This mass speculation, and idea of using the market to get rich quick by inexperienced shareholders, made the economy very unstable. It was too often pointed out that the current state of well-being was resting precariously on virtual wealth, rather than actual money. However, anyone who pointed this out was ignored. Speculation was based on confidence, and when this confidence wavered, masses of shareholders flocked to sell at once, causing a massive fall in prices of all stock. This was a major contributing factor to the crash of the market.
Further deepening the problem of the depression, and even contributing to the cause of it, was the factor of overproduction and under-consumption. When the market crashed, those worst effected were the inexperienced majority who had no idea what they were doing with their money. These were the people who lost all of their savings and as a result could no longer afford either to invest further, or to purchase consumer goods. This lack of public spending meant that many businesses and companies started to loose out and even go bankrupt as fewer and fewer people could afford their luxuries.
Overproduction and under-consumption also deeply affected the agricultural world. Due to better farming techniques and equipment, farms were far more efficient and producing much more food and goods than previously. However, the consumer market had significantly less demand for agricultural produce than the amount it being created. Farming was now even more heavily reliant upon exports to make the balance between that produced and that consumed. To further exacerbate the situation, high US tariffs, such as the Fordney-McCumber Tariff Act that raised rates on imports by 33%, encouraged existing and prospective purchasers to look elsewhere for their goods. On top of this, government policy seemed to completely ignore the farming community, and it’s failure to aid agriculture laid way for severe repercussions.
Farmers were left in doubt as to their future, in debt and with permanent shortages of money. As one historian put it, “farmers struggled with a depression throughout the prosperity decade”.
Perhaps more important than this, as a factor of adding to the causes of the depression, was the mal-distribution of national income. There was becoming a considerable and significant gap between the rich and the poor. The main reason for this seems to be because, throughout the 1920’s, corporate profits increased massively, where the workers wage rose only to a miniscule degree in comparison. The large sums of money enjoyed by the corporate businesses enabled more investment and more production, while at the same time, the low amount of personal funding of the general public meant that increased purchasing power was not possible. Therefore, while businesses used their capital to produce more and more, the public had not the money to consume it.
The failure of the public to keep up with increased inventory meant that industry could only cut their production, cut loose their employees and refrain from any further investment. The outcome of this obvious: thousands of workers became unemployed, cities economies were wrecked and purchasing power for the consumers was further diminished.
The Brookings Institution study on the country’s production and consumption concluded, “income was being distributed with increasing inequality”. This statement seems to be verified with the evidence of Andrew Mellon’s tax cuts – for the wealthy, which merely served to help aggravate disparity in income levels.
Also to be considered is the bad banking structure of the time, which was a major factor in worsening the depression, and which led economist J.K. Galbraith to describe it as “inherently weak”. After employment and income had fallen as a result of a depression, bank failures started a chain reaction in a kind of domino effect. One bank would fail, and the assets of another were frozen, creating a “run” on the banks, so more and more collapsed. Bank failures led to the ruin of thousands of businesses and the closure of farms all over the country. No depositors would spend and no clients would invest, thus deepening the feelings of fear felt by an entire population and, more importantly, ensuring a depression, which would be hard to rectify quickly.
President Herbert Hoover (1929 – 1933) blamed the state of America’s economy on the international state of affairs, refusing to acknowledge any domestic responsibility. After the First World War, the world economy was in tatters. The expense of the war effort, the expense of reparations, the debt owed to other nations and the loans being provided all led to tremendous strain on the financial side of all nations, which created economic instability.
To gain the money that they desperately needed, most European countries raised taxes and tariffs on imported goods. This cut demand, most specifically from the US, and therefore America could not export to the necessary foreign markets to satiate the level of increasing production, meaning a problem of supply and demand.
Countries with large debt payments to make to the USA, on top of other financial difficulties realised that the best way to get the necessary funds was to increase their imports to the US. Hoover predicted this move and so sharply increased tariff, making the approach of larger imports into America inconceivable. However, this meant that the United States was throwing a large part of the world into an economic slump that could easily be tipped over – by the crash.
The New York Stock Market crash of 1929 was indeed an important, if not vital factor in the triggering of the depression, but cannot be held to have caused it. By 1929, America’s economy was riddled with faulty policy and poor understanding by experts. As Galbraith said himself; “the economy was fundamentally unsound”. Stock markets have crashed before and since this period, with little or no setback to the state of world affairs. If the American economy had been strong, or even workable, then the Great Crash would probably have caused nothing more than a short-lived recession.
Causes of the great depression, such as loss of confidence in the market, the banking and corporate system, international financial problems, overproduction and under-consumption, mal-distribution of wealth, and all the other faults with the American system were all wrapped up in the stock market crash, and all worked together to crate the most devastating economic set-back of recent history.
Morgan Williams
