The Great Depression was the worst economic slump ever in U.S. history, and one
that spread to virtually the entire industrialized world. The depression began
in late 1929 and lasted for about 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 misdistribution 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 misdistribution of wealth, caused the American
economy to capsize. The "roaring twenties" was an era when our country
prospered tremendously. The nation's total realized income rose from $74.3
billion in 1923 to $89 billion in 1929. 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, in 1929 the top
0.1% of Americans had a combined income equal to the bottom 42%. 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 $7505. By present day standards, where
the average yearly income in the U.S. is around $18,5006, Mr. Ford would be
earning over $345 million a year. This misdistribution 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 income. 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%. The
federal government also contributed to the growing gap between the rich and
middle-class. Calvin Coolidge's 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. In effect, he was able to lower federal taxes such that a man with a
million-dollar annual income had his federal taxes reduced from $600,000 to
$200,000. 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 unconstitutional. 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. The end
of the 1920’s bought 60% of cars and 80% of radios 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 noted. This strategy created 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 telescoping the
future into the present, when "the future" arrived, there was little
to buy that hadn't already been bought. In addition, people could not 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 wealth’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 forever-greater returns
on investment lead to widespread market speculation. Misdistribution 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 $273. 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. 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 parts necessary to build these things were being produced in
large quantities; the work force 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 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. There
were several causes to this awkward distribution of wealth between U.S. and its
European counterparts. Most obvious is that 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 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 1920's and early 1930's. 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 more. The effect of these tariffs was that
Europeans were unable to sell their own goods in the United States in reasonable
quantities. Mass speculation went on throughout the late 1920's. 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 38139. 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 leapt from 85 to 420 during 1928, even though it had not yet paid a
single dividend. 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 1929. 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, Black
Tuesday an unprecedented 16.4 million shares changed hands. Stocks fell so much,
that at many times during the day no buyers were available at any price. This
speculation and the resulting stock market crashes acted as a trigger to the
already unstable U.S. economy. Due to the misdistribution of wealth, the economy
of the 1920's 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 loosing 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 1929. As a 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 1932.
The country spiraled quickly into catastrophe. The Great Depression had begun.

Bibliography
Troubles during the Great Depression
Watkins, T. H. The Great Depression: America in the 1930s – New York: 1991
Meltzer, Milton Brother, Can You Spare a Dime? : The Great Depression 1929-1933
(Library of American History) -- New York: 1992