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 desperate 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 assistance to ordinary Americans worsened their predicament.
You are viewing: Which Was Not A Direct Cause Of The Great Depression
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 Great Depression. When the unemployment rate peaked in 1933, 25.6 percent of American workers—one in four—found themselves unemployed. That’s a vastly higher rate than the 14.7 percent unemployment in April 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 Great 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 have been a lot of ups and downs, but the Great Depression is really the biggest one,” he explains.
It’s not easy to explain exactly why such hard times happened. “For something to be as bad as the Great Depression, you really need multiple things going wrong, in the U.S. and around the world,” Richardson says.
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.
1. Vulnerabilities in the Global Economy
Read more : How Can You Tell Which Tpms Sensor Is Bad
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 economy in the United States and elsewhere shifted, as ordinary consumers buying durable goods such as 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 that were producing a lot of products and exporting them became fierce competitors. “The war had eliminated a lot of the cooperation between nations that were required to run the international financial system,” Richardson says. That inability to work together at controlling problems meant that any one 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 get rich quick if you were bold enough to invest in the right opportunity at the right time. That’s one reason why 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 Spanish mail coupons and redeeming them for U.S. stamps to profit on the weaker Spanish currency.
But the riskiest gambling took place on Wall Street. Investors increasingly bought stocks on margin, in which they put down as little as 10 percent of the price 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 Monday, October 28, 1929, when the Dow Jones average declined nearly 13 percent in one day. That started a period of catastrophic declines that destroyed almost 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 percent of their value. Scores of investors were ruined, and companies found it difficult to finance their operations.
“The stock market crash did two things,” explains Mary Eschelbach Hansen, a professor of economics at American University. “It had a wealth effect on consumption (when people’s wealth falls, they consume less), and it also made consumers and firms pessimistic. Then came a series of banking panics and failures. Households lost more of their wealth, and the lines of credit that firms used were disrupted. Unemployment soared.”
3. Blunders by the Fed
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’s policies in the 1920s not only failed to stop the Great Depression but actually may have helped to cause it.
“There was a drastic 67 percent increase in the money supply between 1921 and 1929,” explains Daniel J. Smith, a professor of economics and finance and director of the Political Economy Research Institute at Middle Tennessee State University.
Read more : Which Is Bank 1 Sensor 2
That policy led to declining interest rates, which encouraged people to borrow and overinvest. “It also 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 as a natural break to prevent a bubble from forming. This didn’t occur due to the easy monetary policies of the young Fed.”
But eventually, in 1929, the Fed’s board worried that speculation was out of control, and abruptly slammed on the breaks by 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 down,” Richardson explains. “But then it came down a lot, and it came down very quickly.”
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. But after the Wall Street crash, nervous investors began to trade their dollars for gold.
As former Fed chairman Ben Bernacke noted in a 2004 lecture, the Fed then moved to jack up interest rates higher to protect the dollar’s value. But those high-interest rates made it difficult for businesses to borrow the money that they needed to survive, and many ended up closing their doors instead.
5. The Smoot-Hawley Act
Trade protectionists in Congress enacted the Smoot-Hawley Act, which was written in early 1929, while the economy still seemed to be going strong. But after the Wall Street Crash weakened the economy, President Hoover still signed it into law in 1930. The law raised U.S. tariffs by an average of 16 percent, in an effort to shield American factories from the competition with foreign countries’ lower-priced goods. But the move backfired when other countries put tariffs on U.S. exports.
“If you’re a country and you impose tariffs that can be good for your domestic industries because your domestic energy might produce more for home consumption,” Richardson says. “But if other countries retaliate, then it could be bad for everybody.”
Combined: A Perfect Economic Storm
The really unlucky thing was that all those factors combined in a sort of perfect economic storm, whose devastating effects had long-lasting repercussions. As Richardson notes, the U.S. economy didn’t again reach full employment until 1940—just in time for World War II to disrupt consumption with rationing needed to ensure that the military had enough resources. Life didn’t really get back to normal until after the war when the victorious United States emerged as the world’s leading economy.
Source: https://t-tees.com
Category: WHICH
