The Great Depression, which started in 1929 and lasted for roughly a decade, was a disaster that affected the lives of millions of Americans. It was a worldwide economic collapse that saw investors lose their fortunes and left clerks, factory workers, and the unemployed desperate to find a way to feed their families.
Americans in need of government assistance were reluctant to accept help, due to the worsening of their situation. Trade and economic policy mistakes further exacerbated their predicament. During the early 1930s, when President Herbert Hoover often claimed prosperity, those who found themselves living in shanty towns, derisively referred to as “Hoovervilles,” were forced to survive without homes. Some resorted to selling apples on street corners just to make ends meet, while others lost their support.
The unemployment rate in April 2020, when the coronavirus forced factories and businesses to shut down, was significantly higher at 14.7% compared to the peak unemployment rate of 25.6% in 1933 during the Great Depression. The economic downturn caused by the COVID-19 pandemic has affected people who have experienced the depths of deprivation, making it even more challenging for them.
According to Professor Gary Richardson of the University of California, Irvine, extensive research has been conducted on the general downturns and periods in American history, particularly during the Great Depression. It has been found that all American individual workers experienced unemployment throughout the entirety of this time period.
“There have been many highs and lows, but the Great Depression is truly the most significant one,” he clarifies.
According to Richardson, “Both in the United States and globally, it truly necessitates several factors aligning unfavorably for a situation to reach the severity of the Great Depression.” The precise reasons behind the occurrence of such challenging periods are not easily elucidated.
Historians and economists often attribute a combination of factors as the main causes of the most severe economic catastrophe in history.
The nature of the economy in the United States shifted as ordinary consumers began to prioritize buying more durable goods such as cars and appliances. This shift was influenced by the destruction and disruption caused by World War I, which led to a decrease in production from farms and factories, as noted by Richardson.
The attempts of any single country to manage an economic decline were not very successful, mainly due to the lack of cooperation in addressing the problems. According to Richardson, “The war had disrupted the collaboration between nations that was essential for running the global financial system.” This led to intense competition in exporting goods and excessive production by different nations. As a result, consumer confidence became unstable, making them susceptible to sudden changes. However, this situation also generated significant wealth for business owners, which in turn impacted consumption levels.
2. Financial Speculation
If you were bold enough to invest at the right time, the belief that it was easy to get rich quickly helped breed a widespread boom in the economic prosperity of the 1920s. That’s one reason why many ordinary Americans were fleeced by con artists who sold them shady schemes, redeeming stamps for U.S. Mail coupons and buying into the notion of nonexistent oil deposits and swampland in Florida.
However, on Wall Street, the riskiest gambling took place as investors increasingly bought stocks on margin, putting down as little as 10 percent of the price of the stock as collateral, while brokers made huge commissions and stocks soared.
Companies found it difficult to finance their operations, and scores of investors were ruined. During the financial crisis in 1932, the nation’s public companies lost 89 percent of their value, marking the lowest point of the crisis. This period was characterized by catastrophic declines that nearly destroyed half of the Dow’s value in just a single month. However, it was on Black Monday in October 1929, when the Dow Jones Average declined by nearly 13 percent in one day, that the bubble eventually burst.
“Unemployment skyrocketed. Firms that lost their credit lines and a significant portion of their wealth were severely affected. This was followed by a series of banking failures and panics. Additionally, it made consumers pessimistic and caused them to consume less when people’s wealth fell (resulting in a decrease in consumption). Mary Hansen Eschelbach, an economics professor at American University, explains that the stock market crash had two major consequences.”
5. The Smoot-Hawley Act
In an effort to shield American factories from competition with lower-priced goods from foreign countries, the U.S. Raised tariffs by an average of 16 percent when other countries put tariffs on U.S. Exports. However, this move backfired and weakened the U.S. Economy, particularly after the Wall Street Crash in 1930. Despite the economy seeming to still be strong, President Hoover signed the law into effect, but it continued to weaken the economy.
Richardson asserts that if other countries were to retaliate, it could be detrimental for everyone. Therefore, imposing tariffs can be beneficial for your domestic industries because it may lead to increased domestic energy production and consumption.
3. Blunders by the Fed
While the still-young establishment’s policies in the 1920s might have contributed to it, the Federal Reserve System, established in 1913, not only failed to prevent the Great Depression but was also meant to maintain the nation’s economic stability through the regulation of the money circulation.
Smith J. Daniel, the director of the Research Institute for the Economy and professor of finance and economics at Tennessee Middle State University, elucidates that there was a significant 67% surge in the monetary supply between the years 1929 and 1921.
According to Smith, normally, rising interest rates would act as a natural break to prevent the formation of a bubble, as it would lead to a decrease in overinvestment. “It also led to unchecked speculation in the formation of a stock market bubble,” says Smith. That policy led to declining interest rates in the market as well.
Smith observes that, in 1929, the Federal Reserve’s board expressed concerns about excessive speculation and promptly took action by reducing the money supply and increasing interest rates, although eventually.
The stock market quickly plummeted, and they experienced a significant decrease. Richardson explains, “The Federal Reserve’s actions were not sufficient to stabilize the stock market.”
4. The Gold Standard
In 1929, many countries, including the United States, pegged their trade to gold, making investors nervous after the Wall Street crash. However, the value of gold was redeemable in dollars, similar to the United States, and this caused a gold rush.
Instead, numerous businesses ultimately ended up shutting down, which posed challenges for them to secure the necessary funds for survival due to the elevated interest rates. In an effort to safeguard the value of the dollar, the Federal Reserve subsequently decided to increase interest rates, as highlighted by former Fed chairman Ben Bernacke in a lecture from 2004.
Combined: A Perfect Economic Storm
The United States emerged as the world’s leading economy after the war, but it took until 1940 for the economy to truly return to normal. The military had to ensure that they had enough resources, so they implemented rationing to disrupt consumption. Additionally, the economy didn’t reach full employment again until this time. Richardson notes that the repercussions of World War II had lasting and devastating effects on the economy, as all of these unfortunate factors combined to create a perfect storm of economic hardship.