Although precipitated by a collapse of financial markets, the Great Depression was prolonged by a persistent shortfall of demand. As incomes fell and employment declined, a vicious circle of excess capacity and low sales was created. An investigation of the reasons for the extended slump must therefore pay close attention to the roots of the demand problem. This chapter analyzes the contribution of persistent structural unemployment to inadequate demand. Chapter 6 considers the changes in consumer expenditure patterns that exacerbated the demand problem.

Persistent unemployment thwarted recovery of the American economy. Inadequate demand crippled both new and old industries. It also seriously depressed investor confidence. Mature industries saw their markets shrink cyclically as well as secularly. Newer, dynamic industries found it impossible to establish the broad-based markets that their full emergence required. Lowered sales led to layoffs. The resulting unemployment served to maintain the depressed level of effective demand economy-wide.

The fact that certain industries actually prospered and recovered quickly after the trough of 1932 does not mean that demand could be quickly or easily restored. The lower firm incomes and sales that resulted from the crisis of 1929–32 made the more dynamic industries incapable of growing quickly enough to absorb the unemployed from the mature and declining industries.