Saturday, September 1, 2007



Despite the outward appearances of strength, the truth of the matter is that the economy of the 1920s was built on shifting sand. Yes, workers were enjoying relatively good wages, but there were weaknesses underlying the entire system. The rural economy had been in a shambles for years, the direct result of over production and a federal government which refused to step in and offer governmental assistance. Instead of intervening to undermine the glut of agricultural products that were pushing rural incomes downward, both Coolidge and Hoover stuck to their small government obsession,and allowed the situation to worsen. The results were ironic. In the rural community there was a glut of food products, while in urban environments there was a shortage of food, especially after the Stock Market crashed and the
Great Depressio began to spread and deepen. At no time did it occur to President Hoover to use the excess in agricultural products to feed city dwellers. Nor did he endorse the idea of taking acreage out production by paying farmers subsidies not to plant certain crops. Nor was there a willingness to destroy various agricultural products to help drive up the prices of those products, thus creating higher incomes for the suffering American farmer.

A similar condition existed in the automobile industry, where a glut of cars had been produced by the late 1920s, essentially driving down prices and profits which had a direct effect upon the American auto manufacturer, the average American worker.

Despite a plethora of medical advances ( the advent vitamins, advances in chemistry,dietary reforms, and early successes with antibiotics) the typical American was not in the best of health. Norway and Sweden enjoyed lower rates of infant mortality. A disproportionate number of American citizens suffered from ailments associated with poverty, such as bad teeth, poor eyesight, and malnutrition. That said a lot abut a capitalist society which had been touted as a kind of economic Nirvana. [8]

Unemployment rates had begun to rise in the years prior to the crash, especially in the area of residential construction. In the bituminous coal industry, 250,000 men lost their jobs when mines began to close between the years 1923 and 1929. The anthracite coal industry was on the ropes thanks in large part to the rising competition from oil heating. Similarly, the Northern Textile mill had been in a state of decay for years. Retail growth was dropping off. In the midst of this supposed boom six out of ten families were earning less than the required $2000 per year to provide the basic necessities of life. [9]
But the greatest weakness in the Coolidge/Hoover economy was the disproportionate distribution of wealth, which dramatically favored the upper classes. From 1923 to 1929 the nation's total realized income rose from $74.3 billion to $89 billion in 1929. The fruits of that increase however were not equally shared. In 1929 the top 0.1 percent of Americans had a combined income equal to the bottom 42 percent. That same top 0.1 percent of Americans controlled 34 percent of all savings while 80 percent of Americans had no savings at all. While disposable income per capita rose nine percent from 1920 to 1929. those within the top one percent enjoyed a stupendous 75 percent increase in per capita disposable income [10]. Thanks in large part to Secretary of the Treasury Andrew Mellon, national tax policy contributed to the disparity in wealth. The February 26, 1926 Revenue Act reduced federal income and inheritance taxes. The end result was that "a man with a million dollar annual income had his federal taxes reduced from $600,000 to $200,000. Even the Supreme Court played a role in expanding the gap...In the 1923 case Adkins V. Children's Hospital, the Supreme Court ruled minimum wage legislation unconstitutional [11].

So why was that a problem? The answer is obvious. It creates an unstable economy. Over production had already created a glut of unwanted goods and commodities. Now consider the following scenario. Assume that you earn $30,000 a year and that I earn $150,000 a year. That means that I earn fifty times a year more than you do. I might decide to buy a few luxury items that you can't afford to buy, but an economy cannot be sustained on the purchase of luxury items by the wealthy. I can't eat fifty times more food than you do. Nor is it likely that I will purchase fifty DVD players, fifty cars, fifty toasters, fifty digital TVs or fifty microwave ovens. Translated into modern English a thriving economy needs a more even distribution of wealth and income to sustain itself. Granted, I maybe eating for two these days, but let's get real friends and neighbors, I'm not going to buy and gobble down fifty Tombstone pizzas every week. It simply isn't possible.

"We see a similar situation in today's economy," Abe reminded me. "I believe the top 20 percent (of the American people) own somewhere around 80 percent of the wealth. At the same time the bottom 80 percent (of the American people) own about 20 percent of the privately owned wealth." Upon double checking Abe's recollections, I discovered that the situation is actually somewhat worse than he suggested. In the year 2001, the top one percent of American households, those that we would think of as the upper class, had somehow managed to hoard a disproportionate 33.4 percent of the privately owned wealth. The next 19 percent, which includes small businessmen, professionals, and the managerial class had grabbed up another 51 percent of the wealth. This means that the richest 20 percent had managed to acquire a walloping 80 percent of the wealth while the bottom 80 percent were left to fight over a measly 16 percent of the private wealth. As far as financial wealth is concerned, the top once percent of American households own 44.1 percent of the privately held stock, 38 percent of the financial securities, and 57.3 percent of business equity. The top ten percent of American households own between 85 and 90 percent of stock bonds, trust funds, and business equity and more than 75 percent of non-home real estate. [12]

And yet, the Coolidge Hoover economies did manage to sustain themselves, albeit temporarily. But how did they do it? Through luxury spending and investment from the rich and, worse yet, from credit sales. According to Mister Gusmorino, the idea of credit spending, "buying now and paying later," caught on quickly. "Between 1925 and 1929," says Gusmorino, "the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion. Installment credit allowed one to 'telescope the future into the present.'" [13] This sounded good to the American consumer, but eventually there came a time when there was little more that the American people needed and/or wanted to buy. Moreover, many Americans overextended themselves, reached the point where they could no longer afford to purchase new items because a larger portion of their incomes were being used to pay off the credit expenses associated with previous purchases.

"Isn't this the same thing that the pirate capitalists are encouraging today?" Abe asked me. "Do we not have an economy in which the average American is up to his ears in credit card debt? And what do you think would happen if we suddenly pulled in our belts and stopped shopping? What do you think would happen if we stopped buying truck loads of items that we can neither afford nor really need? I'll tel you what would happen. The (Bush) economy would collapse. It's so damned dependent upon shopping--consumerism if you will--that the bottom would drop out if Americans ever became serious about cutting back and saving for a rainy day." Continuing in a similar vein, Abe added. "We talked about how people once bought stocks on margin. Putting aside our discussion about credit cards and consumerism...we're doing the same thing in the real estate and housing markets today. Only we don't call it 'buying on margin.' We call it the 'sub prime lending rate.' Once again we have a greedy credit community, and once again it has been backed by a an incompetent Republican Administration. George W. Bush calls it the ownership society. I'm really shocked by the fact that he didn't also promise us a 'car in every garage and a chicken in every pot.' We heard it all before, a right wing government using rhetoric and policies to to allow legalized loan sharking. George W. Bush may call it the 'ownership society,' but whatever Orwellian name you opt to use, it is actually encouraging people to purchase or build houses that they simply cannot afford. What else can you call it when the creditors decide to raise interest rates and drive unsuspecting Americans out of their homes? Some may think of this as 'good business' or 'good politics' or maybe both, but when I was growing up during the Great Depression we called it loan sharking."

Both Abe and Mr. Gusmorino, and many others, agree that you can't sustain an economy based on investment from the rich. Depending on the wealthy to float your economy makes a certain degree of sense when conditions produce a certain degree of confidence in that economy; but an event like the Stock Market Crash of 1929 shook public confidence and for all intents and purposes, destroyed one of the legs on which the Coolidge/Hoover pipe dream had been supported.

Eventually over-production, loose credit, a maldistribution of wealth and countless other factors brought an end to the wild orgie of stock purchases.

The Stage had been set for the Stock Market Crash of 1929 and the Great Depression.

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