Causes of the Great Depression
In 1929 the stock market crashed, triggering the worst depression ever in U.S. history, which lasted for about a decade. During the 1920s, the unequal distribution of wealth and the stock market speculation combined to create an unstable economy by the end of the decade. The unequal distribution of the wealth had several outlets. Money was distributed between industry and agriculture within the U.S.; in social classes, between the rich and middle class; and lastly in world markets, between America and Europe. Due to the imbalance of the wealth, the economy became very unstable. The stock market crashed because of the excessive speculation in the 1920s, which made the stock market artificially high (Galbraith 175). The poor distribution of the wealth, excessive speculation, and the stock market crashes caused the U.S. economy to fail, signaling the start of the Great Depression.
The 1920s were a time when the American people and the economy were thriving. This period of time was called the Roaring Twenties. Unemployment dropped as low as 3 percent, prices held steady, and the gross national product climbed from $70 billion in 1922 to nearly $100 billion in1929 (EV 525). However, the prosperity of the 1920s was not shared evenly among the social classes in America. A study conducted by the Brookings Institution stated, 78 percent of all American families had incomes of less than $3,000. Forty percent had family incomes of less than $1,500. Only 2.3 percent of the population enjoyed incomes of over $10,000. Sixty thousand American families held savings which amounted to the total held by the bottom 25 million families. (Goldston 26). The 40 percent of Americans at the lowest end of the economic scale received only 12 percent of the national income by 1929 (EV 549). This maldistribution of income between the rich and the middle class increased throughout the 1920s. A major reason for this large and growing gap between the upper class and the working class Americans was that the manufacturing output increased throughout this period. As the production costs fell, wages went up slowly, and prices for goods remained at a constant. The majority of the benefits created by increased productivity fell into the hands of corporate owners. The federal government also helped to make the growing gap between the upper and middle classes. President Calvin Coolidges administration favored business, and as a result, the wealthy invested in these businesses. An example of this type of legislation is the Revenue Act of 1926, which significantly reduced income and inheritance taxes (Goldston 23).
The introduction of credit to the American public proved to choke the economy rather than to stimulate it. To make an economy run properly, the total demand must equal total supply. The economy of the 1920s produced an over supply of goods. It was not that the surplus products were not wanted, but that the people who needed them could not afford the products. The working class spent most of their money on things they needed: food, shelter, and clothes. They also purchased some luxury items, but their income limited them to only a few of these purchases. Meanwhile, the rich were enjoying their increased profits. While the vast majority did not have enough money to satisfy all of their material wants and needs, the manufactures continued to produce surplus goods. Recognizing that the surpluses could be sold if consumers were financially able to buy them, the concept of buying on credit was established. Credit was immediately popular. Nearing the end of the decade, 75 percent of all automobiles were purchased on credit (EV 526). The credit system created artificial demand for products which people could not usually buy. People could not spend their regular wages to purchase products, because much of their income went toward their credit payments.
The poor distribution of wealth within the U.S extended to entire industries, helping one at the expense of another. The prosperity of the decade was not shared among the industries equally. While the automotive industry was thriving in the 1920s, some industries, such as agriculture, were declining steadily. Most of the industries that were prospering in the 1920s were in some