Anyone who has studied economics would understand that a surplus is never an ideal condition for the market to be in. But those who haven’t studied economics may wonder what exactly a surplus is?
Well, to define a surplus, it occurs when the supply of a product exceeds its demand. This abundance of supply has an impact on the entire economy.
Read ahead to find out why were industrial and agricultural surpluses a problem for the US economy during the great depression and what exactly a surplus economy means.
A Surplus Economy- A General Overview
When output exceeds the amount of demand and consumption in the economy, a decision must be taken about what’s to be done with the excessive products.
They can either be kept in inventories, hoarded up for a season when demand increases and supply takes a fall back, or they can be sold overseas at a lower price. This is known as ‘dumping’ of goods.
But when the surplus is of perishable items such as agricultural goods, that’s where the trouble starts.
In both cases, producers face losses, while consumers benefit from the decreased prices.
Dealing with an abundant supply of both industrial and agriculture can be difficult for countries when they’re unable to meet it with equal demand.
An efficient distribution system is needed in order to efficiently handle the surplus and making it available for consumption. Imports may also be a reason why supply may not be met with an equal or more demand. People dependent on imports overlook the locally produced goods which are available in a surplus.
As it always happens, increased supply results in lower prices as producers like to give incentives to buyers to purchase the goods.
This decrease in price, however, results in major losses for producers and also results in low wages of labor.
The Great Depression – 1930’s
The great economic growth experienced right after WWI eventually resulted in the greatest recession ever experienced.
The great depression was one of the darkest time periods in America. After WWI, America experienced a boom in its economic growth. American farmers were motivated and in high spirits. Production began to increase as investment increased and the latest equipment became available while loans became cheaper. The world was depending on the USA for a supply as war-stricken countries failed to produce enough for their people.
Due to this, the prices of food and agricultural products rose sharply post WWI.
Almost 40 million acres of land was utilized for agriculture and about 30 million acres were dedicated to growing food crops such as wheat and corn. It was expected that demand would continue to grow, and producers were motivated to meet it with an equal supply.
Industries too followed the same route giving the economic boost. The growing international demand encouraged businesses to produce more and increase supply. However, the fact that Europe and the rest of the world were still unstable due to the war was not taken into account.
Things were about to change soon, and not for the better.
To say the least, demand was overestimated. Europeans were stuck with poverty and were in the process of getting back on their feet, affording American imports was not something their finances allowed. Hence, the market size for American goods was far smaller than predicted.
Things weren’t so good at home ground either. After the stock market crash, consumption decreased and Americans could no longer afford the goods that were available in a surplus
Why were Industrial and Agricultural surpluses a Problem for the US Economy?
When the surplus remained unconsumed, it created a greater economic slowdown. The farmers were drowning deep in poverty and debt as their production was not being consumed and they got no return on their investment.
Wages began to fall too as demand decreased and consumption patterns changed beyond prediction and speculation.
What started with a stock market crash spread to the entire economic system. The overproduction and under-consumption of goods made a great depression much worse. Unemployment also increased, which meant the average American was unable to pay for even the low-priced food supply. Farmers starved to death.
One can imagine the scale of crisis by the fact that some families burnt corn instead of coal on kitchen stoves because corn was readily available and was inexpensive.
With little or no source of income, paying back the loans given after war became increasingly difficult for farmers and many defaulted. In short, the US economy was a mess all due to high expectations. Europe imposed quotas and restrictions on imports as well, as part of their economic recovery.