The Great Depression began in late 1929 and lasted for about a decade. The 1930s were a time of many changes. Our country had many problems that led to a long hard depression. The United States went from the “Roaring 20’s”, a time of success and happiness, to a terrible struggle to live, only a decade later. Multiple causes occurring within a short time of each other led to a decade of poverty and fear – The Great Depression.
The “Roaring Twenties” was a time when our country prospered. It was right after World War I and people were just getting everything back together. Due to a rapid increase in the industrialization that was fueling the United States economy, the leading economists were led to believe that this growth would continue for a long time. The average total realized income rose from $74.3 billion to $89 billion and there was a seventy-five percent increase in the average per capita income. Even in the tremendously prospering 1920s, causes and danger signals were apparent that the Great Depression was coming.
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One of the main causes of the Great Depression was the uneven distribution of money among the rich and middle-class people, between industry and agriculture, and between the United States and Europe, throughout the 1920s. This created a very unstable economy. From 1923-1929 the average output per worker increased 32 percent in manufacturing, while at the same time, the average wages for manufacturing jobs increased only 8 percent.
This caused wages to increase at a rate one fourth as fast as the rate that 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, rather than personal profits. Soon after, the pay of the workers did not increase at all but the prices rose.
The middle-class people could no longer afford the goods and the companies lost money. A 1932 article in Current History discusses the problems of this uneven distribution of wealth. “We still pray to be given each day our daily bread. Yet there is too much bread, too much wheat and corn, meat and oil, and almost every other commodity required by man for his subsistence and material happiness. We are not able to purchase the abundance that modern methods of agriculture, mining, and manufacturing make available in such bountiful quantities.”
Furthermore, farmers were producing more farm crops than could be sold and the United States was having trouble with the uneven distribution of wealth between Europe and the United States occurred when tariffs were placed on imports. The rich did not want to pay and therefore stopped loaning money to outside countries.
To make matters worse, on October 29, 1929, the New York Stock Market crashed. Many people had invested all of their money in the stock market because they were so sure of the economy’s success. People began to sell their stocks at a very quick pace, selling 16 million shares. Numerous stock prices dropped to fractions of their value. Banks lost money from the stock market and from Americans who couldn’t pay back loans.
By the 1930s 25 percent of the countries, workers had lost their jobs. Approximately 13 million people were jobless and many of those were also homeless. The blacks and unskilled workers were always the first to be fired. Farmers had no money and weren’t able to pay their mortgages. Poor and middle-class families had incomes of less than $2500 per year and 1 in 4 of the Americans who lost their jobs could not find a single job throughout the whole depression.
Farmers picketed and rather than let the unsold milk spoil they gave it away to other poor people like themselves. This led to the Agricultural Adjustment Act being passed in 1933 to help the farmers, most of whom were suffering the most damage. This raised farm prices by growing fewer crops. The Agricultural Adjustment Act helped these farmers get low-interest loans so that they would not lose their farms to the banks that held their mortgage.
Another effect the Great Depression had on the country was the invention of the credit system. Many people could not afford the goods that they wanted but believed that they would be able to pay it back at a later time. The idea of a credit system caught on quickly and buying with credit was started. People would use credit cards to buy everything from cars to groceries and they paid it back after they got their paycheck. This idea lasted past the depression and is still used today.
The Great Depression was the result of many different factors, but the combination of the greatly uneven distribution of wealth and the extensive stock market speculation that took place at this time were the major causes. It affected everyone and it can be safely said that the Great Depression is known to be the worst economic disaster in U. S. history.
“The Great Depression of the 1930s was a worldwide phenomenon composed an infinite number of separate but related events.” The Great Depression was a time of poverty and despair caused by many different events. It’s hard to say what caused this worldwide depression because it’s all based on opinion as opposed to factual data.
There are many contributing factors but not one specific event can be pinpointed for starting the depression. It is believed that some events contribute more than others-such as the Stock Market Crash of 1929.
