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The Days Of Boom And Bust
As the twenties roared on, a market crash became inevitable. Why? And who should have stopped it?
August 1958 | Volume 9, Issue 5
The decade of the twenties, or more precisely the eight years between the postwar depression of 1920–21 and the stock market crash in October of 1929, were prosperous ones in the United States. The total output of the economy increased by more than 50 per cent. The preceding decades had brought the automobile; now came many more and also roads on which they could be driven with reasonable reliability and comfort, There was much building. The downtown section o[ the mid-continent city—Des Moines, Omaha, Minneapolis—dates from these years. It was then, more likely than not, that what is still the leading hotel, the tallest ollice building, and the biggest department store went up. Radio arrived, as of course did gin and jazz.
These years were also remarkable in another respect, for as time passed it became increasingly evident that the prosperity could not last. Contained within it were the seeds of its own destruction. The country was heading into the gravest kind of trouble. Herein lies the peculiar fascination of the period for a study in the problem of leadership. For almost no steps were taken during these years to arrest the tendencies which were obviously leading, and did lead, to disaster.
At least four things were seriously wrong, and they worsened as the decade passed. And knowledge of them does not depend on the always brilliant assistance of hindsight. At least three of these Haws were highly visible and widely discussed. In ascending order, not of importance but of visibility, they were as follows:
First, income in these prosperous years was being distributed with marked inequality. Although output per worker rose steadily during the period, wages were fairly stable, as also were prices. As a result, business profits increased rapidly and so did incomes of the wealthy and the well-to-do. This tendency was nurtured by assiduous and successful efforts of Secretary of the Treasury Andrew W. Mellon to reduce income taxes with special attention to the higher brackets. In 1929 the 5 per cent of the people with the highest incomes received perhaps a third of all personal income. Between 1919 and 1929 the share of the one per cent who received the highest incomes increased by approximately one-seventh. This meant that the economy was heavily and increasingly dependent on the luxury consumption ot the well-to-do and on their willingness to reinvest what they did not or could not spend on themselves. Anything that shocked the confidence of the rich either in their personal or in their business future would have a bad effect on total spending and hence on the behavior of the economy.
This was the least visible flaw. To be sure, farmers, who were not participating in the general advance, were making themselves heard; and twice during the period the Congress passed far-reaching relief legislation which was vetoed by Coolidge. But other groups were much less vocal. Income distribution in the United States had long been unequal. The inequality of these years did not seem exceptional. The trade-union movement was also far from strong. In the early twenties the steel industry was still working a twelve-hour day and, in some jobs, a seven-day week. (Every two weeks when the shift changed a man worked twice around the clock.) Workers lacked the organization or the power to deal with conditions like this; the twelve-hour day was, in fact, ended as the result of personal pressure by President Harding on the steel companies, particularly on Judge Elbert H. Gary, head of the United States Steel Corporation. Judge Gary’s personal acquaintance with these working conditions was thought to be slight, and this gave rise to Benjamin Stolberg’s now classic observation that the Judge “never saw a blast furnace until his death.” In all these circumstances the increasingly lopsided income distribution did not excile much comment or alarm. Perhaps it would have been surprising if it had.
But the other three flaws in the economy were far less subtle. During World War I the United States ceased to be the world’s greatest debtor country and became its greatest creditor. The consequences of this change have so often been described that they have the standing of a cliché. A debtor country could export a greater value of goods than it imported and use the difference for interest and debt repayment. This was what we did before the war. But a creditor must import a greater value than it exports if those who owe it money are to have the wherewithal to pay interest and principal. Otherwise the creditor must either forgive the debts or make new loans to pay off the old.