Economic Weaknesses of
the 1920s
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The Great Depression was not a
brought about by a single event.
A combination of factors led to
the economic downturn.
The four generally recognized
factors that led to the
Depression are:
1. An Old Industrial Base
• Outdated equipment made some
industries less competitive—
meaning they could not sell their
goods as cheaply as industries
who had better, more up-to-date
equipment.
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American textile plants were
competing with mills in Japan, China,
India, and Latin America.
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Also new transportation technologies
such as Automobiles, Trucks, and
Busses were digging into Rail Road
companies’ profits.
2. A crisis in the farm sector
• Starting in the 1920s demand and
prices were both down. WHY?
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After WWI the expected demand for food in
Europe never materialized
So prices for crops went down
And American farmers had a surplus of
crops
To try to make up for low prices American
farmers produced more crops
This pushed prices even farther down
Supply UP & Demand
DOWN--Prices go DOWN!
S
+ D
=P
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However, debts were up
During the war, farmers bought new, expensive
equipment on credit, now that prices were
down, they could not afford to pay.
3. The availability and misuse
of easy credit
• The 1920s marked the rise of
a consumer culture in
America
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Many people went into debt
buying things on installment
plans (like cars)
Others bought stocks on margin
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This means they only paid a fraction of the
cost of a stock as a down payment, and
borrowed the money for the rest. If they
were able to sell their stock for a higher
value it was no problem, and they ended up
making money. If, however the price of the
stock went down, they still had to pay the
balance they had borrowed, but now they
may not have had the means to do so.
This was a big factor in why the stock
market crashed
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When the economy began to take a
downturn, they were left with reduced or no
income, and piles of debt.
• Remember, at this time there was no
welfare, or unemployment insurance. If
you were out of work, you were out of
luck!
This caused banks to fail.
• They had loaned out their money to people
who were unable to pay it back. So they
defaulted on their loans. When people
went to banks to withdraw their savings, it
simply was not there.
• Rural banks were some of the first to begin
failing
•
Remember the farmers
4. The Uneven distribution of
wealth
• There was too little money in the
hands of ordinary people who
made up the majority of
consumers
If consumers cannot afford to buy
what companies are selling,
companies cannot make a profit.
• If companies are not making a
profit, they cannot afford to keep
workers on board—i.e. people lose
their jobs.
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Make
no mistake about it, rich people
(for the most part) weathered the
Depression just fine.