Causes Of The Great Depression Essay Research

Causes Of The Great Depression Essay, Research Paper

The Great Depression was the worst economic slack of all time in U.S.

history, and one which spread to virtually all of the industrialised

universe. The depression began in late 1929 and lasted for about a

decennary. Many factors played a function in conveying about the depression ;

nevertheless, the chief cause for the Great Depression was the combination

of the greatly unequal distribution of wealth throughout the 1920 & # 8217 ; s,

and the extended stock market guess that took topographic point during the

latter portion that same decennary. The maldistribution of wealth in the

1920 & # 8217 ; s existed on many degrees. Money was distributed disparately

between the rich and the middle-class, between industry and

agribusiness within the United States, and between the U.S. and Europe.

This instability of wealth created an unstable economic system. The inordinate

guess in the late 1920 & # 8217 ; s kept the stock market unnaturally

high, but finally lead to big market clangs. These market

clangs, combined with the maldistribution of wealth, caused the

American economic system to turtle.

The & # 8220 ; howling mid-twentiess & # 8221 ; was an epoch when our state prospered

enormously. The state & # 8217 ; s entire accomplished income rose from $ 74.3

billion in 1923 to $ 89 billion in 1929 ( stop note 1 ) . However, the

wagess of the & # 8220 ; Coolidge Prosperity & # 8221 ; of the 1920 & # 8217 ; s were non shared

equally among all Americans. Harmonizing to a survey done by the Brookings

Institute, in 1929 the top 0.1 % of Americans had a combined income

equal to the bottom 42 % ( end note 2 ) . That same top 0.1 % of Americans

in 1929 controlled 34 % of all nest eggs, while 80 % of Americans had no

nest eggs at all ( end note 3 ) . Automotive industry mogul Henry Ford

provides a dramatic illustration of the unequal distribution of wealth

between the rich and the middle-class. Henry Ford reported a personal

income of $ 14 million ( end note 4 ) in the same twelvemonth that the norm

personal income was $ 750 ( end note 5 ) . By present twenty-four hours criterions, where

the mean annual income in the U.S. is about $ 18,500 ( end note 6 ) ,

Mr. Ford would be gaining over $ 345 million a twelvemonth! This

maldistribution of income between the rich and the in-between category grew

throughout the 1920 & # 8217 ; s. While the disposable income per capita rose 9 %

from 1920 to 1929, those with income within the top 1 % enjoyed a

colossal 75 % addition in per capita disposable income ( end note 7 ) .

A major ground for this big and turning spread between the rich

and the propertyless people was the increased fabrication end product

throughout this period. From 1923-1929 the mean end product per worker

increased 32 % in fabrication ( end note 8 ) . During that same period of

clip mean rewards for fabricating occupations increased merely 8 % ( end note

9 ) . Thus rewards increased at a rate one 4th every bit fast as productiveness

increased. As production costs fell rapidly, rewards rose easy, and

monetary values remained changeless, the majority benefit of the increased

productiveness went into corporate net incomes. In fact, from 1923-1929

corporate net incomes rose 62 % and dividends rose 65 % ( end note 10 ) .

The federal authorities besides contributed to the turning spread

between the rich and middle-class. Calvin Coolidge & # 8217 ; s disposal

( and the conservative-controlled authorities ) favored concern, and as

a consequence the wealthy who invested in these concerns. An illustration of

statute law to this intent is the Revenue Act of 1926, signed by

President Coolidge on February 26, 1926, which reduced federal income

and heritage revenue enhancements dramatically ( end note 11 ) . Andrew Mellon,

Coolidge & # 8217 ; s Secretary of the Treasury, was the chief force behind these

and other revenue enhancement cuts throughout the 1920 & # 8217 ; s. In consequence, he was able to

lower federal revenue enhancements such that a adult male with a million-dollar one-year

income had his federal revenue enhancements reduced from $ 600,000 to $ 200,000 ( terminal

note 12 ) . Even the Supreme Court played a function in spread outing the spread

between the socioeconomic categories. In the 1923 instance Adkins V.

Children & # 8217 ; s Hospital, the Supreme Court ruled minimum-wage statute law

unconstitutional ( end note 13 ) .

