Great Depression in the West: Europe and United States

Key Term: Depression• Depression is a very severe recession; a period of

severely declining economic activity spread across the economy (not limited to particular sectors or regions) normally visible in a decline in real GDP, real income, employment, industrial production, wholesale-retail credit and the loss of the overall confidence in the economy.

Key Term: Deflation• Deflation is a general downward movement of prices

for goods and services in an economy.

Key Term: Inflation• Inflation is a general upward movement of prices for

goods and services in an economy.

United States

Fundamental Causes of the Great Depression

• • Drop in farm prices • • Massively uneven distribution of income • • “Get rich quick” schemes in real estate and

especially in stocks • Overextension of credit • • Increased inventories of goods • • Immediate cause: October 1929 stock market crash

Struggling Farmers• During the 1920s, few farmers shared in the prosperity

that supposedly extended nationwide. This discrepancy in farm prices was a warning sign that the economy was in serious trouble. • Although many viewed the 1920s as an “era of prosperity,” the vast majority of people in America were middle class or poor. Since most of the real wealth in the country lay in the hands of only a few people, most citizens didn’t have the cash to purchase goods.

Buying Stock on Margin • Many believed that speculation in real estate—and

especially in stocks—would result in easy money. People also bought stock “on margin,” putting down 10 percent of the stock’s value and then owing the rest to a broker. If the stock continued to climb in value, the investor was safe. However, if the value of the stock declined the broker would make a “margin call,” demanding payment for the rest of the amount owed. If the investor couldn’t pay the other 90 percent, the broker would sell the stock, hoping to recoup his losses. As the market as a whole declined in value, this process became a vicious circle, further driving down stock prices.

Buying Goods on Credit• Many consumers in the 1920s overextended

themselves financially due to the easy availability of credit. New consumer goods such as washing machines, radios, automobiles, and refrigerators appealed to consumers, even though they might not have had the financial resources to buy them. As more people bought products with money they didn’t have, manufacturers continued to produce more and more goods. Soon the supply of goods far exceeded demand, and unsold items piled up in producers’ warehouses.• When people lost their jobs, they had no way to make

payments on the goods they had purchased.

Black Tuesday • • October 29, 1929• • More than 16 million

shares traded in one day • • Stock market lost $30

billion• • Beginning of the

“Great Depression”

Market Decline• While the fundamental causes of the Depression took years to lead

to financial calamity, many point to a single day when the Depression began: October 29, 1929, when the stock market crashed. On that day, more than 16 million shares were traded (a record at the time) and the market lost $30 billion—nearly the amount the U.S. had spent fighting World War I. While the market had rapidly increased in value from 1927–1929 (approximately 140 to 360 points), it fell nearly more than 100 points in the months after the crash. • By the time Roosevelt took office in 1933, stocks had lost 80

percent of their total value. Confidence in the market declined sharply as former investors felt betrayed and unwilling to buy stock. Since they refused to purchase shares, much-needed investment and expansion did not occur, which further hampered economic recovery.

Bank Failures• While many investors lost their money in the market, many other

people found their savings wiped out because banks had irresponsibly invested depositors’ money in the market as well. Therefore, when the crash occurred banks also lost millions. Banking was already a risky business, with more than 600 banks failing every year from 1920–1929. Following the stock market crash, however, bank failures jumped dramatically. • Between 1930 and 1933, nearly 10,000 banks failed nationwide,

with 4000 failing in 1933 alone. Unfortunately for these banks’ depositors, there was no national “safety net” to protect their money. While some states did have insurance programs for bank deposits, bank failures in the period before the crash had essentially wiped out those programs, leaving depositors completely unprotected

Germany

The Weimar Republic • The Weimar Republic was an unofficial, name for the

German state between 1919 and 1933. The name derives from the city of Weimar, where its constitutional assembly first took place. This republic was replaced when Hitler came to power.

Economics in the Weimar Republic• Germany emerged from World War I with huge debts

incurred to finance a costly war for almost five years. The treasury was empty, the currency was losing value, and Germany needed to pay its war debts and the huge reparations bill imposed on it by the Treaty of Versailles, which officially ended the war. The treaty also deprived Germany of territory, natural resources, and even ships, trains, and factory equipment. Her population was undernourished and contained many impoverished widows, orphans, and disabled veterans. The new German government struggled to deal with these crises, which had produced a serious hyperinflation.

Hyperinflation

American Loans• By 1924, after years of crisis management and

attempts at tax and finance reform, the economy was stabilized with the help of foreign, particularly American, loans. A period of relative prosperity prevailed from 1924 to 1929. This relative “golden age” was reflected in the strong support for moderate pro-Weimar political parties in the 1928 elections. However, economic disaster struck with the onset of the world depression in 1929. 

“Precarious Solution” Under the Dawes Plan• Under the terms of the Dawes plan, American banks

loaned money to the German government, which used the loans to pay reparations to the French and British governments, which in turn used the money to pay war debts to American banks. The high interest rates sustained by the Dawes plan made Germany an attractive debtor for American banks, and, for several years, considerable money flowed from the American financial sector into Germany. In the words of historian Dietmar Rothermund, the plan was a "precarious solution," since everything depended on the continuous flow of American capital. 

