Could the Calamities That Caused the Great Depression Happen Again?

The Groovy Depression, a worldwide economic plummet that began in 1929 and lasted roughly a decade, was a disaster that touched the lives of millions of Americans—from investors who saw their fortunes vanish overnight, to factory workers and clerks who found themselves unemployed and drastic for a way to feed their families.

Some people were reduced to selling apples on street corners to support themselves, while others lost their homes and were forced to survive in shanty towns that became known as "Hoovervilles," a bitterly derisive reference to President Herbert Hoover, who in the early 1930s often claimed that "prosperity was just around the corner," even as economic and trade policy mistakes and reluctance to provide government aid to ordinary Americans worsened their predicament.

It's not easy—even for people who've lived through the economical downturn acquired past the COVID-19 pandemic—to grasp the depths of deprivation to which the economy sank during the Great Low. When the unemployment charge per unit peaked in 1933, 25.six percent of American workers—one in four—found themselves unemployed. That's a vastly college rate than the 14.7 percent unemployment in April 2020, when the coronavirus forced businesses and factories to close downwardly.

Things were then bad that of all the days of unemployment experienced past private American workers in American history, half occurred during the Great Depression, according to University of California, Irvine economic science Professor Gary Richardson, who has done all-encompassing research on that menses and the subject of downturns in general.

"There have been a lot of ups and downs, but the Dandy Depression is really the biggest one," he explains.

It'due south not easy to explain exactly why such hard times happened. "For something to be as bad every bit the Great Depression, you really need multiple things going wrong, in the U.Due south. and effectually the world," Richardson says.

Hither are some of the things that historians and economists often point to equally factors that combined to lead to the worst economical disaster in history.

Picket: America, the Story of US: Bust on HISTORY Vault

ane. Vulnerabilities in the Global Economy

Adjourn Market traders gesture with their hands to trade stocks, on Wall Street, New York City.

Hulton Archive/Getty Images

In the 1920s, nations bounced back from the disruption and devastation caused by World War I, with factories and farms producing again, Richardson notes. But the nature of the economic system in the United states and elsewhere shifted, equally ordinary consumers buying durable appurtenances such every bit appliances and cars—often on credit—became more and more important.

While that consumption created a lot of wealth for business owners, it also made them vulnerable to sudden shifts in consumer confidence. At the same time, nations who were producing a lot of products and exporting them became tearing competitors. "The war had eliminated a lot of the cooperation between nations that was required to run the international financial system," Richardson says. That inability to work together at controlling problems meant that any 1 country's efforts to control a downturn were less effective.

2. Financial Speculation

The 1920s economic boom helped breed a widespread belief that it was easy to become rich quick, if you were bold enough to invest in the right opportunity at the correct time. That's one reason why so many ordinary Americans were fleeced past con artists who sold them on shady schemes, from Florida swampland and nonexistent oil deposits to the notion of buying Castilian mail coupons and redeeming them for U.S. stamps to profit on the weaker Castilian currency.

Only the riskiest gambling took identify on Wall Street. Investors increasingly bought stocks on margin, in which they put downwardly every bit little as 10 per centum of the cost of a stock, and borrowed the rest of the money, with their stock itself as collateral. Corporate stocks soared, and brokers made huge commissions.

But the bubble eventually had to burst. It did that on Black Mon, October 28, 1929, when the Dow Jones average declined almost 13 per centum in one day. That started a catamenia of catastrophic declines that destroyed near half of the Dow's value in a unmarried month. Past 1932, at the nadir of the financial crisis, the nation's public companies had lost 89 percentage of their value. Scores of investors were ruined, and companies found it hard to finance their operations.

Roll to Keep

"The stock market crash did two things," explains Mary Eschelbach Hansen, a professor of economics at American University. "Information technology had a wealth effect on consumption (when people'southward wealth falls, they eat less), and it also made consumers and firms pessimistic. Then came a serial of banking panics and failures. Households lost more than of their wealth, and the lines of credit that firms used were disrupted. Unemployment soared."

READ MORE: Hither Are Warning Signs Investors Missed Before the 1929 Crash

3. Blunders by the Fed

Floor of the New York Stock Commutation during heavy trading, c. 1926.

NY Daily News Archive/Getty Images

The Federal Reserve Organization, created in 1913, was supposed to ensure the nation's economical stability by controlling the money supply. But the still-new institution's policies in the 1920s not merely failed to stop the Peachy Depression, but actually may accept helped to crusade it.

"At that place was a drastic 67 percent increase in the coin supply between 1921 and 1929," explains Daniel J. Smith, a professor of economics and finance and director of the Political Economy Enquiry Institute at Centre Tennessee Country University.

That policy led to declining interest rates, which encouraged people to infringe and overinvest. "Information technology too led to unchecked speculation in the formation of a bubble in the stock market," Smith says. "Unremarkably, overinvestment would lead to rise interest rates, which would act every bit a natural break to prevent a bubble from forming. This didn't occur due to the like shooting fish in a barrel monetary policies of the young Fed."

But somewhen, in 1929, the Fed's board worried that speculation was out of command, and abruptly slammed on the breaks by contracting the coin supply and raising interest rates, Smith notes.

The Fed's move to cool the stock market worked a little likewise well. "They got the stock market to come downwardly," Richardson explains. "But and then it came downwardly a lot, and it came downwards very rapidly."

4. The Gold Standard

Back 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. Simply afterward the Wall Street crash, nervous investors began to trade their dollars for gold.

Equally quondam Fed chairman Ben Bernacke noted in a 2004 lecture, the Fed then moved to jack upwardly interest rates higher to protect the dollar's value. Simply those high interest rates made it difficult for businesses to borrow money that they needed to survive, and many ended up closing their doors instead.

READ MORE: How Did the Aureate Standard Contribute to the Great Depression?

5. The Smoot-Hawley Deed

Wall Street clerks working long hours computing gains and losses, c. 1929.

Bettmann Archive/Getty Images

Merchandise protectionists in Congress enacted the Smoot-Hawley Human activity, which was written in early 1929, while the economic system nevertheless seemed to be going strong. But after the Wall Street Crash weakened the economy, President Hoover still signed it into police force in 1930. The law raised U.Due south. tariffs by an average of 16 percent, in an attempt to shield American factories from competition with foreign countries' lower-priced goods. But the move backfired, when other countries put tariffs on U.Southward. exports.

"If you lot're a state and yous impose tariffs that can be good for your domestic industries, considering your domestic free energy might produce more for home consumption," Richardson says. "Simply if other countries retaliate, then information technology could exist bad for everybody."

READ More than: The Great Depression Lesson Nearly 'Trade Wars'

Combined: A Perfect Economical Storm

The really unlucky affair was that all those factors combined in a sort of perfect economic tempest, whose devastating effects had long-lasting repercussions. As Richardson notes, the U.Southward. economy didn't once again reach full employment until 1940—just in fourth dimension for Earth War 2 to disrupt consumption with rationing needed to ensure that the war machine had plenty resources. Life didn't actually get back to normal until subsequently the state of war, when the victorious Us emerged equally the world's leading economy.

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