, all their dependents fell with them. One of the last major instabilities of the American economy had to do with large-scale international wealth distribution problems. While America was prospering in the 1920's, European nations were struggling to rebuild themselves after the damage of the war. During World War I, the U.S. government lent its European allies $7 billion, and then another $3.3 billion by 1920 (Galbriath 187). American foreign lending continued in the 1920's climbing to $1.25 billion in 1927 and 1928 (Goldston 17).
The nations that borrowed money from the U.S. were in no position to pay off their debts. If they paid back the loans, they would ruin their currency. To make matters worse, U.S. placed tariffs on imports from foreign countries in order to protect American business. The effect of these tariffs was that Europeans were unable to sell their own goods in the U.S. in reasonable quantities. If the U. S would not buy from European markets, then there was no way for them 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.
Mass speculation went on throughout the late 1920's. In from early 1928 to September 1929, the Dow Jones Industrial Average rose from 191 to 381 (Galbraith 70-73). Company earnings became of little interest; as long as stock prices continued to rise, huge profits could be made. By purchasing stocks on margin, one could buy stocks without the money to purchase them. Investors went crazy with this asset. By mid 1929, the total of outstanding brokers loans was over $8.5 billion (Goldston 36).
Interest rates for broker loans were reaching the sky, going as high as twenty percent in March 1929 (Goldston 36). Prices had been drifting downward, but speculators continued to flock to the market. Then, on Monday, October 21, prices started to fall quickly. The stocks started to sell quickly.
This caused the collapse to happen faster. Prices stabilized a little, but then on Black Thursday, October 24, everything fell apart again. By this time investors had lost confidence in the market. A group of leading bankers stepped in to try to stimulate the market.
But that was not enough to keep prices from falling. Then on Black Tuesday, 16.4 million shares changed hands (EV 548). Stocks fell so much, that at many times during the day no buyers were available at any price (EV 549). This speculation and the resulting stock market crash 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. President Hoover stated, .".. the crisis has been isolated to the stock market itself". (Docs Hoover). The market crash proved this confidence to be wrong. The rich stopped spending on luxury items, and the middle and lower classes stopped using credit in fear of losing their jobs and defaulting on their loans. As a result, industrial production fell by nine percent causing people to lose their jobs and default on loans (Galbraith 42).
Industries started to fall apart around the automobile and radio industries. The rich refused to make loans to foreign countries for fear of going bankrupt. Foreigners stopped buying U.S. goods. Banks started to go under, stores closed up. President Hoover did not act in time to stop the country from going further into a depression (Docs Hoover). Unemployment had reached 13 million in 1932 (EV 549); the country went quickly downhill.
The start of the Great Depression was setting in.