Causes Of The Great Depression

Causes of The Great Depression

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 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 maldistribution 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(end note 1). 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%(end note 2). That same top 0.1% of Americans

in 1929 controlled 34% of all savings, while 80% of Americans had no

savings at all(end note 3). 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(end note 4) in the same year that the average

personal income was $750(end note 5). By present day standards, where

the average yearly income in the U.S. is around $18,500(end note 6),

Mr. Ford would be earning over $345 million a year! This

maldistribution 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(end note 7).

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(end note 8). During that same period of

time average wages for manufacturing jobs increased only 8%(end note

9). 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%(end note 10).

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(end note 11). 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(end

note 12). 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(end note 13).

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. Essentially what

happened