The big and turning disparity of wealth between the well-to-do

and the middle-income citizens made the U.S. economic system unstable. For an

economic system to work decently, entire demand must be entire supply. In

an economic system with such disparate distribution of income it is non

assured that demand will ever be supply. Basically what

happened in the 1920 & # 8217 ; s was that there was an glut of goods. It

was non that the excess merchandises of industrialised society were non

wanted, but instead that those whose demands were non satiated could non

afford more, whereas the wealthy were satiated by passing merely a

little part of their income. A 1932 article in Current History

articulates the jobs of this maldistribution of wealth:

& # 8220 ; We still pray to be given each twenty-four hours our day-to-day staff of life. Yet there is excessively

much staff of life, excessively much wheat and maize, meat and oil and about every

other trade good required by adult male for his subsistence and stuff

felicity. We are non able to buy the copiousness that modern

methods of agribusiness, excavation and fabrication make available in

such big measures ( stop note 14 ) . & # 8221 ;

Three quarters of the U.S. population would pass basically all of

their annual incomes to buy consumer goods such as nutrient, apparels,

wirelesss, and autos. These were the hapless and in-between category: households with

incomes around, or normally less than, $ 2,500 a twelvemonth. The bottom three

quarters of the population had an aggregative 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 ( end note 15 ) . While the wealthy

excessively purchased consumer goods, a household gaining $ 100,000 could non be

expected to eat 40 times more than a household that merely earned $ 2,500

a twelvemonth, or purchase 40 autos, 40 wirelesss, or 40 houses.

Through such a period of instability, the U.S. came to trust upon

two things in order for the economic system to stay on an even keel: recognition

gross revenues, and luxury disbursement and investing from the rich.

One obvious solution to the job of the huge bulk of the

population non holding adequate money to fulfill all their demands was to

allow those who wanted goods buy merchandises on recognition. The construct of

purchasing now and paying subsequently caught on rapidly. By the terminal of the

1920 & # 8217 ; s 60 % of autos and 80 % of wirelesss were bought on installment

recognition ( end note 16 ) . Between 1925 and 1929 the entire sum of

outstanding installment recognition more than doubled from $ 1.38 billion to

around $ 3 billion ( stop note 17 ) . Installment recognition allowed one to

& # 8220 ; telescope the hereafter into the present & # 8221 ; , as the President & # 8217 ; s Committee

on Social Trends noted ( end note 18 ) . This scheme created unreal

demand for merchandises which people could non normally afford. It put

off the twenty-four hours of calculation, but it made the ruin worse when it came.

By telescoping the hereafter into the present, when & # 8220 ; the hereafter & # 8221 ; arrived,

there was small to purchase that hadn & # 8217 ; t already been bought. In add-on,

people could non longer utilize their regular rewards to buy whatever

points they didn & # 8217 ; Ts have yet, because so much of the rewards went to

paying back past purchases.

The U.S. economic system was besides reliant upon luxury disbursement and

investing from the rich to remain afloat during the 1920 & # 8217 ; s. The

important job with this trust was that luxury disbursement and

investing were based on the affluent & # 8217 ; s assurance in the U.S. economic system.

If conditions were to take a downswing ( as they did with the market

crashed in autumn and winter 1929 ) , this disbursement and investing would

decelerate to a arrest. While nest eggs and investing are of import for an

economic system to remain balanced, at inordinate degrees they are non good.

Greater investing normally means greater productiveness. However, since

the wagess of the increased productiveness were non being distributed

every bit, the jobs of income distribution ( and of overrun )

were merely made worse. Last, the hunt for of all time greater returns on

investing lead to wide-spread market guess.

Maldistribution of wealth within our state was non limited to

merely socioeconomic categories, but to full industries. In 1929 a mere

200 corporations controlled about half of all corporate

wealth ( end note 19 ) . While the automotive industry was booming in the

1920 & # 8217 ; s, some industries, agribusiness in peculiar, were worsening

steadily. In 1921, the same twelvemonth that Ford Motor Company reported

record assets of more than $ 345 million, farm monetary values plummeted, and

the monetary value of nutrient fell about 72 % due to a immense excess ( end note 20 ) .

