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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 ezdards, 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 conezt, 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 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 satiated could not
afford more, whereas the wealthy were satiated by
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Economic inequality in the United States, Economic indicators, Social inequality, Great Depression, Systemic risk, World economy, Economy of the United States, Measures of national income and output, Tax, Poverty, Long Depression, Tax policy and economic inequality in the United States, stock market speculation, causes of the great depression, market crashes, henry ford, personal income, 89, distribution of wealth, decade, unstable economy
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