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Digital History ID 3432

 

Why did the seemingly boundless prosperity of the 1920s end so suddenly? And why, once an economic downturn began, did the Great Depression last so long?

Economists have been hard pressed to explain why "prosperity's decade" ended in financial disaster. In 1929, the American economy appeared to be extraordinarily healthy. Employment was high and inflation was virtually non-existent. Industrial production had risen 30 percent between 1919 and 1929, and per capita income had climbed from $520 to $681. The United States accounted for nearly half of the world's industrial output. Still, the seeds of the Depression were already present in the "boom" years of the 1920s.

For many groups of Americans, the prosperity of the 1920s was a cruel illusion. Even during the most prosperous years of the Roaring Twenties, most families lived below what contemporaries defined as the poverty line. In 1929, economists considered $2,500 the income necessary to support a family. In that year, more than 60 percent of the nation's families earned less than $2,000 a year--the income necessary for basic necessities--and over 40 percent earned less than $1,500 annually. Although labor productivity soared during the 1920s because of electrification and more efficient management, wages stagnated or fell in mining, transportation, and manufacturing. Hourly wages in coal mines sagged from 84.5 cents in 1923 to just 62.5 cents in 1929.

Prosperity bypassed specific groups of Americans entirely. A 1928 report on the condition of Native Americans found that half owned less than $500 and that 71 percent lived on less than $200 a year. Mexican Americans, too, had failed to share in the prosperity. During the 1920s, each year 25,000 Mexicans migrated to the United States. Most lived in conditions of extreme poverty. In Los Angeles the infant mortality rate was five times higher than the rate for Anglos, and most homes lacked toilets. A survey found that a substantial number of Mexican Americans had virtually no meat or fresh vegetables in their diet; 40 percent said that they could not afford to give their children milk.

The farm sector had been mired in depression since 1921. Farm prices had been depressed ever since the end of World War I, when European agriculture revived, and grain from Argentina and Australia entered the world market. Strapped with long-term debts, high taxes, and a sharp drop in crop prices, farmers lost ground throughout the 1920s. In 1910, a farmer's income was 40 percent of a city worker's. By 1930, it had sagged to just 30 percent.

The decline in farm income reverberated throughout the economy. Rural consumers stopped buying farm implements, tractors, automobiles, furniture, and appliances. Millions of farmers defaulted on their debts, placing tremendous pressure on the banking system. Between 1920 and 1929, more than 5,000 of the country's 30,000 banks failed.

Because of the banking crisis, thousands of small businesspeople failed because they could not secure loans. Thousands more went bankrupt because they had lost their working capital in the stock market crash. A heavy burden of consumer debt also weakened the economy. Consumers built up an unmanageable amount of consumer installment and mortgage debt, taking out loans to buy cars, appliances, and homes in the suburbs. To repay these loans, consumers cut back sharply on discretionary spending. Drops in consumer spending led inevitably to reductions in production and worker layoffs. Unemployed workers then spent less and the cycle repeated itself.

A poor distribution of income compounded the country's economic problems. During the 1920s, there was a pronounced shift in wealth and income toward the very rich. Between 1919 and 1929, the share of income received by the wealthiest one percent of Americans rose from 12 percent to 19 percent, while the share received by the richest five percent jumped from 24 percent to 34 percent. Over the same period, the poorest 93 percent of the non-farm population actually saw its disposable income fall. Because the rich tend to spend a high proportion of their income on luxuries, such as large cars, entertainment, and tourism, and save a disproportionately large share of their income, there was insufficient demand to keep employment and investment at a high level.

Even before the onset of the Depression, business investment had begun to decline. Residential construction boomed between 1924 and 1927, but in 1929 housing starts fell to less than half the 1924 level. A major reason for the depressed housing market was the 1924 immigration law that had restricted foreign immigration. Soaring inventories also led businesses to reduce investment and production. During the mid-1920s, manufacturers expanded their production capacity and built up excessive inventories. At the decade's end they cut back sharply, directing their surplus funds into stock market speculation.

The Federal Reserve, the nation's central bank, played a critical, if inadvertent, role in weakening the economy. In an effort to curb stock market speculation, the Federal Reserve slowed the growth of the money supply, then allowed the money supply to fall dramatically after the stock market crash, producing a wrenching "liquidity crisis." Consumers found themselves unable to repay loans, while businesses did not have the capital to finance business operations. Instead of actively stimulating the economy by cutting interest rates and expanding the money supply--the way monetary authorities fight recessions today--the Federal Reserve allowed the country's money supply to decline by 27 percent between 1929 and 1933.

Finally, Republican tariff policies damaged the economy by depressing foreign trade. Anxious to protect American industries from foreign competitors, Congress passed the Fordney-McCumber Tariff of 1922 and the Hawley-Smoot Tariff of 1930, raising tariff rates to unprecedented levels. American tariffs stifled international trade, making it difficult for European nations to pay off their debts. As foreign economies foundered, those countries imposed trade barriers of their own, choking off U.S. exports. By 1933, international trade had plunged 30 percent.

All these factors left the economy ripe for disaster. Yet the depression did not strike instantly; it infected the country gradually, like a slow-growing cancer. Measured in human terms, the Great Depression was the worst economic catastrophe in American history. It hit urban and rural areas, blue-and white-collar families alike. In the nation's cities, unemployed men took to the streets to sell apples or to shine shoes. Thousands of others hopped freight trains and wandered from town to town looking for jobs or handouts.

Unlike most of Western Europe, the United States had no federal system of unemployment insurance. The relief burden fell on state and municipal governments working in cooperation with private charities, such as the Red Cross and the Community Chest. Created to handle temporary emergencies, these groups lacked the resources to alleviate the massive suffering created by the Great Depression. Poor Southerners, whose states had virtually no relief funds, were particularly hard hit.

Urban centers in the North fared little better. Most city charters did not permit public funds to be spent on work relief. Adding insult to injury, several states disqualified relief clients from voting, while other cities forced them to surrender their automobile license plates. "Prosperity's decade" had ended in economic disaster.

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