The Stock Market Crash of 1929 was in the majority opinion, a long and overdue crash that was bound to happen. Prices sky-rocketed is so high that when they reached what was believed to be its all-time high, most people sold their gaining stocks for a profit.
So many people sold their stocks at a rapid rate that the corporations were unable to pay the shareholders. Speculation arose months before the crash when Roger Babson made his speech at the annual National Business Conference which he said “….. Sooner or later a crash is coming which will take the leading stocks and cause a decline from 60 to 90 points in the Dow Jones Barometer.”
This and many other speeches like this scared people into selling their stocks before the inevitable would happen. This was a leading cause that assisted the Great Depression to become one of the bleakest and most studied events in the history of our country: yet not the only cause.
Another large contributing factor was Mother Nature, I say this because in Oklahoma the weather was so dry that the farmers were unable to harvest their crops: these farmers became known as Okies. The land was a barren wasteland of dust and dirt in which it got its name the Dust Bowl. In other areas, the extreme opposite took place: farmers overproduced and prices rapidly dropped because the demand decreased.
The drastic result of this oversupply made it hard for farmers to make money due to the fact that they had so much that they were forced to sell it at substantial low priced just to remain competitive enough to make even the small profit they were making. The imbalances were, however, self-correcting in which if manufacturers made too much of something, it’s the price would fall, profits would disappear, and the producers would cut back on output. In 1932 the American writer, Stuart Chase described cycles as “the spree and hangover of an undisciplined economy.”
Economists recognized the depression as a cycle in which there were four cycles; expansion; crisis(or panic); recession (or contraction); and recovery. The definitive description was made by Wesley Clair Mitchell of the University of California. A cycle Mitchell explained in Business Cycles(1913) was “the process of cumulative change by renewal of [Economic] activity develops into intense prosperity by which the prosperity engenders a crisis, by which crisis turns into depression and by which depression finally leads to…. a revival of activity.”
Banks played a significant role in the depression because they were in charge of all the money and interest rates. For example, when banks had large reserves, they lowered interest rates. Cheaper loans encouraged manufacturers to invest in new equipment and hire additional workers. The resulting expansion of production caused an upswing of the cycle. The increased borrowing eventually reduced the bank’s reserves, thus resulting in a drastic increase in interest rates. That discouraged investors and slowed the economy down.
Another good explanation was the bad distribution of wealth for the cycles. During these challenging and difficult times, the rich opted not to spend their money: they saved in banks, vaults, etc. This resulted in increased investments, more production, and eventually more goods piled up on shelves and warehouses. Prices fell, production was cut back and workers were discharged. As a result, the economy entered the depression phase of the cycle.
The crisis stage of the cycle was brought about by bank failures and by irrational selling of stocks; thus causing business failures, a slowing in production, a rise in unemployment, and an overall optimistic view about the future.
Another helpful aide in the depression was the chief International creditor who was described as “inexperienced and less careful about its lendings because it was less dependent on this business than the chief pre-war tender, Great Britain.” He granted huge short term loans to politically unstable nations.
Lionel Robbins was a professor at the London School of Economics. He offered what was probably “the most influential contemporary explanation of the length of the downturn in the Great Depression(1934)
The World War (World War I) had destroyed much property and stimulated nationalistic sentiments that resulted in restrictions on international trade; Robbins wrote” Robbins believed that the depression was dragging on because of structural weaknesses. An example of Robbin’s philosophy was that the monetary confusion and rampant inflation after the war had hampered.
Many policies that the government put out hurt and slowed the recovering economy. One act is known as the American Hawley-Smooth of 1930 crushed the European industry which was already unstable from the depression. It stopped European trade and prevented European from earning the almighty dollar. This Act also destroyed any possibility of regaining the money loaned to them during World War I.