Depression in Germany• The American stock market crash and bank failures led

to a recall of American loans to Germany. This development added to Germany’s economic hardship. Mass unemployment and suffering followed. Many Germans became increasingly disillusioned with the Weimar Republic and began to turn toward radical anti-democratic parties whose representatives promised to relieve their economic hardships.

German Banking Collapse• The collapse of German banks in 1931 marked the

start of a downward spiral into depression. In 1932, Germany defaulted on its reparations; two years later, Britain and France defaulted on their own war debts, which were owed primarily to the United States.

Civil Unrest• In Germany, protests during the early 1930s arose out

of a more long-term crisis of legitimacy of the Weimar system. In particular, the political extremes — the Communists on the left, and the National Socialist Democratic Workers Party (the Nazis) on the right — were committed to the overthrow of the democratic system by any means, including direct action on the streets. With the spread of unemployment, dissatisfaction with the policies of the Weimar government also intensified.

Great Britain

Stagnation Economy• In Britain, significant economic problems persisted throughout

the 1920s. The First World War cost Britain many of its positions of relative economic advantage: shipping never recovered from the losses of submarine warfare and the advances of competing nations; foreign investment declined as global capital increasingly moved to the United States; American banks displaced English banks as the main lenders to other European nations; coal production declined in the face of European competition, especially from French-occupied coalfields lost by Germany; and manufacturing suffered from the loss of European and colonial markets. Unemployment in Britain remained high throughout the 1920s, reaching 2 million in 1921.

Stagnation Economy, Con’td• Major industries, such as coal, steel, and textiles, were protected from

foreign competition, which also meant that they had little incentive to update equipment, rationalize production, or diversify products. A growing wave of labor unrest had peaked in the 1926 General Strike, but the limited backing for the radical aims of trade union leadership by the government, big business, and a strong base of middle-class supporters dampened efforts to effect political change through extra-parliamentary measures. The memory of the General Strike would become an important factor in the early years of the Depression, as spreading unemployment and increasing despair led to fears of deepening class conflict and political instability. So-called depressed areas remained particular sources of chronic unemployment, hunger, and disease. In the words of historian Gordon Craig, the British economy "continued to stagnate until it was overwhelmed by the world depression."

The General Strike, 1926• The 1926 general strike in the United Kingdom was

a general strike that lasted 10 days, from 3 May 1926 to 13 May 1926. It was called by the General Council of the Trades Union Congress (TUC) in an unsuccessful attempt to force the British government to act to prevent wage reduction and worsening conditions for 1.2 million locked-out coal miners. Some 1.7 million workers went out, especially in transport and heavy industry. The government was prepared and enlisted middle class volunteers to maintain essential services. There was little violence and the TUC gave up in defeat. In the long run, there was little impact on trade union activity or industrial relations.

France

Booming Economy • Unlike Great Britain, France's economic situation

improved markedly during the 1920s. Because the fighting of World War I caused so much damage to France's productive capacity, the government was forced to invest heavily in postwar reconstruction. As a result, French steel, coal, and textile production acquired more advanced machinery and adopted more effective techniques, which gave France a competitive advantage over countries that had not been forced to modernize, such as Britain.

France in the Depression• The effects of the Wall Street crash spread across

France more gradually. During the first years of the global economic crisis, France was predominantly affected by a decline in international tourism, by decreased demand for French luxury goods, and by the wave of protectionism that cut into all international trade.

Depression, Con’td• France could not remain invulnerable to the more

general European and even global crisis. When conditions did worsen, French society quickly succumbed to the same sense of desperation. The contraction in world trade at the same time the government maintained the high value of the French currency ensured that exports became less competitive in a shrinking world market. The combination in turn caused production decreases and the spread of unemployment.

Unemployment in Europe Through DepressionCountry 1929 1930 1931 1932 1933Austria 225,000 239,000 304,000 417,000 456,000Belgium 28,000 42,000 207,000 350,000 383,000Czech 50,000 88,000 340,000 634,000 878,000France 9,000 14,000 72,000 347,000 356,000Germany 2,484,000 3,041,000 4,744,000 6,034,000 5,599,000Norway 24,000 23,000 29,000 38,000 42,000Poland 177,000 289,000 373,000 360,000 280,000Sweden 44,000 42,000 73,000 99,000 121,000U.K. 1,204,000 1,694,000 2,666,000 2,660,000 2,821,000Yugoslavia 12,000 10,000 12,000 23,000 23,000

Discussion Questions

• What underlying issues and conditions led to the Great Depression?

• • What economic conditions led to the stock market crash of 1929?

• How did Britain’s pre-Depression economy differ from France’s?

• •How did poverty effect the psyche of the German citizens?

• What was legacy of the Great Depression in Europe?

• What was the legacy of the Great Depression in the United States?