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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 1920's, and the extensive stock market speculation that took place during the latter part that same decade. The mal-distribution 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 maldistribution of wealth, caused the American economy to capsize. The "roaring twenties" was an era when our country prospered tremendously. 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, 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 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 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 Coolidge's 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, 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 socioeconomic classes. In the 1923 case Adkins v. Children's 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 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 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 combined 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 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 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 hadn't already been bought. In addition, people could no 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 wealthy'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 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 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 $2736. 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. The automotive industry was the driving 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 industry7. 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 up everywhere. With such a wealthy upper-class many luxury hotels were needed. In 1924 alone, hotels such as the Mayflower (Washington D.C.), the Parker House (Boston), The Palmer House (Chicago), and the Peabody (Memphis) opened their doors8. 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.
During the 1920's Americans spent more than a $1 billion each year on the construction and maintenance of highways, and at least another $400 million annually for city streets. But 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. From 1919 to 1928 the construction industry grew by around $5 billion dollars, nearly 50%9. 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, and relied upon the constant growth of the radio market to expand and grow themselves.
By 1930, 40% of American families had radios10. 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 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 ....
Research essay sample on Great Depression