The Great Depression was the worst economic slump ever in U. S. history, and one which spread to virtually all of the 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 maldistribution of wealth in the 1920’s existed on many levels.
Money was distributed isparately 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 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 eliance 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 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 were only made worse. Lastly, the search for ever greater returns on investment lead to widespread market speculation.
Mass speculation went on throughout the late 1920’s. In 1929 alone, a record volume of 1,124,800,410 shares were 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 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 $7billion; 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 ehind. 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. 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 maldistribution 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 hings 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 eople 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 such as The 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. The Republican Party was in power during this time of economic strife.
Their policies in no way aided the Great Depression; in fact they were detrimental to the cause. Republicans believed in big businesses and tax breaks for the already wealthy. The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge’s administration 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 ederal 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. 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 heir 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 bushel. 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.