Interwar Economy: From Post-WWI Recovery to the Great Depression
ITEM 9: The Economy in the Interwar Period
1. The Economy in the 1920s
1.1 The Impact of World War I on Europe’s Economic Stagnation
Economically, World War I wreaked havoc in much of Europe. France lost 30% of its wealth, the UK 32%, Germany 22%, and Italy 26%. The old continent was unable to supply its overseas markets, lost its economic hegemony, and became dependent on the United States. After the war, the European allies owed 11,100 million (7,200 to the UK and U.S.). This debt was a great difficulty for the reconstruction of the continent. The Allies intended to pay these amounts with reparations imposed on Germany. As Germany could not pay, the only solution was the granting of loans by the United States, which would allow Germany to rebuild its economy and pay its creditors.
1.2 The Growth of Non-European Countries
Non-European countries, such as Japan and the USA, reached unprecedented strength. They took Europe’s place in the markets of Latin America and the Far East and expanded their economic activity, allowing them to keep most of their resources intact. Countries like Mexico, Argentina, and India began to industrialize and become more self-sufficient.
1.3 A New Economic Organization
The economic situation of the early postwar years was chaotic. The U.S., Japan, and other neutral countries were the first to recover and exceed previous production levels. In other countries, the situation worsened because the effects of war were compounded by mistrust and lack of solidarity. Austria, Hungary, and Germany suffered from inflation, which left them on the brink of bankruptcy. France and Britain faced great difficulties: France due to the vast destruction of the war and Britain due to the emergence of strong competitors in its industry and greater independence of the dominions of the Crown. The United States experienced an era of prosperity, with spectacular development and expanding economic influence. The Dawes Plan led to the presence of the dollar in Europe. These events consolidated a new global order, contingent on continued U.S. involvement in European politics.
1.4 Economic Expansion Since 1925
There was a general expansion of productive activity and consumption, led by the United States. The development of North American industry was spectacular, accounting for 42% of global volume. The production of automobiles and appliances multiplied, making them available to everyone. Appliances allowed for more free time, and cars became a mass phenomenon. Productivity growth created new jobs, increasing buying power. Foreign trade led the recovery, and Americans surpassed previous years’ levels. U.S. investments increased as the dollar became the main currency. The new American lifestyle was imitated in Europe. Sports became widespread, both as practice and as spectacle and entertainment, with Charleston and black music gaining popularity. Radio accelerated the spread of information, music, and major events in households. Film became a factory of dreams.
2. The 1929 Crash and the Great Depression
2.1 Causes
In 1929, the stock market crash in New York triggered a depression that affected almost the entire planet and became one of the greatest economic catastrophes in history. To understand this complex phenomenon, we must differentiate between the real economy and the financial economy. The real economy is valued by the trend of financial companies and is reflected in stock prices on stock exchanges. There should be a balance between the two, so that the real business situation corresponds to the value of their shares. Sometimes that balance does not occur, and stocks may be overvalued; this was the case with the crash and depression. The reasons for the crash were financial, while imbalances in the real economy were the causes of the depression.
Overproduction: U.S. economic growth had been unstoppable, but major imbalances existed. The most prosperous sectors were consumer goods, driven by strong demand and new farming techniques. Productivity declined in sectors such as coal, textiles, and steel. There was a gap between agricultural and industrial prices, where agricultural prices fell due to oversupply, and industrial prices rose due to trusts and cartels, which prevented the normal growth of supply and demand. This weakened consumption due to high prices, low wages, and poor income distribution. The effects of overproduction included stock accumulation and loss of purchasing power for farmers.
Speculation: Speculation consisted of rapidly obtaining money by buying stocks, as strong demand caused stock prices to rise daily. Many invested in stocks, an apparently secure business where investments multiplied in a few days. Credit growth was closely linked to speculation. Companies were forced to seek bank loans to continue production and afford sales. U.S. banks, made up of small entities, borrowed money from the Federal Reserve at 5% while lending to their customers at 12%. This favored lending entities but only served to support production that could find no outlet in the markets. They also gave credit for equity investments, further fueling credit and speculation.
2.2 The 1929 Crash
In the late 1920s, the U.S. economy showed signs of weakness due to overproduction, which negatively impacted businesses. The financial economy experienced unparalleled growth, with a dramatic increase in stock prices due to speculation. Excessive numbers of shares were offered, and investors were cautioned to be prudent. On October 21, 1929, 13 million shares were put up for sale, triggering panic in the stock market. This time, no one intervened to halt the slide, and the stock market quickly sank. Five days later, 16 million shares were offered, finding no buyers, which wiped out a year’s worth of accrued benefits. The decline stopped, and the stock market reached a minimum. Shares of large companies lost significant value.
2.3 The Great Depression
U.S.
The stock market crash caused the Great Depression in America, which lasted for much of the next decade and reached its peak in 1932. Its effects were cascading:
- Its first victims were millions of small and medium investors who had entrusted their savings to speculation and lost them in a few days, leading to many suicides.
- Hundreds of banks collapsed since most of their capital was invested in stocks.
- Industrial production contracted until 1932, falling to 38% of previous years’ production figures.
- Farming, already weakened by overproduction, low prices, and loss of purchasing power, suffered further.
- Trade activity was reduced to a minimum, both by the collapse of the U.S. economy and the internationalization of the crisis.
- Unemployment figures reached unprecedented levels.