Great Depression

Great Depression

The Great Depression was the worst economic decline ever in U.S. history. It began in late 1929 and lasted about a decade. Throughout the 1920’s, many factors played a role in bringing about the depression; the main causes were the unequal distribution of wealth and extensive stock market speculation. Money was distributed unequally between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This disproportion of wealth created an unstable economy. Before the Great Depression, the "roaring twenties" was an era during which the United States prospered tremendously. The nation's total 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. In 1929, the top 0.1 percentage of Americans had a combined income equal to the bottom 42%. That same top 0.1 percentage of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all. Automotive industry tycoon Henry Ford provides an 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. This poor distribution 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-percentage enjoyed an extraordinary 75% increase in per capita disposable income. These market crashes, combined with the poor distribution of wealth, caused the American economy to overturn. Increased manufacturing output throughout this period created this large and growing gap between the rich and the working class. 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 consequently those that 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. Even the Supreme Court played a role in expanding the gap between the social/economic classes. In the 1923 case Adkins v. Children's Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional. The large and growing disproportion 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 different distribution of income, it is not assured that demand will equal supply. Essentially, what happened in the 1920's was that there was an oversupply of goods. It was not that the surplus products of industrialized society were not wanted, but rather that those whose needs were not satisfied could not afford more, whereas the wealthy were contented by spending only a small portion of their income. 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 middle class: families with incomes around, or usually less than, $2,500 a year. The bottom three quarters of the population had a collective 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. Through this period, the U.S. relied upon two things in order for the economy to remain even: luxury spending, investment and credit sales. One 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. By the end of the 1920’s, 60% of cars and 80% of radios were bought 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