The American economic system of the 1920s had grave flaws. Certain industries did not share in the good times. The coal business, suffering from the competition of petroleum, entered a period of decline. Cotton and woolen textiles also lagged because of the competition of new synthetics, principally rayon. Industry began to be plagued by falling profit margins and chronic unemployment.
The movement toward consolidation in industry, somewhat checked during the latter part of the Progressive Era, resumed; by 1929, 200 corporations controlled nearly half the nation’s corporate assets. General Motors, Ford, and Chrysler turned out nearly 90 percent of all American cars and trucks. Four tobacco companies produced over 90 percent of the cigarettes. One percent of all financial institutions controlled 46 percent of the nation’s banking business. Even retail merchandising, traditionally the domain of the small shopkeeper, reflected the trend. The A & P food chain expanded from 400 stores in 1912 to 17,500 in 1928. The Woolworth chain of five-and-ten-cent stores experienced similar growth.
Most large manufacturers, aware that bad public relations resulting from the unbridled use of monopolistic power outweighed any immediate economic gain, sought stability and “fair” prices rather than the maximum profit possible at the moment. “Regulated” competition was the order of the day, oligopoly (a market controlled by a small group of firms) the typical situation. The trade association movement flourished; producers formed voluntary organizations to exchange information, discuss policies toward government and the public, and “administer” prices in their industry. Usually the largest corporation, such as U. S. Steel in the iron and steel business, became the “price leader,” its competitors, some themselves giants, following slavishly.
The success of the trade associations depended in part on the attitude of the federal government, for such organizations might well have been attacked under the antitrust laws. Their defenders, including President Harding, argued that the associations made business more efficient and prevented violent gyrations of prices and production. Secretary of Commerce Hoover put the facilities of his department at the disposal of the associations. “We are passing from a period of extremely individualistic action into a period of associational activities,” Hoover stated. After Coolidge became president, the antitrust division of the Justice Department itself encouraged the trade associations to cooperate in ways that had previously been considered violations of the Sherman Act.
Even more important to the trade associations were the good times. With profits high and markets expanding, the most powerful producers could afford to share the bounty with smaller, less efficient competitors.
The weakest element in the economy was agriculture. Farm prices slumped and farmers’ costs mounted. Besides having to purchase expensive machinery in order to compete, farmers were confronted by high foreign tariffs and in some cases quotas on the importation of foodstuffs. As crop yields per acre rose, chiefly because of the increased use of chemical fertilizers, agricultural prices fell further.
Despite the efforts of the farm bloc, the government did little to improve the situation. President Harding opposed direct aid to agriculture as a matter of principle. “Every farmer is a captain of industry,” he declared. “The elimination of competition among them would be impossible without sacrificing that fine individualism that still keeps the farm the real reservoir from which the nation draws so many of the finest elements of its citizenship.” During his administration
Congress strengthened the laws regulating railroad rates and grain exchanges and made it easier for farmers to borrow money, but it did nothing directly to increase agricultural income. Nor did the high tariffs on agricultural produce have much effect. Being forced to sell their surpluses abroad, farmers found that world prices depressed domestic prices despite the tariff wall.
Thus the unprecedented prosperity rested on unstable foundations. The problem was mainly one of maldistribution of resources. Productive capacity raced ahead of buying power. Too large a share of the profits was going into too few pockets. The 27,000 families with the highest annual incomes in 1929 received as much money as the 11 million with annual incomes of under $1,500, the minimum sum required at that time to maintain a family decently. High earnings and low taxes permitted huge sums to pile up in the hands of individuals who did not invest the money productively. A good deal of it went into stock market speculation, which led to the “big bull market” and eventually to the Great Depression.
World History
