The world economy had weaknesses.
The Great Depression showed clearly that there were serious economic weaknesses in the United States and, indeed, throughout the world. Although the causes of the Great Depression are complex, three weaknesses in the cconomy were especially important.
Overproduction and underconsumption American industry bccame fabulously productive during the 1920's. By 1929, American factories turned out nearly half of the world's industrial goods. Rising productivity led to enormous profits.
This new wealth, however, was not evenly distributed. For example, the richest 5 percent of the population earned 33 percent of all personal income in 1929. Meanwhile, at the other end of the scale, fully 60 percent of all American families earned less than $2,000 a year. Thus, most families were too poor to buy the record number of goods being produced.
In short, supply raced ahead of demand. There was both overproduction by business and underconsumption by consumers.
As a result, store owners could not sell all the goods they had on hand. They cut hack their orders from factories. Factories began to cut back production and lay off workers. These actions started a downward economic spiral. As more workers lost their jobs, families bought even fewer goods. In turn, factories made further cuts in production and laid off more workers.
The plight of the farmer During the 1920's, American farmers also became increasingly productive. Scientific fanning methods and new fann machinery dramatically increased the yield of crops per acre. Farmers tried to maximize their profits by raising just a few cash crops. Farming became more and more like industry. Thus, farmers became more dependent on the market prices of wheat, com, and pork.
At the same time, American farmers faced new competition from abroad. For the first time, countries such as Australia and Argentina were exporting large amounts of grain. European farmers were increasing production too.
As a result, a worldwide surplus of agricultural products drove prices and profits down. In 1930, for example, the price of a bushel of wheat (in terms of gold) fell to its lowest level in 400 years.
Unable to sell their crops at a profit, many farmers could not pay off their loans. These bad debts weakened banks and forced some to close.
Speculation in stocks The danger signs of overproduction by factories and farms should have warned people against speculating wildly in the stock market. Yet no one heeded the warning.
The stock market crash dashed the hopes of thousands of investors. Between September 1929 and July 1932, the New York Times industrial average fell from $455 to an all-time low of $58. Stockholders lost a staggering $74 billion.
The losses on Wall Street had both economic and psychological conscquences. Economically, they swept away fortunes among the upper class. Consumer spending dropped sharply. Psychologically, Americans' spirit of optimism was replaced with a sense of doubt and fear.
The Depression spread worldwide.
When the American economy collapsed, the shock waves were felt around the world. After the stock market crash, worried American investors began to call back their loans abroad ro cope with the crisis at home. This withdrawal dealt a hard blow to the cconomy of western Europe.
Discussion questions: How do present-day production and consumption patterns compare to those of the 1920's? Could we have another Depression? Students can find facts and opinions about the economy in business periodicals.
A British writer, George Orwell, wrote of "decent young miners and cottonworkers gazing at their destiny with the same sort of dumb amazement as an animal in a
As-
weeks of unemployment stretched into months, jobless people searched
the help-wanted ads and waited in unemployment offices for a chance
to work. Their despair shows in this painting by Isaac Soyer.
one
of his advisers callcd of trouble, he understood
Because of their war debts and dependence on American loans, Germany and Austria were particularly hard hit. A large Austrian bank, the Creditanstalt, failed, starting a financial panic in central Europe. As in the United States, this crisis began a downward spiral in the economy.
The effects of the Depression were felt throughout the world. Between 1929 and 1932, world manufacturing production fell by 38 percent. International trade dropped by an incrediblc 65 percent. Unemployment rates skyrocketed to record levels. In the United States, Great Britain, Germany, and Japan, more than 25 million angry, jobless people began to demand sweeping economic and political changes.
The Depression confronted democracies with a serious challenge to their economic and political systems. Each country tried to meet the crisis in its own way.