15. Causes of the Great Depression (1929-33)

Introduction and background

During 1920’s American economy grew at a healthy pace. People were getting rich overnight. Goods and material were flowing unabated. Industry, particularly, was thriving at an unprecedented rate. Business at stock market became an obsession for people. People were channeling their money into stock markets with a lot speculations. Environment was so benign that a member of General Motors’ board of directors as well as chairman of Democratic Party named John J. Raskob enthusiastically pronounced “any one not only can be rich, but ought to be rich”. This era had given birth to exciting gadgets as radio and refrigerators. Americans owned 23 million automobiles.

The great crash presaged a bleak future

The honeymoon period ended with a nightmare.  By 1928, one share of Radio Corporation of America cost $400 equivalent to many months’ income of common man. By October 1929 brokers’ loans to stock purchasers amounted to $8.5 billion. The get-rich-quick mentality was jolted in September and early October 1929 when stocks prices plunged suddenly causing panic. Industry and agriculture production was far greater than the demand. They were already in a lackluster before the crash. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.

People gathered outside a bank

Causes of great depression

Wall Street Crash

The stock prices had already dropped to the lowest. On 24 October (black Thursday), a record number of shares was traded (12 million), many at low cost. While on 29 October (black Tuesday), another 16 million stocks were traded, by November $30 billion disappeared from US economy. The crash marked the beginning of a hard epoch.

Economic weaknesses (supply-demand gap)

Weak form of economy didn’t help much. Many historian believe the stock market collapse merely moved an ongoing recession into depression. Throughout 1920’s major sectors like agriculture and industry, automobile and construction were plagued with over production, declining prices for farm products, mounting debts and bankruptcy became order of the day. Business people were not investing to expand business, hire new workers and produce more goods. Laborers were being sent home.

Under-consumption

Production had outstripped consumption. Wages and mass purchasing power had lagged behind production surge. Unemployed people were surging, it was bound to change the consumption pattern.
Incorporation of technology:
New technology and machinery replaced people in industries, which added to the miseries of the people. Some instances are in Hartford and New Haven in 1929, the installation of new machinery threw 1190 rubber workers out of their jobs and 35000 orchestra musicians were unemployed in mid-1929 because ‘machine music’ had been installed in nation’s theaters.

Unequal distribution of wealth

Another factor responsible for under consumption was wealth gap. Federal Trade commission reported 1% of American had 59% of countries wealth while 87% owned only 10% of wealth. As a matter of fact poor consumes more wealth than rich on consumer goods. Rich prefer saving or invest in luxuries.

Monopoly of large corporations

In 1929, top hundred non-financial corporations owned 49% of corporate wealth. Their large network had monopoly over stock market. They dangerously speculated on stock market and built pyramid-like business. If one of their unit collapsed other will too (domino effect). Example was Samuel Insull’s large electrical empire in Chicago. The company collapsed in 1932 and he fled to Europe to escape fraud charges.

 Excessive speculation on stock market

Unregulated stocks selling and buying created speculation. Brokers sold stocks to buyers who put up little case and borrowed in order to purchase and then used stocks to pay the loans. When prices decreases the entire system collapsed. Buyers had nothing to pay back their loans to stock brokers. From 1929 to 33, stock market losses touched $85 billion. A famous saying “Trust God not stocks”

Internal economic troubles

First world war and then during Post war construction, American businessmen were beginning to keep their money and investing lucrative stock market. The distressed Europeans were unable to buy more funds and sell their products to American markets due to high tariff. They defaulted on American loans and raised their tariffs choking American products access to their markets.

The failure of Federal policies

Government neither checked corporate power nor imposed income tax on them to ensure equal distribution of wealth and handsome credit was extended to the banks during this period. Moreover it failed to curb the devious speculation created by banks. It ‘Fed’ blundered after the crash, instead of reducing the interest rate to spur borrowing and spending, it tightened the money market which restricted economic activity.