How did overproduction and under-consumption contribute to the Great Depression?

During much of the 1920s, agricultural productivity rose in the United States, many homes installed electricity for the first time, people had jobs, and the economy boomed. In these "roaring twenties," people bought consumer goods: Henry Ford's model-T car made automobiles affordable to the average person, and feeling prosperous, many families purchased electrical appliances and furniture to fill their homes. Advertising and boosterism encouraged optimism, leading many people to buy on credit. But then the economy...

During much of the 1920s, agricultural productivity rose in the United States, many homes installed electricity for the first time, people had jobs, and the economy boomed. In these "roaring twenties," people bought consumer goods: Henry Ford's model-T car made automobiles affordable to the average person, and feeling prosperous, many families purchased electrical appliances and furniture to fill their homes. Advertising and boosterism encouraged optimism, leading many people to buy on credit. But then the economy began to slow down. Agricultural overproduction depressed prices in that sector, and farmers, at that time a signifcant segment of the US economy, began to cut back on spending. As they delayed purchases, inventories piled up in factory warehouses, leading factories to cut production. Reduced production meant that manufacturing businesses needed fewer workers, so they laid people off. These people, having no jobs, and at that time, no unemployment insurance, sharply cut back on their purchases. This began a vicious cycle, in which the drop in demand for consumer goods led to more layoffs, which led to even less purchasing, which led to more layoffs. None of this was terrible until the inflated, largely unregulated stock market crashed and many people's savings were wiped out over night. Factories, with warehouses full of merchandise manufactured on credit, could not pay their bills and were also wiped out. Banks failed because people couldn't pay back their loans. It was very much like a game of dominos, where one domino, weakened demand, hit the next domino, employment, which hit the next and the next until the whole economy had collapsed. It is difficult for us today to understand how bad the situation was in the early 1930s.