The demise of the Second Klan after 1925 resulted from internal corruption and external circumstances. Internal scandals, embezzlement, and immoral behavior at high levels created distrust and disrespect for some Klan officials. One of the most egregious examples is that of D. C. Stephenson, Grand Dragon of Indiana and a major figure in the Klan hierarchy, who embezzled funds, raped his secretary and allowed her to die after a suicide attempt, for which he received a sentence of life in prison. Also, the inherent secrecy of the Klan, a lack of accountability, and the large incomes from dues tempted and corrupted officials at all levels. Furthermore, Klan leaders failed to live up to Klan principles. Klan founder, "Colonel" Simmons, was forced from his office in the early 1920s as a result of heavy drinking and poor management. The owners of the Southern Publicity Association, Clarke and Tyler, scandalized members after they were discovered together drunk and half-naked in an Atlanta hotel room.

Moreover, the political and economic circumstances that attracted people to the Klan changed after 1924 for many reasons. Congress enacted restrictions on immigration in 1921 and in 1924. The economy soared to high levels of productivity and prosperity; consumer goods were plentiful. Union activity declined during the 1920s and the labor movement remained weak (membership in the American Federation of Labor fell by 1.5 million). Al Smith, the Catholic governor of New York, lost his bid for the presidency in 1924. The threat of "Bolshevism" had diminished and Hollywood movie makers responded to public criticism by toning down nudity and morally offensive material. Furthermore, the Klan secrecy and fanaticism generated opposition: the Klan failed to win broad political support while political opposition against it solidified. Some states passed legislation, such as the Walker Law in New York in 1923, to regulate the Klan or similar organizations. By the end of the 1920's, the Klan dissolved as a social movement only to return later under different social and political circumstances.