Causes of the Great Depression

The Great Depression remains to be the worst economic slump ever in American history and one which spread practically all over the industrialized world. The Depression bombarded in late 1929 and lasted nearly a decade. Many factors elemented the depth of the widespread prosperity. However, combined, 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 remain the key of all elements.

The distribution of wealth in the 1920's was disparate and largely dispersed where funds were randomly needed. Between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe were the major recipients of distribution. 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 horribly. 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 great 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,Ford would be earning over $345 million a year.

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%. Therefore wages increased at a rate only one fourth as fast as productivity increased. As production costs fell quickly, wages rose slowly, and prices remained the same, the bulk benefit of the increased productivity went into corporate profits, not the worker‘s. In fact, from 1923-1929 corporate profits rose 62% and dividends rose 65% for stockholders.

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. The Act 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.

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 disparate distribution of income, it is not assured that demand will always equal supply. Ultimately what happened in the 1920's was that there was an oversupply of goods. It wasn‘t that the manufactured goods weren‘t in demand, but instead that those whose needs were not satisfied financially could not afford more and the wealthy were satisfied by spending only a small portion of their income. A 1932 article in Current History articulates the problems of this maldistribution 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.

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