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Causes of the great depression

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Causes of the great depression

Between the late 1890's, after the panic of 1893, and the late 1920's, the American people led good lives in which most prospered. In the 1920's the problems that led to the Great Depression were dispersed over a time of maldistribution of wealth, and what was called a bull market. A bull market is a stock market that is based on speculation. Speculation was a system of borrowing money to buy stocks and selling for a profit. Speculation only worked if the stock market was on the rise though. To this day people who have not been properly educated about the Great Depression believe that President Hoover was the cause. The idea that President Herbert Hoover caused the Depression could have arisen from the fact that he was the President at the time the Depression began. However, the people who do not believe that President Hoover was the cause deem the crash of the stock market in 1929 as the real culprit. The truth behind the stock market crash is that it was the event that caused the already unstable economy to go over the limit.

If the president and the stock market crash did not cause the Great Depression, then what did? According to research done on the Great Depression, the causes rest on of different factors, but can be put under two main categories. The responsibility for the Great Depression falls not only on the Stock Market Crash, but also on the maldistribution of wealth, an unstable economy and the wild stock market practices of the 1920's.

The largest reason for the growing gap between the rich and the working-class people was the sudden increase in manufacturing during the 1920's. The people of the working class were significantly increasing their output, but their wages only increased slightly. For example, the average worker out put from 1923-1929 increased about 32%, but the average income of the worker only increased about 8% (Gusmorino, Main Causes of the Great Depression). Therefore one may conclude that wages only increased one-fourth the amount production increased. Another amazing feat of the manufacturing increase was that prices for goods stayed the same, therefore the executives in the companies were keeping the mass amounts of profit that were now coming into the company. In fact, one can see that top executives in a certain company increased significantly because their salaries from 1923-1929 rose 64% (Gusmorino, Main Causes of the Great Depression), eight times more than what the workers wages increased.

The 'roaring twenties' was an era when the United States prospered tremendously. The national income rose from $74.3 billion to $89 billion (Gusmorino, Main Causes of the Great Depression). The whole American population did not live through the benefits of the 'Coolidge Prosperity.' For example McElvaine, in his research on the Great Depression, stated, 'in 1929 the top 0.1% of the population had an income equivalent to the bottom 42% of the population,' (McElvaine, Causes of Depression). That same top 0.1% of the population in 1929 had 34% of all the savings, while 80% of the population had no savings at all. A good example of this maldistribution of wealth can be seen with Henry Ford. In 1929, Ford reported an income of fourteen million dollars, while the average income of the American people was seven hundred and fifty dollars annually (McElvaine, Causes of Depression). If one were to calculate these numbers by present daily standards, with the average income at eighteen thousand dollars, Henry Ford would be making an astonishing three hundred and forty five million dollars. However, one should be reminded that Ford was not the only man in America making this amount of money, there were many people just like Ford around the Nation. Comparing the 1920's to today, one could say that such businessmen are like the Internet CEO's today. With such a growing gap in the income of the people, it was without surprise that such a catastrophic event could occur.

The Federal government also could be held responsible for contributing to the growing gap between the rich and the working-class. The President at the time, Calvin Coolidge, and the conservative Congress favored business; additionally, they supported the wealthy individuals who controlled the business. One great example of the federal government helping the wealthy of the nation came in the Revenue Act of 1926. This acted decreased the amount taxed on a person's annual salary. For example, a business owner in the beginning of 1926 would have expected to pay six hundred thousand dollars on his annual one million dollar salary; however, when the Revenue Act of 1926 was passed, this businessman was obligated to pay only two hundred thousand dollars of his annual salary (None, Causes of The Great Depression). The driving force behind this tax cut was President Coolidge and Andrew Mellon, the Secretary of the Treasury. Besides the executive and legislative branches, the judicial branch was known for their influence in the growing gap between the socioeconomic classes. In a 1923 Supreme Court case named Adkins vs. Children's Hospital, the Supreme Court declared minimum-wage legislation to be unconstitutional (Kanjas, Timeline of the Great Depression). The impact of this a declaration showed that employers did not have to pay their workers any certain wage so that the top executives and stockholders of a company may collect larger profits.

The large gap growing between the United States citizens was creating a very unstable economy. According to economists who have studied the Great Depression, in order for the economy to operate appropriately the total demand must equal the total supply. Unfortunately in the twenties this equilibrium with supply and demand was not held; there was incredible excess in the amount of goods produced and unfortunately the price of goods was not dropping and the working class could not afford to buy them. The maldistribution wealth and income was one of the most profound causes of the Great Depression.

The United States working class would generally spend what they could as soon as they received their paychecks. In fact, three quarters of the United States' population would spend most of or nearly all of their money on consumer goods, food, clothing, radios, and cars. Everyone seemed to be living a good life despite the fact they did not have exceptional wages. Middle-class family's income was usually around two thousand five hundred dollars. What was most amazing about the income distribution was the fact that 55% of the national income was distributed to the top 25% of the national population (Nordean, Causes and Cures). The working and middle-class of this time lived for three things; credit sales, luxurious spending and investment from the rich. The way in which most people could afford to buy what they wanted, was credit.

The credit problem appeared as a result of the middle-class wanting to spend money on a luxurious living. The key for the middle-class to living a luxurious living was the magical word, credit. Credit was something anyone could have and with credit they could buy whatever they wanted and not have to worry about paying for it until a later time. The concept of buying now and paying later caught on quickly with the American people. At the end of 1920's, 60% of cars and 80% of radios were bought on credit (Gusmorino, Main Causes of the Great Depression). Between 1925 and 1929 the credit amount in the United States rose from $1.38 billion to $3 billion (Gusmorino, Main Causes of the Great Depression). The President could also be seen taking part in the whole credit trend. A Presidential committee, unidentified by the author, stated that credit was the, 'telescope the future into the present,' (None, Causes of the Great Depression). This notion of the 'telescope to the future' meant that when the future was to come, there was little to buy that already had not been bought. This concept of credit was good for the time being, however, it made the time in which the people who could not originally buy these products even worse when they had to pay the credit companies. Furthermore, the wages of the working-class could not go to new products to buy, or sometimes in extreme cases food, because they had to pay for products that had already been previously purchased by credit.

The United States economy required the middle-class population to continue their luxurious spending and increasing investment from rich people to continue prosperity. The significant problem with this idea of the United States economy being based on the rich investing and the middle-class credit use was that the economy would gain a false wealthy confidence that would later on hide the oncoming Depression. If conditions in the United States economy took a slight turn off track (as they did in the stock market crash of 1929), investing by the rich and spending on luxuries would come to a sharp halt. According to many economists, it is important for savings and investment to stay balanced. If the levels of investment were to increase suddenly, the level of production should increase. However, because of maldistribution of income that existed in the 1920's, the sudden increase in investment created problems for the economy. The great amount of investment and credit use led to the widespread amounts of market speculation.

Maldistribution of wealth existed not only among the social classes, but also in the business world. For example, in 1929, 200 corporations controlled approximately half of all the cooperate wealth (McElvaine, Causes of Depression). While many industries, such as automobiles for example, were thriving in the new industrial America, industries such as agriculture were still prospering but it families began moving off the farms and into the cities; furthermore, farm life in America was being cut down. In 1929, Ford Motor Company reported earnings of more than $345 million; farm prices fell about 72% (McElvaine, Causes of Depression). In 1929, the average income of an American was $750, but in that same year the average income of someone working in agriculture was about $273 (McElvaine, Causes of Depression). Therefore one could ...

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