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The Depression Essay, Research Paper

Depression of the 1930s

Depression of the 1930s

The economic depression that beset the United States and other countries in the

1930s was unique in its magnitude and its consequences. At the depth of the depression, in

1933, one American worker in every four was out of a job. In other countries

unemployment ranged between 15 percent and 25 percent of the labor force. The great

industrial slump continued throughout the 1930s, shaking the foundations of Western

capitalism and the society based upon it.

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. 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%. That same top

0.1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no

savings at all. 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 in the same year that the average personal income was

$750. By present day standards, where the average yearly income in the U.S. is around

$18,500, 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.

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. During

that same period of time average wages for manufacturing jobs increased only 8%. 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%.

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. 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. 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.

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

spending only a small portion of their income. A 1932 article in Current History articulates

the problems of this maldistribution of wealth.

President Calvin Coolidge had said during the long prosperity of the 1920s that

“The business of America is business.” Despite the seeming business prosperity of the

1920s, however, there were serious economic weak spots, a chief one being a depression

in the agricultural sector. also depressed were such industries as coal mining, railroads,

and textiles. Throughout the 1920s, U. S. banks had failed–an average of 600 per year–as

had thousands of other business firms. By 1928 the construction boom was over. The

spectacular rise in prices on the stock market from 1924 to 1929 bore little relation to

actual economic conditions. In fact, the boom in the stock market and in real estate, along

with the expansion in credit (created, in part, by low-paid workers buying on credit) and

high profits for a few industries, concealed basic problems. Thus the U. S. stock market

crash that occurred in October 1929, with huge losses, was not the fundamental cause of

the Great Depression, although the crash sparked, and certainly marked the beginning of,

the most traumatic economic period of modern times.

The enormous amount of unsecured consumer debt created by this speculation left

the stock market essentially off-balance. Many investors, caught up in the race to make a

killing, invested their life savings, mortgaged their homes, and cashed in

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