The collapse of the German Banking system in 1931 had monumental effects on the entire world. It aided to turn, what would have been, a small economic problem into the Great Depression. President Hoover was outraged and blamed the Great Depression on the Europeans by saying, “the hurricane that swept our shores were of European origin.”
He also said, “European statesmen did not even have the courage to meet the real issues and heavy spending on arms and frantic public works programs to meet unemployment led to unbalanced budget and inflation that tore their system asunder.”
The Germans also blamed the depression on the harsh terms imposed by the Versailles Treaty, especially the reparation they were forced to pay. They claimed the reparations brought down the economic vitality of their country to an all-time low.
Not one single book I have read has blamed any one specific country for the start of this catastrophe. As a matter of fact, each book has said if the countries would have worked in unison rather than focusing solely on themselves we might not have ever heard of the Great Depression. Nobody knows what the result would have been if the countries worked together and resolved the problem before it festered as it did. No one ever envisioned the extensive duration of the depression. My only prayer is that we never see another time like this again.
The United States was and still is great power in the world’s manufactured goods – twice as much as Great Britain and Germany combined. When American producers cut back on their purchases of raw materials and other supplies, the effect on other countries was devastating. The policies of the Federal Reserve Board in the early 1930’s put added pressure on European currencies.
After Great Britain was again forced to leave the gold standard in 1931, many foreign banks withdrew deposits from America in the form of gold: they were afraid that the United States might go off the gold standard too. “When the Reserve Board raised the discount rate to discourage these withdrawals it inadvertently exacerbated the deflationary trend, thus deepening and prolonging the world depression.” The America deflation was probably the cause of much of the deflation that took place elsewhere and thus an important reason why the depression lasted so long.
High unemployment was the most alarming aspect of the Great Depression. “In every industrial nation, more people were out of work than in any period in the past. It has been estimated that in 1933 about thirty million workers were jobless, about two-thirds of these in three countries – the United States, Germany, and Great Britain.
If anything, this estimate is low.” In New York City a survey was conducted by the Welfare Council and in New York alone 100,000 families were being treated for physical and mental effects of unemployment. The homeless rate increased dramatically.
So much so that many people did not even have a roof over their heads. The majority of homeless people had nothing at all and the minority made shacks on vacant land: these shacks soon became known as “Hoovervilles”. Women played a new role during this time. When a man lost his job and was having difficulty locating a new one, it was up to the women to work. This made a man “feel less than a man” because the women were supporting the family and at that point in time such an event was frowned upon.
Worldwide, in 1929 about one-third of all workers were women. Everyone agreed that ending the depression would solve the unemployment problem or at least bring unemployment down to “manageable” levels. There was also, however, the more immediate problem of what to do about the people who were unemployed and needed assistance merely to survive. Whether efforts to aid the unemployed would help to end the depression or make it worse was a matter of risk-taking.
Another way to solve the unemployment problem was to export people to other countries that had available jobs so that people could survive. I do not think the Great Depression could have been avoided: we simply do not live in a perfect world. There is no way of telling when or if the next depression will occur. I feel if the governments worked together then the depression would not have been such a catastrophe as it ended up being.
Did the nations not know that they influenced the course of the depression and in turn, the course of history. Another reason why the depression lasted so long was that politicians were so busy pointing fingers at each other instead of resolving it.
Who knows how long the depression would have lasted if World War II never came to be. World War II industries began making weapons and these industries hired the workers to meet the high demands. The United States would sell their weapons world wide and make a profit.
This turn in events concludes the era of the Great Depression with the last cycle: recovery. It is an amazing and complex phenomenon, that at seventeen years old I am able to pin-point (in what is my opinion), the leading cause of the duration of the Great Depression: uncooperative leaders unwilling to aid and assist so that harmonious coexistence would have prevailed.
Hopefully, at this point in our history, we have learned from our past mistakes and will never see such a dreadful and dire time again!
