Reasons for the economic crisis of 1929–33: Overproduction and underconsumption

• Overproduction in the 1920s meant factories produced more goods than people could buy.
• Mass production made greater numbers of cars, radios, and appliances at lower prices.
• Underconsumption meant consumers did not buy as many products as were being made.
• Once many families owned the latest products, sales slowed and factories were left with unsold stock.
• Many Americans were too poor to buy new consumer goods.
• Around 42% of Americans did not earn enough money to afford basic necessities comfortably, let alone cars and refrigerators.
• Farms grew more crops than could be sold and prices fell.
• Falling crop prices meant many farmers could not repay debts and were forced to sell their farms.

The 1920s was a time when the US’s economy grew incredibly fast. Great technical advances in industrial mass-production made the production of consumer goods much easier and cheaper.

• factory assembly lines produced the latest products quickly and cheaply
• a huge increase in the quantity and variety of products on sale in American shops
• more American households had electricity in their homes and wanted the latest new technology

Mass production, pioneered by Henry Ford, brought the price of cars down and created huge numbers of well paid jobs on the production lines.

Ford produced the Model T car with the aim that anyone earning a reasonable income could afford one.

Around 1914, a Ford Model T cost $850, but by 1926 the price had fallen to just $295. The costs of cars fell with the introduction of production assembly lines.

Demand rose, but with competition from General Motors and Chrysler, there were always more cars to supply to customers than there were people to buy them.

The growth of the motor industry stimulated growth in other areas:

• steel for the car and truck bodies
• glass for windscreens
• leather for seats
• rubber for tyres and inner tubes
• petrol for power

Motels sprung up alongside the highways, as did garages, hotels and roadside diners, and petrol stations

However, there were potential problems.

More cars, radios and other electrical goods were being made than people could buy. The USA was experiencing the serious problem of overproduction.

Not everyone could afford to update their car or refrigerator as frequently as the manufacturers wanted them to. Once everyone had the latest product, market consumption inevitably slowed down and products remained unsold.

In addition, there was a lack of acknowledgement by the government that when the market was saturated and consumers stopped buying, factories would have to close resulting in high unemployment.

Although the American economy was booming, not everybody shared in the growing affluence of the 1920s.

Prosperity in the 1920s was very uneven. Six million families had an income of less than $1,000 a year.

The enormous output of goods required consumers who could afford to buy them. However, many workers’ income in the 1920s did not rise with the increased productivity.

In 1928, it was estimated that 42% of Americans did not earn enough to buy adequate food, clothing or shelter let alone have money to spend on fridges and cars.

In the 1920s, traditional labour-intensive industries such as coal mining faced tough new competition from oil, gas, and electricity.

In 1918, 680 million tons of coal were produced a year. By 1932, coal tonnage had reduced to 360 million, yet there was still a surplus.

Coal miners could expect to be paid one-third of the national average income. The coal industry did not have strong trade unions to protect workers. Wages dropped, working hours increased, and working conditions declined as mine owners cut costs in an attempt to save money.

Mining employed large numbers of workers, and mine closures significantly raised the nation's unemployment figures.

Other traditional industries including shipbuilding and railroads faced decline in the 1920s, and new production techniques reduced the need for workers.

World War One saw increased demand for food from Europe and this resulted in American farmers enjoying a huge increase in profits.

Many farmers invested in new machinery and technology, most often on credit. The new technology and improved farming techniques lead to an increase in production of food and other crops.

However, farmers faced increasing problems during the 1920s:

• European agriculture recovered after the war, reducing the market for American produce and bringing increased competition.
• Increased production caused prices for produce to drop.
• Wartime prices had been high, and the collapse in prices dramatically reduced income.
• New, cheaper, synthetic (man-made) materials such as nylon replaced cotton to make clothes.
• Prohibition meant that there was no requirement for barley to make beer. The demand for barley fell by 90%.
• Demand for wheat fell by 25% in the years 1900-1925, as an increasingly prosperous population preferred foods that were more luxurious.
• European countries introduced trade tariffs, increasing the price of American goods for European customers. This led to a drop in sales to European markets.

As a result, prices fell and farmers lost money and were forced to sell their farms.

• In 1924, 600,000 farmers lost their farms.
• In 1930, there were a million fewer farms than there had been in 1920.

The 1920s economy grew quickly, but factories began producing more goods than people could buy. This is called overproduction.

• Mass production made greater numbers of cars, radios, and appliances.
• Using machines and production lines also made these products cheaper.

But consumer demand could not keep up with the huge number being made. This created a problem of underconsumption.

• Once many families owned the latest products, sales slowed and factories were left with unsold stock.
• Workers helped produce more goods, but often their wages did not rise enough for them to buy what they were making.
• Many Americans were too poor to buy new consumer goods.
• Around 42% of Americans did not earn enough money to afford basic necessities comfortably, let alone cars and refrigerators.

If people stopped buying products, factories risked cutting production, closing down, and creating unemployment. This would in turn reduce the number of people who could afford to buy products.

Farmers also suffered from overproduction:

• Farms grew more crops than could be sold.
• As a result prices fell.
• Falling crop prices meant many farmers could not repay debts.
• Many were forced to sell their farms.

Although the 1920s looked prosperous, overproduction and underconsumption created serious weaknesses in the US economy that helped lead to future economic problems.