Introduction
Other than the 2007-2008 financial crises, the great depression is a memorable financial and economic crisis in the American history. Numerous structural failings and economic imbalances resulted in the stock market crash of 1929 as well as the Great Depression. People wanted to make quick money from the stock market which offered high expectations from the new gold rush.
Economists and historians share different theories on the major causes of the great depression and the fall of the stock market. Historians blame economies of scale as a major cause of great depression. Historians of U.S. business generally argue that corporate managers preferred policies that favored long-term stability and growth of their enterprises to those that maximized current profits.
Wrong economic policies undertaken by the U.S during that particular time can be blamed for the great depression. Among the many causes of the stock market crash of 1929 and the Great Depression, the paper has explored economies of scale as a major cause.
The essay discuses how the economies of scale as discussed by Daniel M. G. Raffin’s article, “Making Cars and Making Money” might have contributed to the stock market crash of 1929 and the subsequent depression. It also explores advertising strategies explored by William Leach and Roland Marchand.
To achieve the essay’s objective, the relationship between overproduction, under-consumption, credit, banking crisis and international trade with respect to the Great Depression has been explored.
Mass production and other crisis
During the 1920s, industries like the automobile industry witnessed a great change which was as a result of new production techniques. During this era, new production techniques enabled mass production that was characterized by economies of scale (Raff 725). General Motors and Ford dominated the industry because of their innovative methods.
In addition, it is during this period that mergers were carried out between different industries ranging from grocery to automobiles. As a result, the process came to be known as the “mergermania”. Mergermania led to over-production, glut in the market, increased layoffs, excessive competition, economic volatility, waste of resources and produced products (Leach 265).
Companies produced more than the market demand could afford thus creating a glut. Consequently, firms started to struggle to sell their products but the demand was low which led to wastes and excessive competition.
For instance, managers from Steinback and the New Brunswick observed that the excessive competition in the market could only be met through the development of individual purchasing power (Leach 260). The profits generated were disappointing compared to the production costs which had been invested. This precipitated the fall of share prices in the major production firms.
Most of the chain stores which had been formed as a result of mergers had been developed through the aid of financial bankers which was against the tradition of family ownership and independence (Leech 260). In addition, the bank investments aid was deployed without determining the credit worthiness of the companies. The only incentive that drove the formation of mergers was to make quick profits.
The growth of stores and expansions prompted competitors to purchase stocks and acquire more companies as a way of diversifying their market share. By 1929, the market was flooded with departmental stores which increased the level of competition. Moreover, fewer profits were made which could not pay the finances which had been credited during merger formation.
In the automobile industry, Ford’s invention increased flexibility in automobile production. As a result, the market a revolution was witnessed during the inter war period. Just as asserted by Leach (271), engineering at the time spurred mass production of electronics and automobiles. The concept of consumerism had hit the market and advertisers used print media and radio to market their products (Marchand 316).
With high economies of scale General Motors exploited the economies of scale resulting to high production (Raff 727). Mass market domination was disappointing as demand for expensive cars started to decline.
Exploitation of innovation in different industries coupled by radical innovation evolved production. However, in 1920s it become hard to sell the products as consumers who worked in the production sector had been laid off.
The concentration of economic power, supported by accelerated economic productivity was witnessed during the end of the World War I (Leach 264; Raff 725). In addition, America was in a phase of company consolidation and production. As a result of effective and efficient means of production as a result of economies of scale, America industries were characterized by overproduction of goods and products (Leech 265).
Given that capitalism was the order of the day and the Karl Marx’s free hand controlled the economy, a new tempo of undertaking business was experienced. Over production was resulted to stock pilled and backed up inventories. At this time, the glut was experienced in the market as a result of low demand compared to supply.
Because of a painful depression experienced in 1921 which resulted from industrial overproduction, high level of unemployment was witnessed (Leech 265). Moreover, product prices plummeted dislocating the economy.
The supposition of the basic law of demand and supply, increase in products supplied results to decline in product prices as a result of market glut was witnessed. Although this was short lived, the economy had already been affected. Unemployment reduced the purchasing power of consumers
The concept of consumerism was highly experienced prior the great depression. The philosophy behind “consumptionism” was that human beings were committed to industrial production which ensured that more products were produced each year (Leach 268). In addition, capitalism played a major role and a cut throat war was witnessed between socialists and capitalists.
Capital’s appetite to generate massive profits prompted capitalists to produce more products. This was supported by advertising which disregarded ethics and taste for advertising as most of the capitalists concentrated on making more money despite the consequences (Marchand 316).
As noted by Samuel Strauss, the market was characterized by “particularism” which was based on mass production, standardization, and mass distribution. Since people were seen as mass consumers, major industries continued to produce more goods and products. Flooding of the markets with goods in the mid 1920s did not deter capitalists from producing more goods.
The climate of capitalism and greed started to destroy the economy because despite the fact that the companies made high profits, employees continued to be lowly paid, and low revenues were made compared to the cost of production.
By 1930s, most Americans possessed an automobile because they were easily available in the market (Leach 270). This has been supported early writing which indicate that the innovation by Ford had spurred mass production of automobiles (Raff 730).
Although manufactures saw the warning signs of economic upsurge from the fall of car sales, decline in housing construction, and lower level of steel production, the warning was not taken into an account. Increased sales were supported by high levels of adverts which dominated the market to meet the excessive competition in the market (Marchand 301).
To show the aggressiveness of advertisers during the era, automobile ads used more than one illustration which sought the attention of the buyers. Commercialism was explicitly evident in the market as advertisers played hard to attract consumers (Leach 272).
It is important to note that advertising played a major role in a market characterized by infusion of money, increased sales and mass production. As a result, by the 1930s, competitive pressures as a result of depression increased advertising trends in the radio and print media (Marchand 306).
Because of the current macroeconomic instabilities such as high levels of unemployment, low purchasing power and increased credit (Marchand 310), it become hard to control the depression. Some small companies started to fall while others resulted to mergers and consolidation (Marchand 312).
Conclusion
Based on the essay, it is imperative to note that innovation was a major driving force which resulted in mass production. To dominate the market, major chain stores formed mergers with the objective of increasing their dominance in the market. Furthermore, aid from investment banks was used to support the mergers.
Capitalist ruled America in the 1920s as mass production continued thus creating glut in the market. To evade the consequences of excessive competition in the market, companies which enjoyed economies of scale resulted to cut throat advertising.
Works Cited
Leach, William. Land of Desire: Merchants, Power and the Rise of a New America Culture. New York: Vintage books, 1993. Print.
Marchand, Roland. Advertising the American Dream: Making Way for Modernity, 1920-1940. Berkeley: University of California Press, 1985. Print
Raff, Daniel MG. “Making Cars and Making Money in the Interwar Automobile Industry: Economies of Scale and Scope and the Manufacturing behind the Marketing.” Business History Review, 65 (1991): 721-753.