Main Causes Of The Great Depression Essay

, Research Paper

Main Causes of The Great DepressionThe Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtuallyall of theindustrialized world. The depression began in late 1929 and lasted for about a decade. Many factorsplayed a role in bringing about the depression; however, the main cause for the Great Depression was thecombination of the greatly unequal distribution of wealth throughout the 1920’s, and the extensive stockmarket speculation that took place during the latter part that same decade. The maldistribution of wealthin the 1920’s existed on many levels. Money was distributed disparately between the rich and themiddle-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 keptthe 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. The nation’s total realizedincome rose from $74.3 billion in 1923 to $89 billion in 1929(end note 1). However, the rewards of the”Coolidge Prosperity” of the 1920’s were not shared evenly among all Americans. According to a study doneby the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom42%(end note 2). That same top 0.1% of Americans in 1929 controlled 34% of all savings, while 80% ofAmericans had no savings at all(end note 3). Automotive industry mogul Henry Ford provides a strikingexample of the unequal distribution of wealth between the rich and the middle-class. Henry Ford reporteda personal income of $14 million(end note 4) in the same year that the average personal income was$750(end note 5). By present day standards, where the average yearly income in the U.S. is around$18,500(end note 6), Mr. Ford would be earning over $345 million a yea!r! This maldistribution of income between the rich and the middle class grew throughout the 1920’s. Whilethe disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed astupendous 75% increase in per capita disposable income(end note 7). A major reason for this large and growing gap between the rich and the working-class people was theincreased manufacturing output throughout this period. From 1923-1929 the average output per workerincreased 32% in manufacturing(end note 8). During that same period of time average wages formanufacturing jobs increased only 8%(end note 9). Thus wages increased at a rate one fourth as fast asproductivity increased. As production costs fell quickly, wages rose slowly, and prices remainedconstant, the bulk benefit of the increased productivity went into corporate profits. In fact, from1923-1929 corporate profits rose 62% and dividends rose 65%(end note 10). The federal government also contributed to the growing gap between the rich and middle-class. CalvinCoolidge’sadministration (and the conservative-controlled government) favored business, and as a result the wealthywho 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 taxesdramatically(end note 11). Andrew Mellon, Coolidge’s Secretary of the Treasury, was the main force behindthese and other tax cuts throughout the 1920’s. In effect, he was able to lower federal taxes such that aman with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,000(end note12). Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. In the1923 case Adkins v. Children’s Hospital, the Supreme Court ruled minimum-wage legislationunconstitutional(end note 13). The large and growing disparity of wealth between the well-to-do and the middle-income citizens made theU.S. economy unstable. For an economy to function properly, total demand must equal total supply. In aneconomy with such disparate distribution of income it is not assured that demand will always equalsupply. Essentially what happened in the 1920’s was that there was an oversupply of goods. It was notthat the surplus products of industrialized society were not wanted, but rather that those whose needswere not satiated could not afford more, whereas the wealthy were satiated by spending only a smallportion of their income. A 1932 article in Current History articulates the problems of thismaldistribution of wealth:”We still pray to be given each day our daily bread. Yet there is too much bread, too much wheat andcorn, meat and oil and almost every other commodity required by man for his subsistence and materialhappiness. We are not able to purchase the abundance that modern methods of agriculture, mining andmanufacturing make available in such bountiful quantities(end note 14).”Three quarters of the U.S. population would spend essentially all of their yearly incomes to purchaseconsumer goods such as food, clothes, radios, and cars. These were the poor and middle class: familieswith incomes around, or usually less than, $2,500 a year. The bottom three quarters of the population hadan aggregate income of less than 45% of the combined national income; the top 25% of the population tookin more than 55% of the nati