1. Unequal Distribution of Wealth and Income
Despite rising wages overall, income distribution was extremely unequal. Gaps in income had actually
increased since the 1890s. The 1% of the population at the very top of the pyramid had incomes 650%
greater than those 11% of Americans at the bottom of the pyramid. The tremendous concentration of
wealth in the hands of the few meant that the American economy was dependent on high investment
or luxury spending of the rich. However, both high spending and high investment are very susceptible to
fluctuations in the economy; they are much less stable than people's expenses on daily necessities like
food,clothing, and shelter. Therefore, when the market crashed and the economy tumbled, both big
spending and big investment collapsed.
2. Unequal Distribution of Corporate Power
From the late 1870s on, there had been an ongoing movement of consolidations and mergers. During
World War I, many would-be competitors were merged into huge corporations like General Electric,
making competition nearly nonexistent. In 1929 two hundred of the biggest corporations controlled 50%
of the corporate wealth in America. This concentration of wealth meant that if just a few companies went
under after the Crash, the whole economy would suffer.
3. Bad Banking Structure
In the 1920s, banks were opening at the rate of 4-5 per day, but with few federal restrictions to
determine how much start-up capital a bank needed or how much of its reserves it could lend. As a
result, most of these banks were highly insolvent; between 1923 and 1929, banks closed at the rate of
two a day. Until the stock market crash in 1929, prosperity covered up the flaws in the banking system.
4. Foreign Balance of Payments
World War I had turned the U.S. from a debtor nation into a creditor nation. In the aftermath of the
war, the U.S. was owed more money -- from both the victorious Allies and the defeated Central
Powers -- than it owed to foreign nations. The Republican administrations of the 1920s insisted on
payments in gold bullion, but the world's gold supply was limited and by the end of the 1920s, the
United States itself controlled most of the world's supply. Besides gold, which was increasingly in
short supply, countries could pay their debts in goods and services. However, protectionism
and high tariffs kept foreign goods out of the U.S.. This protectionism produced a negative effect
on U.S. exports: if foreign countries couldn't pay their debts, they had no money to buy American
goods.
5. Limited or Poor State of Economic Intelligence
Most American economists and political leaders in 1929 still believed in laissez-faire and the self-
regulating economy. To help the economy along in its self-adjustment, President Hoover asked
businesses to voluntarily hold down production and increase employment, but businesses couldn't
keep up high employment for long when they were not selling goods. There was a widespread
belief that if the federal budget were balanced, the economy would bounce back. To balance the
budget demanded no further tax cuts (although Hoover lowered taxes) and no increase in
government spending, which was disastrous in the light of rising unemployment and falling prices.
Another problem with economic practices of the day was the commitment of the Hoover
administration to remain on the international gold standard. Many suggested increasing the money
supply and devaluing the dollar by printing paper money not backed by gold, but Hoover refused.
Going off the gold standard was one of the first actions of new President Roosevelt in 1933.
6. Decrease in Money Supply
The decline in money supply between 1929 and 1933 dampened economic developments. It led
to a sharp contraction in output and nominal income, and a extraordinary climb in unemployment.
If the Federal Reserve had increased the money supply, the fall in the economic activity
could have been moderated considerably.
7. International Factors
The Depression was a global event. The international monetary system of the time (the gold
exchange standard) was a fixed-rate system. As long as the rules were observed, economic
conditions in various countries would be closely related. Thus, problems in one large economy
would be passed on to others, and ultimately, could transmitted back to the country of origin |
