Then, at the end of the decade, an economic crisis began in the United States and spread to the rest of the world. This global economic slump, called the Great Depression, was the longest, most severe economic downturn to strike the industrialized Western world.

Overproduction and a Drop in Demand

Both the American and the world economy had weak points. In the industrial world, a major problem was overproduction, meaning that factories and farms produced more goods than were being sold. In other words, supply outpaced demand.

By the 1920s, improved technology and farming methods had led to higher output. When demand for goods slowed, prices fell. Consumers benefited from the lower prices, but farmers, miners, and other suppliers of raw materials did not. Overproduction created a backlog of unsold goods, leading businesses to cut back on output and lay off workers. Unemployed workers had no money to spend on buying goods, which slowed demand further and brought more layoffs. This cycle then had a ripple effect throughout the economy.

Crash Leads to Collapse

Meanwhile, a crisis in finance—the management of money matters, including the circulation of money, loans, investments, and banking—was brewing. Few saw the danger. Prices on the New York Stock Exchange were at an all-time high. Eager investors acquired stocks through risky methods. To slow the run on the stock market, the Federal Reserve, the central banking system of the United States, raised interest rates in 1928 and again in 1929.

In the autumn of 1929, jitters about the economy caused brokers to call in the loans made to investors. When investors were unable to repay, financial panic set in. Stock prices crashed in October, wiping out the fortunes of many investors. The stock market crash worsened the economic decline. The Great Depression had begun.

Over the next few years, consumer spending and investment fell, causing still more businesses and factories to close. Millions of people lost their jobs. The cycle spiraled steadily downward. By 1933, between 13 to 15 million Americans were jobless and almost half the banks had closed. The jobless could not afford to buy goods, so more factories had to close, which in turn increased unemployment. People slept on park benches and lined up to eat in soup kitchens.

The Depression Spreads Around the World

The economic problems quickly spread around the world. American banks stopped investing or making loans abroad and demanded repayment of foreign loans. Without new investments, European prosperity slowed.

Analyze Information

In what year did unemployment and bank failures peak in the United States?

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