The Great Depression: Causes, Impacts, and Global Responses
1. The Aftermath of World War I
1.1 Immediate Effects of the War
- Weakened European Economies: The war adversely affected population, production, and international cooperation. Prices of essential products increased, and Europe suffered deflation. Highly indebted Allied countries relied on the U.S. for financial support.
- Treaty of Versailles Disputes: The treaty generated disagreements, particularly regarding Germany’s responsibility for the conflict and its economic recovery. France demanded significant reparations.
- U.S. Opposition to Reparations: The U.S. opposed the high reparations imposed on Germany, leading to disagreements among former allies about debt repayment and trade.
- German Monetary Collapse: Efforts to meet the Versailles reparations led to the collapse of the German monetary system in 1923 and unprecedented inflation.
1.2 Trade Imbalances
New borders and modified trade routes disrupted the flow of goods. The Treaty of Versailles caused Germany to lose territories and access to raw materials, hindering its industry and economic relations. The treaty reduced Germany’s territory by 13%, and Austria and Hungary were reduced to a quarter of their former size. Trade imbalances emerged between industrialized countries and food exporters. Post-war production recovery led to a surplus of food and raw materials, causing declining agricultural prices and worsening trade balances for importing countries.
2. The Roaring Twenties and the Stock Market Crash
2.1 American Prosperity
Unprecedented Economic Growth
Technological innovation and changes in work organization, particularly the use of electricity and oil, fueled economic growth. New industrial sectors emerged, including the automobile industry, which pioneered mass production. Skyscraper construction boomed, and demographic growth contributed to increased productivity, exceeding European levels. Reduced production costs led to increased demand and supply growth.
The Consumer Revolution
Installment buying and credit allowed families to increase purchases. Advertising and marketing fueled consumer demand. This massive increase in consumption led to a consumer revolution, boosting confidence and incomes for many, but also causing high household debt.
2.2 The Stock Market Fever
The stock market’s strength initially reflected the positive economic situation. However, rising prices led to a speculative bubble. Shareholder value increased primarily due to investor belief in future profits from selling shares at higher prices, rather than from dividends. Small investors borrowed to buy shares, further inflating the bubble. Loan repayments became disconnected from actual company profits.
3. The Great Depression
3.1 Causes of the Great Depression
- Industrial Overproduction: Signs of overproduction emerged before the stock market crash, with slowing U.S. growth prior to 1929.
- Lack of Liquidity: Following the crash, monetary crises hindered debt repayment, leading to defaults, industry closures, and bank failures. European investors withdrew funds, and credits to food exporters were canceled.
- Drop in Consumption: Reduced consumption stemmed from various factors, including the diminished purchasing power of stock market investors, fear of job losses, and falling agricultural prices due to over-indebtedness from durable goods purchases.
3.2 The Industrial and Banking Crisis
These factors severely impacted the banking system. Borrowers defaulted on loans, and many banks had accepted stocks as collateral. This triggered a banking crisis, with over 4,000 banks failing. Millions of families were ruined. The ruin of stock investors and reduced credit led to declining consumption, rising inventories, and falling prices. Underconsumption and reduced investment caused an industrial crisis, leading to high unemployment and widespread poverty. Millions lost their jobs and homes, further reducing demand and agricultural production.
4. Global Impact
4.1 Mechanisms for Expansion
- Falling American Prices: The decline in American product prices created difficulties for businesses worldwide.
- Drop in Demand and Imports: Reduced American demand harmed exporting countries.
- Decreased American Lending and Investment: The American banking crisis led to a sharp decrease in loans and investments in Europe.
The banking crisis was the first symptom of recession, leading to increased unemployment. The crisis was particularly severe in Germany, where post-war inflation soared and industrial production plummeted. In the UK, the recession caused the collapse of the international monetary system, forcing the government to suspend the convertibility of the pound. Many countries followed suit to lower exports and counter the increased competitiveness of British products.
4.2 The Collapse of Trade
Rising protectionism, with countries adopting protective tariffs, led to a trade war and the collapse of international trade. This further expanded the crisis, particularly for countries exporting food and raw materials.
5. Responses to the Crisis
5.1 The Keynesian Proposal
John Maynard Keynes argued against wage reductions as the sole solution to the crisis. He advocated for government intervention to stimulate demand and investment. Keynes proposed increased public spending and labor-intensive projects to boost production and tax revenues, offsetting the initial deficit.
5.2 The New Deal of Roosevelt
The New Deal aimed to overcome the economic crisis and mitigate its social effects. Key measures included the Agricultural Adjustment Act (AAA) to address falling agricultural prices and a monetary policy to encourage exports. The Social Security Act established a social safety net. These measures helped stabilize the American economy.
5.3 The Scandinavian Countries
Sweden and Denmark recovered faster by implementing active state intervention to stimulate demand. Increased state investment offset reduced private investment and unemployment. These countries also implemented plans to help the unemployed and began building the welfare state, which later spread across developed Europe.
5.4 Germany’s Political Response
Germany pursued rearmament to stimulate heavy industry, expanded public works, and restricted imports to encourage domestic demand. Hitler aimed for economic self-sufficiency. The government also suppressed union leaders and leftist parties.
5.5 Britain and France
The UK devalued the pound to promote exports and established trade agreements with its colonies. France adopted social programs in 1936, including guaranteed prices for farmers and devaluation of the franc to boost exports. These measures, along with improved conditions in raw material and food exporting countries, helped alleviate the crisis.