Overproduction in Factories
Overproduction in manufacturing was also
an economic concern during the era leading up to the depression.
During the 1920s,
factories produced an increasing amount of popular consumer goods in
an effort to match demand. Although factory output soared as more
companies utilized new machines to increase production, wages for
American workers remained basically the same, so demand did not
keep up with supply. Eventually, the price of goods plummeted when
there were more goods in the market than people could afford to
buy. The effect was magnified after the stock market crash, when
people had even less money to spend.
Overproduction on Farms
Farmers faced a similar overproduction crisis. Soaring
debt forced many farmers to plant an increasing amount of profitable
cash crops such as wheat. Although wheat depleted the
soil of nutrients and eventually made it unsuitable for planting,
farmers were desperate for income and could not afford to plant
less profitable crops. Unfortunately, the aggregate effect of all
these farmers planting wheat was a surplus of wheat
on the market, which drove prices down and, in a vicious cycle,
forced farmers to plant even more wheat the next year. Furthermore,
the toll that the repeated wheat crops took on the soil contributed
to the 1930s
environmental disaster of the Dust Bowl in the West
(see The Dust Bowl, p. 33).
Income Inequality
Income inequality, which was greater
in the late 1920s
than in any other time in U.S. history, also contributed to the
severity of the Great Depression. By the time of the stock market
crash, the top 1 percent of Americans owned
more than a third of all the nation’s wealth, while the poorest 20 percent
owned a meager 4 percent of it. There was
essentially no middle class: a few Americans were rich, and the
vast majority were poor or barely above the poverty line. This disparity
made the depression even harder for Americans to overcome.
Bad Banking Practices
Reckless banking practices did not help the economic situation either.
Many U.S. banks in the early 1900s
were little better than the fly-by-night banks of the 1800s,
especially in rural areas of the West and South. Because virtually
no federal regulations existed to control banks, Americans had few
means of protesting bad banking practices. Corruption was rampant,
and most Americans had no idea what happened to their money after
they handed it over to a bank. Moreover, many bankers capitalized
irresponsibly on the bull market, buying stocks on margin with customers’
savings. When the stock market crashed, this money simply vanished,
and thousands of families lost their entire life savings in a matter
of minutes. Hundreds of banks failed during the first months of
the Great Depression, which produced an even greater panic and rush
to withdraw private savings.
A Global Depression
The aftermath of World War I in Europe also played a significant role
in the downward spiral of the global economy in the late 1920s. Under
the terms of the Treaty of Versailles, Germany owed
France and England enormous war reparations that were
virtually impossible for the country to afford. France and England,
in turn, owed millions of dollars in war loans to the United States.
A wave of economic downturns spread through Europe, beginning in
Germany, as each country became unable to pay off its debts.
Hoover’s Inaction
At first, President Herbert Hoover and other
officials downplayed the stock market crash, claiming that the economic
slump would be only temporary and that it would actually help clean
up corruption and bad business practices within the system. When
the situation did not improve, Hoover advocated a strict laissez-faire (hands-off) policy
dictating that the federal government should not interfere with
the economy but rather let the economy right itself. Furthermore,
Hoover argued that the nation would pull out of the slump if American
families merely steeled their determination, continued to work hard,
and practiced self-reliance.
