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Introduction

The 1920s marked a decade of increasing conveniences that were made available to the middle class. By and large Americans as a whole were weary of war and looking for a way to put the horrors of the last few years behind them. New products made chores around the home easier and resulted in increased leisure time. Products that had once been too expensive were suddenly affordable due to new forms of financing that made it possible for families to spend beyond more existing means. New forms of advertising resulted in the sale of increased goods through the capitalization of consumer hopes and dreams.

Pre-bubble boom

For the first time it became possible for Americans to buy on credit through the credo of ‘buy now, pay later’ practices that ushered in the Roaring Twenties. Generous lines of credit were offered by department stores for families who were not able to pay upfront but who could demonstrate their ability to pay in the future. Installment plans were also offered to buyers who were not able to pay upfront. More than half of the automobiles in the nation were sold on credit by the end of the 1920s. As a result, consumer debt more than doubled during the decade (PBS, n.d).

Bubble mania

Overall, the goal of most Americans was to put the fear and uncertainties of the World War I behind them and return to Normalcy. The country emerged from the war with a new respect around the world by President Woodrow Wilson became poised to lead cooperation in an international arena. With his death, this spirit of international cooperation ended and the Republic Party subsequently dominated the remainder of the 1920s (PBS, n.d).

While there was a brief depression during the first part of the decade, it eventually receded under the stewardship of President Warren Harding and his institution of federal spending and tax cuts. When Harding died suddenly in 1923 and Calving Coolidge took control of the economy, matters began to change.

By the middle of the decade, the economy had once again become sluggish as the Reserve banks relaxed requirements for credit and more than $500 million was created in new money. Loans totaling more than $4 billion were made available to the American public. The hope was that such measures would stimulate the economy; however, the opposite occurred as more and more consumers took on an increasing amount of debt and the price of stocks and real estate began to skyrocket. In 1926, Coolidge supported the Revenue Act, which reduced taxes on individuals with higher incomes but offered little relief to middle-income families (Chris Butler, 2007).

After Coolidge decided not to run for office two years later Herbert Hoover emerged as the candidate for the Republican Party. When he was elected to office it appeared as though the American economy was stable. Within a year the exact opposite was true. Hoover found it increasingly difficult to gain control of a rapidly worsening economic situation. As a result of the panic of stockholders selling their stocks too rapidly for the system to be able to compensate, the stock market fell in the fall of 1929. Stocks were no longer traded at face value but were instead sold at whatever price they would bring (PBS, n.d.).

The economy of the United States was destroyed almost overnight. Factories, banks and companies around the nation began to close and millions of Americans suffered unemployment as a result. More than 5,000 banks collapsed and by 1932 there were 12 million people out of work in America (Chris Butler, 2007).

While the United States had boasted the largest economy in the world in the 1920s, across the ocean Europeans struggled as a result of the end of WWI. With the fall of the stock market, a chain of events was set off that would plunge America into the deepest and longest economic crisis of the country’s history. While the stock market crash is often viewed as the single largest cause of the Great Depression, there were actually numerous underlying causes that sent the country into a downward spiral (Chris Butler, 2007).

During the 1920 American companies earned record profits. Most of those profits were re-invested in further expansion. By the end of the decade, businesses had expanded to the breaking point. Workers were no longer able to continue fueling further expansion. Corporate profits had skyrocketed; however the wages of workers had only increased at an incremental rate. This served to further widen the distribution of wealth in the country. More than 1/3 of the American assets were owned by 1% of Americans. As a result of the concentration of wealth in such a limited manner, economic growth was limited. Wealthier Americans tended to save their money rather than putting it back into the economy while middle-class Americans were already stretched by purchasing vehicles and household appliances through installment plans (Chris Butler, 2007).

In addition, there were fundamental weaknesses within the structure of the American economic system. No guarantees were offered by banks to their customers. This resulted in a panic when times became difficult. There were also few regulations in place for banks, who subsequently loaned money to individuals who recklessly invested in stocks. Due to low agricultural prices of the 1920s farmers were unable to achieve any type of recovery. The downward slide was made even worse as Europeans were purchasing fewer and fewer American products as a result of their own economic difficulties (Chris Butler, 2007).

At the same time, stockholders were experiencing a boom. The prices of stocks soared to record heights. Between 1925 and 1929 the total value of the New York Stock Exchange increased from $27 billion to $87 billion. Stock fever swept throughout the country. This rapid expansion was further fueled by a risky practice that made it possible to purchase stock on margin, meaning that an investor could borrow money, sometimes up to 75% of the actual purchase price, in order to purchase a larger amount of stock. Borrowers often paid as much as 20% interest on loans, certain that the potential rewards were worth the risk. Such practices became increasingly commonplace, in spite of warnings issued by the Federal Reserve Board (Rosenberg, 2012).

Bubble Burst

Stock prices are governed by one simple principle. When an investor believes a stock has a good value he or she is willing to pay an increased amount for that share and thus the value of the stock rises. When traders believe that the value of a stock will fall they are thus unable to sell it at an increased price. When all investors sell their stocks at the same time and there are no willing buyers, the value of the market begins to significantly diminish. This is precisely what occurred on October 24, 1929 in what would come to be known as Black Thursday, as a massive amount of stocks were sold at once (Smiley, 2010).

The effects of the depression were felt throughout the nation, including through immigrant communities that had increased in the United States in the preceding years. As the nation’s economic problems grew worse, immigrants were often seen as the problem rather than a solution due to record high levels of unemployment. The Mexican Repatriation Program was authorized by Herbert Hoover in response. Under the program, the removal, by force if necessary, of American citizens of Mexican descent and Mexican citizens from the United States was authorized. The deportation of more than half a million Mexican-Americans occurred as a result in an effort to make more jobs available. In addition, numerous European immigrants left the United States during the Great Depression as well (Rosenberg, 2012).

Although not a direct cause of the depression, in 1930 drought conditions in the Mississippi Valley certainly did nothing to improve matters. Farmers found themselves forced to sell their farms at absolutely no profit when they were unable to pay their taxes (Bierman, 2010)

Conclusion

Throughout the 1930s thousands upon thousands of banks failed as a direct result of the Great Depression. At the time deposits in banks were uninsured and when a bank failed, customers lost their savings and had no recourse available to them. Banks that were able to survive suddenly became increasingly wary and were unwilling to give out new loans; further exacerbating an already difficult situation (Bierman, 2010)

As the unemployment rate rose and the nation’s economy grew worse, everyone stopped making purchases. This, in turn, led to further reductions within the workforce. Consumers were suddenly unable to pay for the items they had previously purchased on credit and installment plans, leading to massive amounts of repossessions. The unemployment rate rose to more than 25% (Smiley, 2010).

References
PBS. (n.d.). Stock Market Crash. Retrieved on 12th April 2012, from http://www.pbs.org/fmc/timeline/estockmktcrash.htm

Bierman, H. (2010). The 1929 Stock Market Crash. Retrieved on 10th April 2012, from http://eh.net/encyclopedia/article/bierman.crash

Chris Butler.(2007). FC131: Post War Boom and Bust (1920-29). Retrieved on 13th April, 2012, from http://www.flowofhistory.com/units/etc/20/FC131

Rosenberg, J. (2012). The Stock Market Crash of 1929: About.com 20th Century History. Retrieved on 12th April 2012, from http://history1900s.about.com/od/1920s/a/stockcrash1929.htm

Smiley, G.(2010).The U.S. Economy in the 1920s. Retrieved on 15th April, 2012, from http://eh.net/encyclopedia/article/smiley.1920s.final