In the spring of 1929, the United States enjoyed a fragile prosperity. Although America had become the world’s leading economy, it had done little to help rebuild Europe’s shattered economy after World War I. Instead, the Republican administrations demanded that Allied nations repay their war loans, creating a tangled web of debts and reparations that sapped Europe’s economic vitality. Moreover, to boost American business, the United States enacted tariffs that prevented other nations from selling their goods to Americans. Fewer sales meant that foreign nations had less money to buy American goods. American banks propped up the nation’s export trade by extending credit to foreign customers, deepening their debt.

America’s domestic economy was also in trouble. Wealth was badly distributed. Farmers continued to suffer from low prices and chronic indebtedness; the average income of farm families was only $240 per year. The wages of industrial workers, though rising during the decade, failed to keep up with productivity and corporate profits. Overall, nearly two-thirds of all American families lived on less than the $2,000 per year that economists estimated would “supply only basic necessities.” In sharp contrast, the wealthiest 1 percent of the population received 15 percent of the nation’s income—the amount received by the poorest 42 percent. The Coolidge administration worsened the deepening inequality by cutting taxes on the wealthy.

By 1929, the inequality of wealth produced a serious problem in consumption. The rich, brilliantly portrayed in F. Scott Fitzgerald’s novel The Great Gatsby (1925), spent lavishly, but they could absorb only a tiny fraction of the nation’s output. For a time, the new device of installment buying—buying on credit—kept consumer demand up. By the end of the decade, four out of five cars and two out of three radios were bought on credit.

Signs of economic trouble began to appear at mid-decade. New construction slowed down. Automobile sales faltered. Companies began cutting back production and laying off workers. Between 1921 and 1928, as investment and loan opportunities faded, five thousand banks failed, wiping out the life savings of hundreds of thousands.