 |
Business | Industries | Finance | Tax |
| Index: > A B C D E F G H I J K L M N O P Q R S T U V W X Y Z |
|
|||||
| First Prev [ 1 2 3 4 5 ] Next Last |
A fundamental maldistribution of purchasing power, the greatly unequal distribution of wealth throughout the 1920s, was another factor that contributed to the Great Depression. Wages increased at a rate that was a fraction of the rate at which productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into profits. As industrial and agricultural production increased, the proportion of the profits going to farmers, factory workers, and other potential consumers was far too small to create a market for goods that they were producing. Even in 1929, after nearly a decade of economic growth, more than half the families in America lived on the edge or below the subsistence level—too poor to share in the great consumer boom of the 1920s, too poor to buy the cars and houses and other goods the industrial economy was producing, too poor in many cases to buy even the adequate food and shelter for themselves. As long as corporations had continued to expand their capital facilities (their factories, warehouses, heavy equipment, and other investments), the economy had flourished. Thanks to pressure from the Coolidge administration and the business, the Federal Reserve Board kept the rediscount rate low, encouraging excessive investment. By the end of the 1920s, however, capital investments had created more plant space than could be profitably used, and factories were producing more goods than consumers could purchase.
An increase in margin buying, the act of borrowing money from lenders in order to buy stocks, helped many people invest in the roaring stock market of the 1920s. When the stock market began to decline, the lenders panicked and demanded their money back. This increased the sales of stocks to pay off the loans, but many people remained in debt and the lenders couldn't get their money back.
Another factor was the serious lack of diversification in the American economy of the 1920s. Prosperity had been excessively dependent on a few basic industries, notably construction and automobiles; in the late 1920s, those industries began to decline. Between 1926 and 1929, expenditures on construction fell from $11 billion to under $9 billion. Automobile sales began to decline somewhat later, but in the first nine months of 1929 they declined by more than one third. Once these two crucial industries began to weaken, there was not enough strength in the other sectors of the economy to take up the slack. Even while the automotive industry was thriving in the 1920s, some industries, agriculture in particular, were declining steadily. While the Ford Motor Company was reporting record assets, farm prices plummeted, and the price of food fell precipitously.
During World War I many European nations abandoned the gold standard in an attempt to use inflationary policies to fund wartime expenditures. This had a number of economic consequences in its own right. However what is of particular relevance is that following the war most nations returned to the gold standard at the pre-war gold price. Monetary policy was in effect put into a deflationary setting that would over the next decade slowly grind away at the health of many European economies. Modern advocates of the gold standard , such as proponents of supply-side economics, maintain that the correct policy following World War I would have been to return to the gold standard at the prevailing market price of gold rather than at the pre-war price.
Deflation's impact is particularly hard on sectors of the economy that are in debt. Deflation erodes the price of commodities while increasing the real value of debt. One typical group that is adversely affected is the farm sector.
It should be noted, however, that deflationary forces alone do not fully account for the Great Depression and must be considered in the context of other factors.
Farmers, already deeply in debt, saw farm prices plummet in the late 20s, their implicit real interest rates on loans skyrocket; their land was already mortgaged, and crop prices were too low to allow them to pay off what they owed. Small banks, especially those tied to the agricultural economy, were in constant crisis in the 1920s as their customers defaulted on loans due to the sudden rise in real interest rates; there was a steady stream of failures among these smaller banks throughout the decade.
Although most American bankers in this era were staunchly conservative, some of the nation's largest banks were failing to maintain adequate reserves and were investing recklessly in the stock market or making unwise loans. In other words, the banking system was not well prepared to absorb the shock of a major recession. The banking system as a whole, moreover, was only very loosely regulated by the Federal Reserve System at this time.
| Politics | Business | Finance |
 |
 |
 |
|