What systemic factors led to the Great Depression?

The Great Depression, a worldwide economic collapse 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 back up 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," fifty-fifty every bit economic and trade policy mistakes and reluctance to provide authorities help to ordinary Americans worsened their predicament.

It's not easy—even for people who've lived through the economic downturn caused by the COVID-19 pandemic—to grasp the depths of deprivation to which the economy sank during the Not bad Depression. When the unemployment rate peaked in 1933, 25.half-dozen percent of American workers—one in four—found themselves unemployed. That's a vastly higher rate than the 14.7 percent unemployment in Apr 2020, when the coronavirus forced businesses and factories to shut down.

Things were so bad that of all the days of unemployment experienced by individual American workers in American history, half occurred during the Groovy Depression, according to University of California, Irvine economics Professor Gary Richardson, who has done extensive research on that period and the subject of downturns in general.

"There accept been a lot of ups and downs, just the Neat Depression is really the biggest ane," he explains.

It's not easy to explain exactly why such difficult times happened. "For something to be as bad equally the Cracking Depression, you really need multiple things going wrong, in the U.South. and around the world," Richardson says.

Here are some of the things that historians and economists oftentimes point to as factors that combined to lead to the worst economical disaster in history.

WATCH: America, the Story of The states: Bust on HISTORY Vault

ane. Vulnerabilities in the Global Economy

Curb Market traders gesture with their easily to merchandise stocks, on Wall Street, New York Metropolis.

Hulton Annal/Getty Images

In the 1920s, nations bounced back from the disruption and destruction 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, as ordinary consumers ownership durable goods such equally appliances and cars—often on credit—became more than and more than of import.

While that consumption created a lot of wealth for business organization owners, it also made them vulnerable to sudden shifts in consumer confidence. At the aforementioned time, nations who were producing a lot of products and exporting them became fierce competitors. "The war had eliminated a lot of the cooperation betwixt nations that was required to run the international fiscal organisation," Richardson says. That inability to work together at controlling issues meant that whatever one land'due south efforts to control a downturn were less effective.

two. Financial Speculation

The 1920s economical blast helped breed a widespread conventionalities that it was easy to go rich quick, if you lot were bold enough to invest in the right opportunity at the correct fourth dimension. That's ane reason why and so many ordinary Americans were fleeced by 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.South. stamps to turn a profit on the weaker Spanish currency.

Simply the riskiest gambling took place on Wall Street. Investors increasingly bought stocks on margin, in which they put downward as picayune every bit 10 percent of the price of a stock, and borrowed the residuum of the money, with their stock itself equally collateral. Corporate stocks soared, and brokers made huge commissions.

Merely the chimera eventually had to outburst. It did that on Black Monday, October 28, 1929, when the Dow Jones average declined nigh thirteen percent in one day. That started a menstruation of catastrophic declines that destroyed near half of the Dow's value in a single month. By 1932, at the nadir of the financial crisis, the nation's public companies had lost 89 pct of their value. Scores of investors were ruined, and companies plant it difficult to finance their operations.

Gyre to Continue

"The stock market place crash did 2 things," explains Mary Eschelbach Hansen, a professor of economic science at American Academy. "It had a wealth consequence on consumption (when people's wealth falls, they swallow less), and it also made consumers and firms pessimistic. Then came a series of cyberbanking panics and failures. Households lost more of their wealth, and the lines of credit that firms used were disrupted. Unemployment soared."

READ More: Here Are Warning Signs Investors Missed Before the 1929 Crash

three. Blunders by the Fed

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

NY Daily News Archive/Getty Images

The Federal Reserve System, created in 1913, was supposed to ensure the nation's economic stability by controlling the money supply. But the still-new institution'southward policies in the 1920s non but failed to stop the Great Depression, but actually may have helped to crusade it.

"There 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 Research Found at Eye Tennessee State Academy.

That policy led to declining interest rates, which encouraged people to borrow and overinvest. "It as well led to unchecked speculation in the formation of a bubble in the stock market," Smith says. "Normally, overinvestment would lead to rising interest rates, which would act every bit a natural intermission to prevent a chimera from forming. This didn't occur due to the like shooting fish in a barrel monetary policies of the immature Fed."

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

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

4. The Gilded Standard

Back in 1929, the The states—like many other countries at the fourth dimension—was on the Gold Standard, with the dollar redeemable in gilt and pegged to its value. Simply after the Wall Street crash, nervous investors began to trade their dollars for gilt.

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

READ More than: How Did the Gold Standard Contribute to the Groovy Depression?

5. The Smoot-Hawley Act

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

Bettmann Archive/Getty Images

Trade protectionists in Congress enacted the Smoot-Hawley Act, which was written in early 1929, while the economy even so seemed to be going stiff. Merely afterward the Wall Street Crash weakened the economic system, President Hoover still signed it into law in 1930. The law raised U.Southward. tariffs past an average of xvi percent, in an effort to shield American factories from competition with foreign countries' lower-priced goods. But the move backfired, when other countries put tariffs on U.S. exports.

"If yous're a state and you impose tariffs that can be good for your domestic industries, considering your domestic free energy might produce more than for dwelling consumption," Richardson says. "Simply if other countries retaliate, so it could be bad for everybody."

READ MORE: The Great Depression Lesson About 'Trade Wars'

Combined: A Perfect Economic Tempest

The actually unlucky thing was that all those factors combined in a sort of perfect economical storm, whose devastating furnishings had long-lasting repercussions. As Richardson notes, the U.S. economic system didn't again reach full employment until 1940—but in time for World War II to disrupt consumption with rationing needed to ensure that the military machine had enough resources. Life didn't actually get back to normal until after the war, when the victorious United states emerged as the world'southward leading economic system.

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