1929 Stock Market Crash, Great Depression & Global Responses

Posted on Mar 31, 2025 in Economy

Stock Market Crash of 1929

The collapse of the New York Stock Exchange was the catalyst for the economic crisis. The causes included:

  • The crisis in traditional industrial sectors such as textiles, coal, steel, and shipbuilding. Agriculture faced similar difficulties.
  • Industry sectors initially favored by expansion experienced the consequences of declining purchasing power by 1927. The situation was aggravated because the purchase of these consumer goods was often done on credit.
  • A crisis emerged in the construction sector.
  • Between 1927 and the spring of 1929, the value of shares on the New York Stock Exchange continued to rise, creating a very fragile stock market situation which led to a huge speculative bubble.
  • Many people took out loans to buy shares. When shares began to drop in the spring of 1929, banks started restricting lending.

The Great Depression

The stock market collapse triggered a long crisis known as the Great Depression. Its features were:

  • It caused the destruction of savings, consumption, and investment.
  • Banks plunged into crisis as people withdrew their savings, and many loans were not repaid.
  • The cessation of demand and investment resulted in an industrial crisis and massive unemployment rates.
  • Large numbers of unemployed people fell into poverty.
  • It deepened the agrarian crisis, and world poverty became even greater.

Consequences of the Depression

  • It is estimated that in the industrialized world, there were some 30,000,000 unemployed people by 1932.
  • Misery spread, and the fear of hunger affected many, though the middle classes were not entirely spared.
  • A sense of injustice against the powerful and the economic system pervaded capitalist societies, sparking strikes and demonstrations.
  • The fear of the so-called “Red Danger” – that thousands of citizens might opt for communism – led to strong government repression.

Economic Policies Against the Depression

There were two main types of response to the crisis:

Deflationary Policies

Governments initially tended to implement the classic recipe of liberalism:

  • Economic Protectionism: To protect their industries and agriculture, nations chose to erect barriers against imports (tariffs).
  • The outcome of these initial responses prompted the World Economic Conference in London (1933), which proposed a return to the gold standard and the reduction of tariffs. However, the meeting ended without agreement.

Interventionist Policies

Economist John Maynard Keynes proposed greater state intervention in the economy. Governments began to implement new remedies, which had different national characteristics:

  • United States (The New Deal): A program of economic intervention led by President Franklin D. Roosevelt. Between 1933 and 1938, a series of measures were adopted to combat deflation, revive the economy, and create jobs.
    • Program to clean up the banking system.
    • Launched a program of heavy investment in public works (e.g., dams, roads).
    • Attempted to reduce agricultural overproduction to raise prices.
    • Initially favored big business, but later forced employers to accept social improvements.
    • Created old-age pensions and widows’ pensions (Social Security Act).
  • United Kingdom: Tried to revive the economy by reducing interest rates, devaluing the pound sterling, and strengthening protectionism through tariffs on imports (Imperial Preference). This policy reduced unemployment and increased production somewhat.
  • France: Attempted to reactivate the economy through increased purchasing power for workers (e.g., shorter work week, paid holidays under the Popular Front), a program of public works, and tax increases. These measures were largely considered a failure in stimulating strong recovery.
  • Germany: Imposed state control over the economy under the Nazi regime. The aim was to achieve economic self-sufficiency (autarky) through large investments, particularly in rearmament and public works. Unemployment fell sharply, largely due to these measures and removing groups from the workforce.