There were four main things that were seriously wrong in the American society that continued to worsen as the decade went on (1920-1930). One of these was hardly noticeable, but the impact was well-felt. And the other three were highly visible and widely discussed and debated.
The first of these flaws was the income being distributed with great inequality. Although output to workers increased, and business profits increased rapidly, only the well-to-do and wealthy families saw a significant increase in income. This meant that the economy was very dependant on the luxury consumption of the rich, or the investments into further businesses. In this period, because of the depression, many of the rich families, instead of putting some of the earnings back into the economy, they chose to place it in savings. Despite all these circumstances, the increasingly lopsided income distribution did not affect the general population much at all, and this flaw went seemingly unnoticed.
New York Stock Exchange on Wall Street in New York...
English: New York Stock Exchange on Wall Street, N...
Corporation Street, Birmingham - Midland Metro wor...The other three flaws in the economy were far less subtle as the first. During the First World War, the United States became the world's greatest creditor. A debtor country could export a greater value of goods than imported, and then use the difference gained to pay of debts. A Creditor though must import greater value than exports to pay back the money owed. During the twenties though, the balance of these was maintained through foreign loans. Because of taxes taken from the loans, and interest accumulated, the character of these loans was no longer accepted as a secure measure of payment. Because of this drawback, the buying power of both the exporter and importer reduced, and bond owners, such as farmers, began to suffer.
The second weakness of the economy was the large-scale corporate stock monopolies. This took form in a variety of...
Stock Market Crash
One of the main abuses behind the unprecedented run-up in stock prices in the 1920s was the practice of unbridled buying on margin. This practice is analogous to buying stock with a credit card. As long as prices kept rising there was no problem. But if prices fell, your broker would issue what's called a margin call. The investor who bought stock on credit would be expected to send his broker a check to cover the drop in stock value. Of course, when the bubble finally burst in 1929, the plunging prices were too steep to allow the vast majority of investors to make good the losses. Bankruptcy resulted all around, including at banks which were some of the biggest stock investors of all. FDIC insurance wasn't instituted until the 1930's and many depositors were wiped out. Strict rules were also instituted regarding margin buying, which still isn't prohibited. The rules remain to this very day as one safeguard to prevent a recurrence. The SEC was also formed in the 1930s to serve as a watchdog to encourage fairer corporate financial reporting.
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