The semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash. Business is always thoroughly sound until suddenly the debacle takes place.26
The recession precipitated a sudden contraction of speculative ventures and unproductive expenditures, so reducing still further the market for industrial output. Faced with declining sales, industrialists were already beginning to borrow from the banks, rather than lend to them. Those who had engaged in the speculative boom (including both industrialists and banks) now tried to borrow more in order to cover their losses after the crash, but borrowing was now very difficult. Those who could not borrow went bust, creating further losses for those who had lent to them. The slump spread from one sector of the economy to another.
Once the decline started there seemed no end to it. Industrial decline led to pressure on the banks, which in turn deepened industrial decline and put more pressure on the banks. But that only further exacerbated the disproportion between productive capacity and consumer demand, further worsening the crisis in industry. As firms tried to sustain sales by competitive price cutting, profits everywhere fell and with them the willingness even of firms that survived to invest. The non-productive expenditures that helped to fuel the boom were cut right back as companies tried to conserve their funds and the slump grew deeper.
The position in Europe was no better, with recession also already under way when Wall Street crashed. Conditions were worst in Germany, the world's second biggest industrial economy, which began experiencing an economic downturn in 1928:27 "By the summer of 1929 the existence of depression was unmistakable" ,28 as unemployment reached 1.9 million and the spectacular failure of the Frankfurt Insurance Company began a series of bankruptcies.
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Capitalism in the 20th Century