While the mean per capita income in 1929 was $ 750 a twelvemonth for all

Americans, the mean one-year income for person working in

agribusiness was merely $ 273 ( end note 21 ) . The prosperity of the 1920 & # 8217 ; s

was merely non shared among industries equally. In fact, most of the

industries that were thriving in the 1920 & # 8217 ; s were in some manner linked

to the automotive industry or to the wireless industry.

The automotive industry was the drive force behind many other

dining industries in the 1920 & # 8217 ; s. By 1928, with over 21 million autos

on the roads, there was approximately one auto for every six Americans ( stop

note 22 ) . The first industries to thrive were those that made

stuffs for autos. The flourishing steel industry sold approximately 15 % of its

merchandises to the car industry ( end note 23 ) . The Ni, lead,

and other metal industries capitalized likewise. The new closed autos

of the 1920 & # 8217 ; s benefited the glass, leather, and fabric industries

greatly. And makers of the gum elastic tires that these autos used

grew even faster than the car industry itself, for each auto

would likely necessitate more than one set of tyres over the class of its

life. The fuel industry besides profited and expanded. Companies such as

Ethyl Corporation made 1000000s with points such as new & # 8220 ; knock-free & # 8221 ;

fuel additives for autos ( end note 24 ) . In add-on, & # 8220 ; tourer places & # 8221 ;

( hotels and motels ) opened up everyplace. With such a wealthy

upper-class many luxury hotels were needed. In 1924 entirely, hotels such

as the Mayflower ( Washington D.C. ) , the Parker House ( Boston ) , The

Palmer House ( Chicago ) , and the Peabody ( Memphis ) opened their

doors ( end note 25 ) . Last, and perchance most significantly, the

building industry benefited enormously from the car. With

the turning figure of autos, there was a large demand for paved roads.

During the 1920 & # 8217 ; s Americans spent more than a $ 1 billion each twelvemonth on

the building and care of main roads, and at least another

$ 400 million yearly for metropolis streets ( stop note 26 ) . But the

automotive industry affected building far more than that. The

car had been cardinal to the urbanisation of the state in the

1920 & # 8217 ; s because so many other industries relied upon it. With

urbanisation came the demand to construct many more apartment edifices,

mills, offices, and shops. From 1919 to 1928 the building

industry grew by around $ 5 billion dollars, about 50 % ( end note 27 ) .

Besides thriving during the 1920 & # 8217 ; s were concerns dependent upon

the wireless concern. Radio Stationss, electronic shops, and electricity

companies all needed the wireless to last, and relied upon the

cons

tant growing of the wireless market to spread out and turn themselves. By

1930, 40 % of American households had wirelesss ( stop note 28 ) . In 1926 major

airing companies started looking, such as the National

Airing Company. The advertisement industry was besides going

to a great extent reliant upon the wireless both as a merchandise to be advertised, and

as a method of advertisement.

Several factors lead to the concentration of wealth and

prosperity into the automotive and wireless industries. First, during

World War I both the car and the wireless were significantly

improved upon. Both had existed earlier, but wireless had been largely

experimental. Due to the demands of the war, by 1920 cars,

wirelesss, and the parts necessary to construct these things were being

produced in big measures ; the work force in these industries had

been formed and had become experient. Manufacturing workss were

already in topographic point. The substructure existed for the automotive and

wireless industries to take off. Second, due to federal authorities & # 8217 ; s

easing of recognition, money was available to put in these industries.

Thankss to coerce from President Coolidge and the concern universe, the

Federal Reserve Board kept the rediscount rate low.

The federal authorities favored the new industries as opposed to

agribusiness. During World War I the federal authorities had subsidized

farms, and payed absurdly high monetary values for wheat and other grains. The

federal authorities had encouraged husbandmans to purchase more land, to

overhaul their methods with the latest in farm engineering, and to

bring forth more nutrient. This made sense during that war when war-ravaged

Europe had to be fed excessively. However every bit shortly as the war ended, the U.S.

suddenly stopped its policies to assist husbandmans. During the war the

United States authorities had paid an unheard of $ 2 a bushel for wheat,

but by 1920 wheat monetary values had fallen to every bit low as 67 cents a bushel ( stop

note 29 ) . Farmers fell into debt ; farm monetary values and nutrient monetary values tumbled.

Although modest efforts to assist husbandmans were made in 1923 with the

Agricultural Credits Act, husbandmans were by and large left out in the cold

by the authorities.