Example #3 – Effects of the Great Depression
Many times throughout history the United States has undergone economic depression. The most recognized period of economic depression is called the Great Depression. The Great Depression is well known because of the seriousness of the stock market crash.
The results of the crash were more serious than any other crash throughout American History. The Great Depression caused a change in the nature of the American family, an increase in poverty, and President Herbert Hoover’s proposal for immediate action by the government balanced his belief in “rugged individualism” with the economic necessities.
While most Americans are familiar with the Great Depression as a time of the economic disaster, it also had an impact on American Family life. There were obvious differences in the classes as a result of the Great Depression. The lower and the middle classes changed considerably, but the upper-class lifestyle did not vary a great deal. (Simmons 41)
The father’s role as head of the household became more challenging because there were fewer jobs. The expectation was for fathers to work and support their families. The reality of the lower class was that few men brought home paychecks. Some fathers suffered anxiety and a feeling of worthlessness for failing to provide for their families. Many resorted to stealing food and money just to survive. (Simmons 41)
Women were offered greater opportunities in the workforce, however, they tended to take the position of stay-at-home mothers. According to Simmons “Men resented employed women for they felt that they were occupying jobs that could be given to unemployed men.”(Simmons 43)
Children in the lower class were expected to get an education so that they could improve their situation. In addition, they were needed at home to help with household chores. Unfortunately, many poor children dropped out of school because of their obligations at home. Children in the middle class were better than those in the lower class. They had the opportunity to stay in school and were treated to some luxuries. The children of the upper-class families received an excellent education and were treated to many luxuries. (Simmons 42-43)
Along with a change in American family life, there was also an increase in poverty. The Great Depression was an intense time of poverty. The downfall of American businesses, the closing of banks, and the lowered employment contributed to this period of destitute. According to an old study “, 26,000 American businesses collapsed; in 1931, 28,000 more met the same fate. And by the beginning of 1932, nearly 3,500 banks, holding billions of dollars in uninsured deposits, had gone under.
Twelve million people were unemployed (nearly 25 percent of the workforce), and the real earnings for those still lucky enough to have jobs fell by a third” (Internet). This statistical evidence effectively illustrates the increase in poverty caused by the Great Depression.
An additional result of the Great Depression was that President Hoover balanced his belief of “rugged individualism” with the economic necessities of the time by proposing direct action by the government. Hoover had only been in office for eight months when the stock market crashed. At first, he treated this financial disaster and a decline in employment and business that followed the Great Depression as a panic. According to The American Pageant “He was accused of saying, yet did not use these precise words, that prosperity was just around the corner” (Bailey 776).
As the depression got worse Hoover became more and more concerned about the troubles of Americans. Hoover refused to agree with the request of the Democrats in Congress, who wanted the government to distribute money to the unemployed. “?[Hoover] as a “rugged individualist” deeply rooted in an earlier era of free enterprise, shrank from the heresy of government handouts. Convinced that industry, thrift, and self-reliance were the virtues that made America great, President Hoover felt that a government doling out doles would weaken, perhaps destroy the national fiber?”(Bailey 776).
However, President Hoover “would assist the hard-pressed railroads, banks, and rural credit corporations, in the hope that if financial health were restored at the top of the economic pyramid, unemployment would be relieved at the bottom on a trickle-down basis” (Bailey 777). In order for Hoover to do so, he introduced The Reconstruction Act.
This Act was created to prepare emergency financing for banks, insurance companies, and other companies. The Glass-Steagall Act used government gold reserves to help the industry. The Federal Home Loan Bank Act created discount banks to help refinance homes and prevent foreclosures. Hoover also wanted the reform of bankruptcy laws to help in the reconstruction of businesses.
