What factors led to the end of prosperity in 1929?

The sudden end of prosperity in 1929

Longer term reasons

Overproduction in agriculture - as farming techniques improved and demand from Europe dropped, farmers were producing too much food. This caused a fall in prices, and drop in profits, so thousands of farmers had to sell their farms.

Overproduction in industry/falling demand for goods - by the end of the 1920s there were too many consumer goods unsold in the USA. Not everyone in America was rich. Those that could afford to buy cars, refrigerators etc had already bought one, but approximately 60 per cent of Americans could not. The supply was bigger than the demand.

Buying on credit - some of the country's poorer people bought goods on credit and as a result, a great deal of them owed money to shops and large companies. Many of these companies subsequently went into financial difficulties as the poor failed to pay their debts.

Commerce - by the end of the 1920s, America tried to sell its surplus goods to European countries. But, in response to the Fordney-McCumber Tariff Act, European countries had imposed a tax on American goods. So American goods were too expensive to buy in Europe and, as a result, there wasn't much trade between America and European countries.

Property prices - house prices increased a great deal in the early 1920s. But after 1926, house prices fell leaving a number of Americans owning houses that were worth less money than what they had paid (and borrowed from the bank) for it. This is called negative equity.

Too many small banks - due to laissez-faire policies banks were not tightly regulated meaning there were only a few rules to follow to run a bank. There were many small banks that did not have the financial resources to cope with the rush for money when the Wall Street Crash happened. A number of banks had to close leaving thousands of customers with no money and no confidence in the banking system.

Short term reasons

The Stock Market - throughout the 1920s the prices of shares had increased to unrealistic levels. People continued to buy shares as they were making huge profits from them. By 1929 over 20 million people had invested in shares. The value of the stock market had more than tripled from $27 billion in 1925 to $87 billion in 1929.

Overspeculation - as it was easy to borrow money, many people would buy shares on the margin - which meant borrowing money to buy shares and then holding on to them until they were worth more than the debt. Approximately 75 per cent of the purchase price of shares was borrowed in 1929. Then they would sell the shares, pay off the original debt and make a profit.

Loss of confidence and a sudden fall in prices - the Wall Street Crash.

The short and long term reasons for the end of prosperity in America.Short and long term reasons for the end of prosperity in America