The job with such heavy concentrations of wealth and such

monolithic dependance upon basically two industries is similar to the

job with few people holding excessively much wealth. The economic system is reliant

upon those industries to spread out and turn and put in order to

prosper. If those two industries, the automotive and wireless industries,

were to decelerate down or halt, so would the full economic system. While the

economic system did prosper greatly in the 1920 & # 8217 ; s, because this prosperity

wasn & # 8217 ; t balanced between different industries, when those industries

that had all the wealth concentrated in them slowed down, the whole

economic system did. The cardinal job with the car and wireless

industries was that they could non spread out ad infinitum for the simple

ground that people could and would purchase merely so many autos and wirelesss.

When the automotive and wireless industries went down all their

dependants, basically all of American industry, fell. Because it had

been ignored, agribusiness, which was still a reasonably big section of

the economic system, was already in ruin when American industry fell.

A last major instability of the American economic system had to make with

large-scale international wealth distribution jobs. While America

was thriving in the 1920 & # 8217 ; s, European states were fighting to

rebuild themselves after the harm of war. During World War I the

U.S. authorities lent its European Alliess $ 7 billion, and so another

$ 3.3 billion by 1920 ( stop note 30 ) . By the Dawes Plan of 1924 the U.S.

started loaning to Axis Germany. American foreign imparting continued in

the 1920 & # 8217 ; s mounting to $ 900 million in 1924, and $ 1.25 billion in 1927

and 1928 ( stop note 31 ) . Of these financess, more than 90 % were used by the

European Alliess to buy U.S. goods ( end note 32 ) . The states the

U.S. had lent money to ( Britain, Italy, France, Belgium, Russia,

Yugoslavia, Estonia, Poland, and others ) were in no place to

pay off the debts. Their gold had flowed into the U.S. during and

instantly after the war in great measure ; they couldn & # 8217 ; t direct more

gold without wholly destroying their currencies. Historian John D.

Hicks describes the Allied attitude towards U.S. loan refund:

& # 8220 ; In their position the war was fought for a common aim, and the

triumph was as indispensable for the safety of the United States as for

their ain. The United States had entered the battle tardily, and had

poured forth no such part in lives and losingss as the Allies

had made. It had paid in dollars, non in decease and devastation, and

now it wanted its dollars back ( terminal note 33 ) . & # 8221 ;

There were several causes to this awkward distribution of wealth

between U.S. and its European opposite numbers. Most obvious is that fact

that World War I had devastated European concern. Factories, places,

and farms had been destroyed in the war. It would take clip and money

to recover. Equally of import to doing the disparate distribution

of wealth was tariff policy of the United States. The United States

had traditionally placed duties on imports from foreign states in

order to protect American concern. However these duties reached an

all-time high in the 1920 & # 8217 ; s and early 1930 & # 8217 ; s. Get downing with the

Fordney-McCumber Act of 1922 and stoping with the Hawley-Smoot Duty

of 1930, the United States increased many duties by 100 % or more ( stop

note 34 ) . The consequence of these duties was that Europeans were unable

to sell their ain goods in the United States in sensible measures.

In the 1920 & # 8217 ; s the United States was seeking & # 8220 ; to be the universe & # 8217 ; s

banker, nutrient manufacturer, and maker, but to purchase every bit small as

possible from the universe in return. & # 8221 ; ( stop note 35 ) This effort to hold

a invariably favourable trade balance could non win for long. The

United States maintained high trade barriers so as to protect American

concern, but if the United States would non purchase from our European

opposite numbers, so there was no manner for them to purchase from the

Americans, or even to pay involvement on U.S. loans. The failing of the

international economic system surely contributed to the Great Depression.

Europe was reliant upon U.S. loans to purchase U.S. goods, and the U.S.

needed Europe to purchase these goods to thrive. By 1929 10 % of American

gross national merchandise went into exports ( stop note 36 ) . When the

foreign states became no longer able to purchase U.S. goods, U.S.

exports fell 30 % instantly. That $ 1.5 billion of foreign gross revenues lost

between 1929 to 1933 was to the full one eighth of all lost American gross revenues

in the early old ages of the depression ( end note 37 ) .

