Everyone was over-confident that the boom would go on and that demand would continue to rise. It did not. By early 1929, several things began to cut down demand. America’s population growth was slowing down and fewer goods were needed. Foreign countries put high tariffs on American imports, responding to the American government’s similar policy. So the goods been produced were not been distributed to other countries because they could not afford them either.
The fall in demand of the products was a result of the poor income distribution. Too much of the income from the 1920s boom was going into too few hands. By 1929, 5% of the American population was receiving 33% of the total income. By reducing the top rates of tax, the Republican government was helping the rich to become richer. Some of the wealth was spent or invested. But there was a limit to what this small percentage could consume. Higher wages would have resulted in greater consumption of goods and therefor a greater demand on goods, this would have stopped the mass unemployment and may have even stopped the depression happening at all. The Crash in 1929 revealed many weaknesses in the way in which businesses were carried out. During the 1920s, companies had been given as much freedom as they needed by the Republican government and tax breaks to big businesses, while the government provided no welfare. Trade unions were also very week. But after the crash, it became clear that many of the companies were badly structured, and some had even gone corrupt.
This was the start of the vicious circle of depression. Industries cut back on production resulting in the workers being sacked. Then the unemployed cannot afford the produce resulting in the industry closing because of the demand for goods declining. Something similar was happening in agriculture. Farmers were producing the food to sell but because of the mass unemployment and poor income distribution no one could afford to buy the goods. The prices had to be dropped in order to sell them so there was less money coming into the family. Therefor they attempted to overcome this by producing more food to make money, but the prices dropped even more. Farmers could not afford to pay debts and bills, which resulted in the banks taking over the farms to repay their debts.
President Herbert Hoover was widely blamed for failing to lift the USA out of the depression. Like many Americans, Hoover thought that the depression would eventually cure itself. He was very reluctant to use the powers of the government to aid in the recovery of the economy. He reluctantly set up the Reconstruction Finance Corporation in hope to relief the pressure of money. It was aimed to lend money to banks, insurance companies and railways and he also passed the Federal Home Loan Act, which provided loans to Building Societies, and the Relief and Construction Act. Hoover believed in the ‘trickle down’ effect. He hoped that these loans would encourage investments and eventually provide jobs. But they did too little too late.
The Wall Street Crash was the trigger event that started the great depression. The collapse was due to a combination of factors acting like a chain reaction.