The Great Depression, a global economic collapse that began in 1929 and lasted about a decade, was a catastrophe that touched the lives of millions of Americans, investors who saw their fortunes vanish overnight, to factory workers and employees who have found themselves unemployed and desperate. for a way to feed their families.
Some people have been reduced to selling apples on street corners to support themselves, while others have lost their homes and been forced to survive in slums known as ‘Hoovervilles’, a bitterly derisive reference to President Herbert Hoover, who in the early 1930s asserted that “prosperity was just around the corner,” even as mistakes in economic and trade policy and an unwillingness to provide government aid to ordinary Americans deepened their hard situation.
It is not easy, even for people who have lived through the economic downturn caused by the COVID-19 pandemic, to grasp the depths of deprivation into which the economy sank during the Great Depression. When the unemployment rate peaked in 1933, 25.6% of American workers – one in four – found themselves unemployed. That’s a much higher rate than the 14.7% unemployment rate in April 2020, when the coronavirus forced businesses and factories to close.
Things were so bad that of all the days of unemployment experienced by individual American workers in American history, half occurred during the Great Depression, according to University of California, Irvine economics professor , Gary Richardson, who has done extensive research on this period and the subject. slowdowns in general.
“There were a lot of ups and downs, but the Great Depression is really the biggest,” he explains.
It is not easy to explain exactly why these difficult times occurred. “For something to be as bad as the Great Depression, you really have to have a lot of things go wrong, in the United States and around the world,” says Richardson.
Here are some of the things that historians and economists often point to as factors that combined to lead to the worst economic disaster in history.
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1. Vulnerabilities in the global economy
In the 1920s, nations rebounded from the disruption and destruction caused by World War I, with factories and farms producing again, Richardson notes. But the nature of the economy in the United States and elsewhere has changed, with ordinary consumers buying durable goods such as appliances and cars – often on credit – becoming increasingly important.
While this consumption has created a lot of wealth for business owners, it has also made them vulnerable to sudden shifts in consumer confidence. At the same time, nations that produced a lot of products and exported them became fierce competitors. “The war eliminated much of the cooperation between nations that was necessary to make the international financial system work,” Richardson said. This inability to work together to control problems meant that a country’s efforts to control a recession were less effective.
2. Financial speculation
The economic boom of the 1920s helped spawn a widespread belief that it was easy to get rich quick, if you were bold enough to invest in the right opportunity at the right time. It’s one of the reasons so many ordinary Americans have been scammed by scam artists who sold them on shady plans, Florida swamps and non-existent oil fields to buy coupons from Spanish couriers and exchange them for US stamps to take advantage of the weaker Spanish currency.
But the riskiest game took place on Wall Street. Investors increasingly bought stocks on margin, in which they deposited as little as 10% of a stock’s price and borrowed the rest of the money, with their stock itself as collateral. Company stocks soared and brokers made huge commissions.
But the bubble eventually burst. It did on Black Monday, October 28, 1929, when the Dow Jones average fell nearly 13% in one day. This began a period of catastrophic declines that destroyed nearly half the value of the Dow Jones in a single month. In 1932, at the height of the financial crisis, the country’s state-owned enterprises had lost 89% of their value. Dozens of investors were ruined and companies struggled to finance their operations.
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“The stock market crash did two things,” says Mary Eschelbach Hansen, professor of economics at American University. “It’s had a wealth effect on consumption (when people’s wealth goes down, they consume less), and it’s also made consumers and businesses pessimistic. Then came a series of panics and bank failures. Households lost more of their wealth and lines of credit used by businesses were disrupted. Unemployment soared.
READ MORE: Here are the warning signs investors missed before the crash of 1929
3. Fed blunders
The Federal Reserve System, created in 1913, was supposed to provide the nation’s economic stability by controlling the money supply. But the policies of the still-new institution in the 1920s not only failed to stop the Great Depression, but may actually have helped bring it about.
“There was a drastic 67% increase in the money supply between 1921 and 1929,” says Daniel J. Smith, professor of economics and finance and director of the Political Economy Research Institute at Middle Tennessee State University.
This policy led to lower interest rates, which encouraged people to borrow and overinvest. “It also led to uncontrolled speculation in the formation of a bubble in the stock market,” Smith said. “Normally, overinvestment would lead to higher interest rates, which would act as a natural pause to prevent a bubble from forming. This did not happen due to the accommodative monetary policies of the young Fed.
But eventually, in 1929, the Fed’s board feared speculation was spiraling out of control and abruptly ended the pauses by contracting the money supply and raising interest rates, Smith notes.
The Fed’s decision to cool the stock market has worked a little too well. “They took the stock market down,” says Richardson. “But then it went down a lot, and it went down very quickly.”
4. The gold standard
In 1929, the United States, like many other countries at the time, was on the gold standard, with the dollar redeemable in gold and pegged to its value. But after the Wall Street crash, nervous investors started swapping their dollars for gold.
As former Fed Chairman Ben Bernacke noted at a conference in 2004, the Fed then decided to raise interest rates to protect the value of the dollar. But those high interest rates made it difficult for businesses to borrow the money they needed to survive, and many ended up closing their doors instead.
READ MORE: How did the gold standard contribute to the Great Depression?
5. The Smoot-Hawley Act
Congressional trade protectionists enacted the Smoot-Hawley Act, which was drafted in early 1929, when the economy still seemed strong. But after the Wall Street Crash weakened the economy, President Hoover signed it into law anyway in 1930. The law raised U.S. tariffs by an average of 16%, in an effort to protect U.S. factories from competition with low-priced products from foreign countries. But that decision backfired when other countries imposed tariffs on US exports.
“If you are a country and you impose tariffs that may be good for your domestic industries, because your home energy could produce more for home consumption,” says Richardson. “But if other countries retaliate, it could be bad for everyone.”
READ MORE: The lesson of the Great Depression on ‘trade wars’
Combined: a perfect economic storm
The real misfortune is that all of these factors combined into a sort of perfect economic storm, the devastating effects of which had lasting repercussions. As Richardson notes, the American economy did not reach full employment again until 1940, just in time for World War II to disrupt consumption with the rationing needed to ensure the military had enough resources. . Life didn’t really return to normal until after the war, when the victorious United States became the world’s largest economy.