Information for Causes of the Great Depression
- Widening Income Gap-
Despite the general appearance of prosperity in the 1920s, Americans did not share wealth equally. The top 0.1 percent of American families had a combined income equal to the total income of the bottom 42 percent of the population. Between 1920 and 1929 the disposable income (money beyond what is needed for necessities) per person rose by 9 percent for most Americans, but the top 1 percent of the population saw a 75 percent increase.
The reason for the gap between rich and poor had much to do with wages. Although worker productivity (the rate at which goods are produced) increased 32 percent between 1923 and 1929, wages increased only 8 percent in the same period. At the same time, prices remained stable, and the costs of production fell as items were mass-produced. As a result, profits soared. Corporate profits increased by 62 percent, and those profits went to the factory owners, not to the workers. American workers were increasingly less able to purchase the vast amount of goods they were producing, even with installment buying. Of course, the wealthy spent money on luxury items, but this spending could not counteract the mounting financial distress of the masses in America.
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II. Collapse of the Farm Industry
In WWI the American farmers increased their production to almost entirely sustain the Allied effort. This increased production was important as it helped start the engine for the war and also led to the overproduction of the Roaring 20’s leading to the Great Depression. WWI was important because it showed how in times of need the farming community could still save the day economically by providing enough sustenance to support the economy.
WWI was important in relation to farming because it expanded the U.S.'s role in agriculture. During WWI the U.S. fed almost the entire Triple Entente showing the importance of a strong agricultural economy.
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The Dust Bowl
As the nation sank into the Depression and wheat prices plummeted from $2 a bushel to 40 cents, farmers responded by tearing up even more prairie sod in hopes of harvesting bumper crops. When prices fell even further, the "suitcase farmers" who had moved in for quick profits simply abandoned their fields. Huge swaths of eight states, from the Dakotas to Texas and New Mexico, where native grasses had evolved over thousands of years to create a delicate equilibrium with the wild weather swings of the Plains, now lay naked and exposed.
Then the drought began. It would last eight straight years. Dust storms, at first considered freaks of nature, became commonplace. Static charges in the air shorted-out automobiles on the road; men avoided shaking hands for fear of shocks that could knock a person to the ground. Huge drifts of dirt buried pastures and barnyards, piled up in front of homesteaders' doors, came in through window cracks and sifted down from ceilings.
Some 850 million tons of topsoil blew away in 1935 alone. "Unless something is done," a government report predicted, "the western plains will be as arid as the Arabian desert." The government's response included deploying Civilian Conservation Corps workers to plant shelter belts; encouraging farmers to try new techniques like contour plowing to minimize erosion; establishing conservation districts; and using federal money in the Plains for everything from grasshopper control to outright purchases of failed farms. This ecological and economic catastrophe is now known as the Dust Bowlin American History.
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III. Limited Government Regulation
The United States was led by three Republican Presidents during the 1920s, namely Warren Harding, Calvin Coolidge and Herbert Hoover.
The policy of these Republican Presidents was that government should leave the economy alone – they adopted a laissez-faire (free market) policy. This meant that big businesses were free to expand without being held back by the government regulation.
Warren Harding (1921-23)
His promise was a "return to normality". He reduced taxes to give businesses more money to grow and to put more money in the pockets of ordinary Americans. In 1922, he introduced the Fordney-McCumber Tariff Act which imposed a tax on goods from foreign countries. This made foreign goods more expensive than domestic goods, and so this encouraged Americans to buy American goods only. The name for this policy was protectionism.
Calvin Coolidge (1923-29)
"Business is America's business," said Calvin Coolidge. He stuck to the same policy as Harding. Although he didn’t do much (his nickname was 'Silent Cal'), Americans believed he was a good President because of the strength of the economy. He had a huge respect for businessmen and adhered to the laissez-faire policy. He gave businessmen the freedom to make a profit and become rich. Even the Wall Street Journal praised this policy: "No government ever before, either here nor in any other country, has succeeded in uniting so thoroughly with the business world."
Herbert Hoover (1929-32)
He became President in 1929 following his promise to "put a chicken in every cooking pot, and a car in every garage". Hoover believed in laissez-faire, but also in rugged individualism. This meant that people should not depend on the government for help - they should solve their own problems by working harder. Hoover lost the next Presidential election in 1932, when people were looking for the government to take an active role in solving the issues of the Great Depression.
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IV Stock Market Speculation
Buying on margin means that a person purchases a stock by using a bit of his or her own money and borrowing the rest. It is similar to buying on credit. For example, to purchase a $100 stock the buyer might put up $20 and borrow $80 to make up the entire price. Investors worked with investment brokers to borrow money and then buy a stock.
Investment brokers got their loan money from banks; brokers and banks alike believed that the stock market was on a permanent upward climb. The brokers set a margin limit. In the example the margin limit was 20 percent, meaning that the investor had to keep 20 percent of his or her own cash invested in the stock. If the stock value increased to $130, then the investor paid back the $80 borrowed and was left with the $20 originally invested and $30 profit. All $50 could be reinvested in a similar manner. The $30 profit represented a 150 percent profit. Such large profits were common as the market continued to rise.
Investors, using their increasing profits and borrowed money, continued to buy stocks. This growing demand for stocks pushed stock prices up until they were dramatically higher than the stocks' real worth based on the particular company's profits and overall worth. When stock prices are steadily rising, the market is called a "bull" market. When the market steadily drops, it is a "bear" market. The market in mid-1929 was a raging "bull" market.
Black Tuesday, October 29, 1929hit Wall Street as investors traded 16,410,030 shares on the New York Stock Exchange in a single day. Billions of dollars were lost, wiping out thousands of investors, and stock tickers ran hours behind because the machinery could not handle the tremendous volume of trading. In the aftermath of Black Tuesday, America and the rest of the industrialized world spiraled downward into the Great Depression.
During the 1920s, the U.S. stock market underwent rapid expansion, reaching its peak in August 1929, a period of wild speculation. By then, production had already declined and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the eventual market collapse were low wages, the proliferation of debt, a weak agriculture, and an excess of large bank loans that could not be liquidated.
Stock prices began to decline in September and early October 1929, and on October 18 the fall began. Panic set in, and on October 24—Black Thursday—a record 12,894,650 shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday, in which stock prices collapsed completely.
After Tuesday, October 29, 1929, stock prices had nowhere to go but up, so there was considerable recovery during succeeding weeks. Overall, however, prices continued to drop as the United States slumped into the Great Depression, and by 1932 stocks were worth only about 20 percent of their value in the summer of 1929. The stock market crash of 1929 was not the sole cause of the Great Depression, but it did act to accelerate the global economic collapse of which it was also a symptom. By 1933, nearly half of America’s banks had failed, and unemployment was approaching 15 million people, or 30 percent of the workforce. It would take World War II, and the massive level of armaments production taken on by the United States, to finally bring the country out of the Depression after a decade of suffering.