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.
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, 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.
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.
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.
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.