Lecture

Learning Objective III

Learning Objective III

Explain how the Republican domestic program from 1921-1933 led to the Great Depression of 1929-1941 .

The significance of the Republican domestic program from 1921 to 1933 was that it helped create and/or stimulate the weakened conditions in the economy which were responsible for the crash and depression in 1929.

There seems little question that, in 1929, the economy was fundamentally unsound . Many things were wrong, but seven weaknesses seem to have had an especially intimate bearing on the ensuing disaster.

1. Unequal Distribution of Wealth

One weakness was the uneven distribution of income. In 1929, the 5% of the population with the highest income received approximately 1/3 of all personal income. Thus, the lower classes had no purchasing power, while the upper class engaged in a high level of luxury consumption, capital investment, and speculation.

2. Mental Attitude of the General Public

The mental attitude of the general public and the way they perceived the economy was also very important. Overly positive and overly negative mental attitudes played important roles, respectively, first in creating the depression and then in prolonging it.

As a result of artificial profits that were made because of the Republican domestic program, the American public was overconfident in the economy. This led to a great deal of unsound economic practices. A larger public than ever had money and the leisure to participate in the affluent society. A new and growing advertising industry used psychology that all of the new products society manufactured were basic necessitates of life creating a desire to buy.  

By the mid-1920's advertising had grown into both a major industry and a major institution of social control. Old-time values of thrift and saving gave way to a new economic ethic which made spending a virtue. The innovation of installment buying made increased consumption feasible for many. Psychology played an important role in advertising. Since few of the new products could be considered basic necessities, ads had to create desire to buy . Advertisers often used the implied approval of science, represented by the white-coated doctor who appeared in many advertisements , to sell their products. \Ad writers also sold products by calling attention to people's insecurities. They came up with a variety of socially unacceptable diseases, including "sneaker smell," "ashtray breath," and the dreaded B.O. (Body Oder)

Uneven distribution of income, however , limited the adoption of these new patterns of consumption to the more prosperous members of the middle class. Yearly income of about 65% of America's families was less than $2,000 at the height of prosperity in the 1920's.

The average family income for the bottom 40 % of the population was $725.

With that amount, a family spent an average of about $290 a year for food, $190 for housing, and $110 for clothing. These expenditures left only $135 for everything else.

3. Overproduction

The problem of an uneven distribution was partially overcome by dramatic increase in installment buying. With easier credit and buying on time, families could spend and pay later, as well as current, income. It is difficult to realize how revolutionary the philosophy of "buy now, pay later" was to consumers.

With the prospect of good times ahead, consumers abandoned old-time values of thrift and saving to tum to the new economic ethic This ethic made spending a virtue and used all the economic flexibility of the average consumer. When the depression came the consumer and the economy had no economic flexibility to fall back on---only debt.

After the economy collapsed, the confidence and the willingness of both business and the consumer to participate in the economy was destroyed . Consequently, an overly negative attitude developed which prolonged the depression.

Overproduction, created as a result of the Republican domestic program, was a direct result of excess profits made by big business and was a major contributor to causes of the depression .

4. Poor Economic Intelligence (deductive reasoning)

As discussed , the "external tax policy" created an unhealthy balance in foreign trade.

Another weakness was the poor state of economic intelligence . The economic philosophy of Hoover and the other Republican presidents of the 1920's as well as a huge section of the Democratic party greatly inhibited Hoover's attack on the depression and caused the economy to reach its unstable state during the 1920's.

5. Andrew Mellon's Revenue Acts

This point was demonstrated with Andrew Mellon's Revenue Acts of the 1920's and the "trickle down" theory which supported these acts. Another area where a misplaced economic philosophy appeared was in dealing with the American tariff system and the idea that a high tariff was good for the total economy. Finally, when the depression came, the government asked how to advance recovery. The answer from economic advisors was that the budget should be balanced . Both parties agreed .

This policy meant that there could be no increase in government outlays to expand purchasing power and relieve distress. It also meant there could be no further tax reduction to give the common man relief and more purchasing power. Instead of stimulating the economy, this action stagnated the economy. The attempts to balance the budget limited efforts to make interest rates low and credit plentiful.

6. Holding Companies

The another effect of the Republican domestic program was that it fostered large-scale corporate combinations, which led to an unstable corporate structure. The holding company was the most common device for concentrating economic control.

Of the biggest industrial corporations in 1929, 94 were holding companies. Twenty-one were purely holding companies that did , not themselves produce anything. Holding companies were formed to obtain control over a large number of other companies with as little investment as possible .

By the end of the twenties, companies six to eight layers high were commonplace.

There was a problem with this type of corporate structure. If anything happened to the dividends of the downstream companies, upstream companies would be in trouble, because they had issued bonds on the stock of the downstream companies. Once the earnings stopped, the ·bonds would go into default and the pyramid would collapse.

Such a collapse would have a bad effect not only the business and investment by the operating companies but also on confidence, investment, and spending by the community at large. 

7. Banking Structure

The final weakness was the unsound banking structure. Although the bankers and their policies were not unusually foolish in 1929, the banking structure was weak.

The weakness was implicit in the large number of unregulated independent units. When one bank failed, this led to other failures. These failures spread with a domino effect as the independent banks were hit with runs triggered by the collapse of another independent bank, Thus, the weak destroyed not only the other weak, but also weakened the strong.

Another important factor was many banks were deeply committed to holding company pyramids. This meant that when the pyramid collapsed, the banking system was threatened. When income, employment, and values fell as the result of the depression, bank failures could quickly become epidemic.

In the first six months of 1929, 346 banks failed in various parts of the country with aggregate deposits of nearly $115 million. When income, employment , and values fell as the result of a depression, bank failures could quickly become epidemic . This happened after 1929.

In a final summary, it is in light of the above weaknesses of the economy that the stock market crash in the thirties must be seen.

1. The collapse in securities values affected the wealthy and the well-to-do. In the world of 1929, this was a vital group. These members disposed of a large proportion of the consumer income; they were the source of a lion's share of personal saving and investment. Anything that struck at the spending or investment by this group would of necessity have broad effects on expenditure and income in the economy at large. Precisely such a blow was struck by the stock market crash.

2. The stock market crash was also an exceptionally effective way of exploiting the weaknesses of the corporate structure. The subsequent collapse of these systems destroyed both the ability to borrow and the willingness to lend for investment. The crash was also effective in bringing to an end the foreign lending by which the international accounts had been balanced.

3. Finally , when the misfortune had struck, the attitudes of the time kept anything from being done about it. This, perhaps, was the most disconcerting feature of all.