He supported a loan of $300 million to states for direct relief, expansion of public works, and cutbacks in the federal government. By proposing this act President Hoover was not giving up his belief in “rugged individualism. He was not supporting the Democrats’ calls for increased welfare. Instead, he was providing better access to loans and financing so that Americans could help themselves. Although his actions did stop increased destruction from occurring, he did not get the credit he deserved. (Simmons 46-49)
The Great Depression had an enormous effect on American life. It affected family life by altering the status of family members. Poverty increased as seen through the number of collapsed American businesses, closed banks, and lowered employment rates. President Hoover balanced the economic needs of the country with his personal belief in “rugged individualism.” He proposed a series of acts to address these economic needs including the Reconstruction Act, the Stealgal Act, and the Federal Home Loan Bank Act.
The Great Depression was the worst economic slump ever in U.S. history and one which touched virtually all of the industrialized worlds. 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 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 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 by 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 the 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 1920s. 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 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 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 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 President’s Committee on Social Trends noted5.
This strategy created an artificial demand for products that 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 1920s. 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 the income distribution (and of overproduction) were only made worse. Lastly, the search for ever greater returns on investment leads 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.
The automotive industry was the driving force behind many other booming industries in the 1920s. 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 1920s 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 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 1920s Americans spent more than $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 1920s 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 1920s 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 in 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 the 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 workforce in these industries had been formed and had become experienced.
Manufacturing plants were already in place. The infrastructure existed for the automotive and radio industries to take off. Second, due to the federal government’s easing of credit, money was available to invest in these industries. Thanks to pressure from President Coolidge and the business world, the Federal Reserve Board kept the rediscount rate low.
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 that war when war-ravaged Europe had to be fed too.
However, as soon as the war ended, the U.S. abruptly 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 bushel11. Farmers fell into debt; farm prices and food prices tumbled. Although modest attempts to help farmers were made in 1923 with the Agricultural Credits Act, farmers were generally left out in the cold by the government.
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 upon those industries to expand and grow and invest in order to prosper. If those two industries, the automotive and radio industries, were to slow down or stop, so would the entire economy. While the economy did prosper greatly in the 1920s, because this prosperity wasn’t balanced between different industries, when those industries that had all the wealth concentrated in them slowed down, the whole economy did.
The fundamental problem with the automobile and radio industries was that they could not expand ad infinitum for the simple reason that 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 the American industry, fell. Because it had been ignored, agriculture, which was still a fairly large segment of the economy, was already in ruin when the American industry fell.
The last major instability of the American economy had to do with large-scale international wealth distribution problems. While America was prospering in the 1920s, 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 enactment of the Dawes Plan in 1924, the U.S. started lending 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. goods12. The nations the U.S. had lent money to (Britain, Italy, France, Belgium, Russia, Yugoslavia, Estonia, Poland, and others) were in no position to pay off the debts. Their gold had flowed into the U.S. during and immediately after the war in great quantity; they couldn’t send more gold without completely ruining their currencies. Historian John D. Hicks describes the Allied attitude towards U.S. loan repayment:
?In their view the war was fought for a common objective, and the victory was as essential for the safety of the United States as for their own. The United States had entered the struggle late and had poured forth no such contribution in lives and losses as the Allies had made. It had paid in dollars, not in death and destruction, and now it wanted its dollars back.?13
There were several causes of this awkward distribution of wealth between the U.S. and its European counterparts. Most obvious is 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 disparate distribution of wealth was the tariff policy of the United States.
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 1920s and early 1930s. 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 more14. The effect of these tariffs was that Europeans were unable to sell their own goods in the United States in reasonable quantities.
In the 1920s 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 so as to protect American business, but if the United States would not buy from our European counterparts, then there was no way for them to buy from the Americans, or even to pay interest on U.S. loans. The weakness of the international economy certainly contributed to the Great Depression.
Europe was reliant 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 products went into exports. When the foreign countries became no longer able to buy U.S. goods, U.S. exports fell 30% immediately. That $1.5 billion of foreign sales lost between 1929 to 1933 was fully one-eighth of all lost American sales in the early years of the depression.
Mass 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 leaped 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 at $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 losing 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 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 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 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.