In Search of Root Causes
Historians and economists have come up with numerous theories about why the Great Crash happened when and where it did, and why it had such a devastating global impact. Two theories present themselves most often. The first is that there was a massive speculative bubble in the United States, which eventually burst and set in motion a chain reaction that crippled the world economy.
There is much truth to this, as by 1929 the economy of the United States towered over the rest of the world and produced an amazing 42% of total world economic output - the three next largest economies combined for around 28% (I should note in passing that the fact that the four largest world economies produced 70% of economic output is a critically important aspect of understanding the global crash.) The second theory, refuting the first, posits that there actually was no speculative bubble in 1929 and that the sharp decline on Wall St. and the subsequent dominoes that fell because of it were mainly caused by fears of a pending crash promulgated by the new mass media – especially by the newspapers in London and New York. Scholars have studied in depth the reporting in the months before the Great Crash and many have posited that the media created a real crisis out of a fictional one. It was, some argue, mass hysteria that brought down the relatively stable and profitable American business sector and plunged the world into the abyss. While it is likely that hysteria contributed to the speed with which the stock market collapsed, it is not realistic to believe that media alone could have upended a strong economy. More likely is that the mass media contributed to the more rapid fall of a weak one.
Let us assume the more likely possibility - that there was a real speculative bubble, which was propping up an unhealthy economy. The causes of the economic sickness were a combination of over-production and under-consumption. But what caused over-production and under-consumption? It would stand to reason that such a dramatic increase in production would lead to more jobs and thus an increase in purchasing power. If more cars are being made, for example, we have more autoworkers buying them and other consumer products. Why didn’t the cycle perpetuate itself?
The key to factor has to do with the weakness of consumer demand. This demand was weakened in two primary ways. The first was growing income inequality. The problem with a great inequity of wealth is that when rich people acquire vast sums of money, they spend this money differently than if ordinary people make, say, 10-15% more than usual. While extra income for normal people is usually spent within the consumer economy, the rich generate wealth by investment and speculation. As wealth inequality grows, the overall ability for a society to consume declines. Redistributing wealth, therefore, buoys consumption and churns the engines of the real economy. If this principle is taken too far, however, it cuts off needed investment and speculation and causes economic stagnation. During the period before 1929, whole fractions of society, like women, African Americans and many immigrant groups were grossly underpaid and discriminated against in the workplace. This economic discrimination based on race, ethnicity, and sex crippled American consuming power. Not redistributing wealth, on the other hand, buoys the world of investment and creates speculative bubbles. While it is true that average Americans participated in the speculative fever before 1929, the big players were rich bankers and industrialists.
The second reason for this lack of consuming power is found on the global scale - and this is where we find the major cause of the collapse: the huge disparities of financial assets in the global economy. In short, the United States was funneling global wealth inwards, while at the same time not redistributing this wealth back out into the world by buying exported good from other countries. The result of this great accumulation was that while WWI and pre-war international investment had contributed to rapid increases in production throughout the world, a global consumer class was not created. Had Europeans and Americans taken pains to create a global consumer class by justly paying for labor and commodities instead of using its collective imperial might to drain these commodities from countries at prices far beneath their value, new markets might have been created for consumer goods. In short, what we see is the following scenario: wealth following out of the global economy and into the major industrial economies, foremost the United States. These industrial economies use the wealth to generate production with two results. They produced more goods than could be consumed on the national marketplace (especially in export-oriented Europe) and the profits from this wealth went disproportionately to a few, thus further decreasing the purchasing power of the masses. This upside-down pyramid of wealth fed speculation, which propped up businesses whose profits were declining. Because this speculation was so effective for a number of years in the 1920s, normal people (and foreign banks) were enticed to add to it by investing in the American stock market, thus increasing speculation and decreasing consumption. In the end, the economy of the great accumulation crashed - hitting hardest those who were always at the bottom - the working classes, minorities, people in non-industrialized countries - in general, the poor around the world.
There is much truth to this, as by 1929 the economy of the United States towered over the rest of the world and produced an amazing 42% of total world economic output - the three next largest economies combined for around 28% (I should note in passing that the fact that the four largest world economies produced 70% of economic output is a critically important aspect of understanding the global crash.) The second theory, refuting the first, posits that there actually was no speculative bubble in 1929 and that the sharp decline on Wall St. and the subsequent dominoes that fell because of it were mainly caused by fears of a pending crash promulgated by the new mass media – especially by the newspapers in London and New York. Scholars have studied in depth the reporting in the months before the Great Crash and many have posited that the media created a real crisis out of a fictional one. It was, some argue, mass hysteria that brought down the relatively stable and profitable American business sector and plunged the world into the abyss. While it is likely that hysteria contributed to the speed with which the stock market collapsed, it is not realistic to believe that media alone could have upended a strong economy. More likely is that the mass media contributed to the more rapid fall of a weak one.
Let us assume the more likely possibility - that there was a real speculative bubble, which was propping up an unhealthy economy. The causes of the economic sickness were a combination of over-production and under-consumption. But what caused over-production and under-consumption? It would stand to reason that such a dramatic increase in production would lead to more jobs and thus an increase in purchasing power. If more cars are being made, for example, we have more autoworkers buying them and other consumer products. Why didn’t the cycle perpetuate itself?
The key to factor has to do with the weakness of consumer demand. This demand was weakened in two primary ways. The first was growing income inequality. The problem with a great inequity of wealth is that when rich people acquire vast sums of money, they spend this money differently than if ordinary people make, say, 10-15% more than usual. While extra income for normal people is usually spent within the consumer economy, the rich generate wealth by investment and speculation. As wealth inequality grows, the overall ability for a society to consume declines. Redistributing wealth, therefore, buoys consumption and churns the engines of the real economy. If this principle is taken too far, however, it cuts off needed investment and speculation and causes economic stagnation. During the period before 1929, whole fractions of society, like women, African Americans and many immigrant groups were grossly underpaid and discriminated against in the workplace. This economic discrimination based on race, ethnicity, and sex crippled American consuming power. Not redistributing wealth, on the other hand, buoys the world of investment and creates speculative bubbles. While it is true that average Americans participated in the speculative fever before 1929, the big players were rich bankers and industrialists.
The second reason for this lack of consuming power is found on the global scale - and this is where we find the major cause of the collapse: the huge disparities of financial assets in the global economy. In short, the United States was funneling global wealth inwards, while at the same time not redistributing this wealth back out into the world by buying exported good from other countries. The result of this great accumulation was that while WWI and pre-war international investment had contributed to rapid increases in production throughout the world, a global consumer class was not created. Had Europeans and Americans taken pains to create a global consumer class by justly paying for labor and commodities instead of using its collective imperial might to drain these commodities from countries at prices far beneath their value, new markets might have been created for consumer goods. In short, what we see is the following scenario: wealth following out of the global economy and into the major industrial economies, foremost the United States. These industrial economies use the wealth to generate production with two results. They produced more goods than could be consumed on the national marketplace (especially in export-oriented Europe) and the profits from this wealth went disproportionately to a few, thus further decreasing the purchasing power of the masses. This upside-down pyramid of wealth fed speculation, which propped up businesses whose profits were declining. Because this speculation was so effective for a number of years in the 1920s, normal people (and foreign banks) were enticed to add to it by investing in the American stock market, thus increasing speculation and decreasing consumption. In the end, the economy of the great accumulation crashed - hitting hardest those who were always at the bottom - the working classes, minorities, people in non-industrialized countries - in general, the poor around the world.
