Weaknesses in the 1920s Economy

1. Weaknesses in the 1920s Economy

2. 1) Unequal distribution of wealth 60% of all American families had an income of less than $2000 per year (i.e. they were living below the poverty line). Top 5% of people earned 1/3 of the wealth . The only way poorer Americans could consume was through credit and consumption. 80% of Americans had no savings at all . This unequal distribution of wealth meant that the purchasing power was concentrated in the top margins of American society, meaning that, in reality, a whole group of consumers were not consuming.

3. 2) Farming problems American farmers’ annual income was $477 below the national average . They did not have purchasing power to participate in the boom. There were 3500 foreclosures out of 5280 farms . With the recovery of European agriculture after the First World War, American farmers were still overproducing, which drove prices down. Natural disasters ruined crops, such as the boll weevil plague .

4. 3) Decline in old industries Traditional industries such as textiles and coal mining began to decline after demand fell and production rose. Old industries couldn’t compete with newer industries like oil. The New England textiles industry collapsed because it couldn’t compete, and its workforce fell from 190,000 to 100,000 by 1933 .

5. 4) Trade problems Republican protectionism led to the passing of high tariffs which effected international trade due to retaliation by other countries. Mass production meant that it wouldn’t be long until production outweighed demand and goods would need to be sold abroad, which wasn’t an option because goods could not be cheaply exported. The surplus agricultural produce couldn’t be sold abroad either, meaning that the situation for farmers only got worse.

6. 5) Stock market speculation and lack of regulation The American banking system was not regulated at all. Lots of smaller banks, which serviced the agricultural sector, were speculating as much as the big banks, and collapsed with the system of credit. There was no regulation of the stock market, encouraging speculation and leading to greater broker debts. 75% of the purchased price of shares could be borrowed . After 1927 , there was an average of 5m transactions per day . In 1927 , th e Federal Reserve Board lowered interest by 0.5% . People had a blind faith in the market, supported by the fact that the fluctuation in the stock market between 1928-9 was always fixed. Brokers had persuasive selling techniques involving ‘rags to riches’ tales. The Federal Trade Commission was half-hearted at best.

7. 5) Stock market speculation and lack of regulation Bank failures were common during the 1920s. There was little consistency in measures to discourage speculation. Charles Mitchell pumped $25m of his own money into the broker industry while the FRB was trying to discourage speculation . The members of the Board were private bankers, putting their own interests above those of the nation. No one wanted to see the bull market – which had not been failing so far – to be regulated, due to the laissez-faire attitude of the public.

8. 5.5) The extent of the Wall Street Crash ( evaluation ) After the Crash, share prices were still higher than they had been in 1928 . Stock prices did not plunge until 1932 . Many historians say that the Crash was a symptom, rather than a cause, of the Depression. The economy was already in dire straits by the time the Crash occurred.

9. 6) International debt Great Britain and France didn’t have the money to pay back US war loans, meaning that America lost out on this source of income. The war debts weakened the British and French currencies, which effected their capacity to consume US goods.