Mass guess went on throughout the late 1920 & # 8217 ; s. In 1929

entirely, a record volume of 1,124,800,410 portions were traded on the New

York Stock Exchange ( stop note 38 ) . From early 1928 to September 1929

the Dow Jones Industrial Average rose from 191 to 381 ( end note 39 ) .

This kind of net income was resistless to investors. Company net incomes

became of small involvement ; every bit long as stock monetary values continued to lift

immense net incomes could be made. One such illustration is RCA corporation, whose

stock monetary value leapt from 85 to 420 during 1928, even though it had non

yet paid a individual dividend ( end note 40 ) . Even these returns of over

100 % were no step of the possibility for investors of the clip.

Through the miracle of purchasing stocks on border, one could purchase stocks

without the money to buy them. Buying stocks on border functioned

much the same manner as purchasing a auto on recognition. Using the illustration of RCA,

a Mr. John Doe could purchase 1 portion of the company by seting up $ 10 of

his ain, and borrowing $ 75 from his agent. If he sold the stock at

$ 420 a twelvemonth subsequently he would hold turned his original investing of

merely $ 10 into $ 341.25 ( $ 420 minus the $ 75 and 5 % involvement owed to the

agent ) . That makes a return of over 3400 % ! Investors & # 8217 ; fad over the

proposition of net incomes like this drove the market to absurdly high

degrees. By mid 1929 the sum of outstanding agents & # 8217 ; loans was over

$ 7 billion ( stop note 41 ) ; in the following three months that figure would

make $ 8.5 billion ( stop note 42 ) . Interest rates for agents loans were

making the sky, traveling every bit high as 20 % in March 1929 ( stop note 43 ) . The

bad roar in the stock market was based upon assurance. In the

same manner, the immense market clangs of 1929 were based on fright.

Monetary values had been floating downward since September 3, but

by and large people where optimistic. Speculators continued to flock to

the market. Then, on Monday October 21 monetary values started to fall rapidly.

The volume was so great that the heart fell behind ( end note 44 ) .

Investors became fearful. Knowing that monetary values were falling, but non by

how much, they started selling rapidly. This caused the prostration to

happen faster. Monetary values stabilized a small on Tuesday and Wednesday,

but so on Black Thursday, October 24, everything fell apart once more.

By this clip most major investors had lost assurance in the market.

Once adequate investors had decided the roar was over, it was over.

Partial recovery was achieved on Friday and Saturday when a group of

taking bankers stepped in to seek to halt the clang. But so on

Monday the twenty-eighth monetary values started dropping once more. By the terminal of the twenty-four hours

the market had fallen 13 % ( end note 45 ) . The following twenty-four hours, Black Tuesday an

unprecedented 16.4 million portions changed custodies ( stop note 46 ) . Stockss

fell so much, that at many times during the twenty-four hours no purchasers were

available at any monetary value ( end note 47 ) .

This guess and the ensuing stock market clangs acted as

a trigger to the already unstable U.S. economic system. Due to the

maldistribution of wealth, the economic system of the 1920 & # 8217 ; s was one really much

dependent upon assurance. The market clangs undermined this

assurance. The rich stopped passing on luxury points, and slowed

investings. The middle-class and hapless stopped purchasing things with

installment recognition for fright of fring their occupations, and non being able

to pay the involvement. As a consequence industrial production fell by more

than 9 % between the market clangs in October and December 1929 ( stop

note 48 ) . As a consequence occupations were lost, and shortly people get downing

defaulting on their involvement payment. Radios and autos bought with

installment recognition had to be returned. All of the sudden warehouses

were stacking up with stock list. The thriving industries that had been

connected with the car and wireless industries started falling

apart. Without a auto people did non necessitate fuel or tyres ; without a

wireless people had less demand for electricity. On the international

scene, the rich had practically stopped imparting money to foreign

states. With such enormous net incomes to be made in the stock market

cipher wanted to do low involvement loans. To protect the state & # 8217 ; s

concerns the U.S. imposed higher trade barriers ( Hawley-Smoot Tariff

of 1930 ) . Foreigners stopped purchasing American merchandises. More occupations were

lost, more shops were closed, more Bankss went under, and more

mills closed. Unemployment grew to five million in 1930, and up to

13 million in 1932 ( stop note 49 ) . The state spiraled rapidly

into calamity. The Great Depression had begun.