Great Depression Essays - Systemic Risk, Financial Crises

Great Depression Essays - Systemic Risk, Financial Crises 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 stockmarket speculation that took place during the latter part that same decade. The lack of distribution of wealth in the 1920's existed on many levels. Money was distributed in equally 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 stock market was kept artificially high, but eventually lead to large market crashes. These market crashes, combined with the lack of distribution 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. However, the rewards of the Coolidge Prosperity of the 1920's were not shared evenly among all Americans. In 1929 the top 0.1% of Americans controlled 34% of all savings, while 80% of Americans had no savings at all. Automotive industry mogul Henry Ford is one 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 persons income was $750. By present day standards Mr. Ford would be earning over $345 million a year! This lack of distribution of income between the rich and the middle class grew throughout the 1920's. A major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout the 1920s. From 1923-1929 the average output per worker increased 32%. During that same period of time average wages for manufacturing jobs increased only 8%. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into corporate profits. The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge's administration favored business. An example of legislation to this purpose is the Revenue Act of 1926, which greatly reduced federal income and inheritance taxes. Andrew Mellon was the main force behind these and other tax cuts throughout the 1920's. Because of these tax cuts 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 the1923 case Adkins v. Children's Hospital, the Supreme Court ruled minimum-wage legislation unconstitutional. The large and growing difference 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. Essentially what happened in the 1920's was that there was an oversupply of goods. It was not that the surplus products were not wanted, but rather that those who needed the products could not afford more, while the wealthy were satisfied 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 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. While the wealthy too purchased consumer goods, a family earning $100,000 could not be expected to eat 40 times more than a family that only earned $2,500 a year. Through the imbalance the U.S. came to rely upon two things in order for the economy to remain on an even level: credit sales, or investment from the rich. One obvious 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. This strategy created a non realistic demand for products which people could not usually afford. People could no longer use their regular wages to