What triggered the Great Depression throughout the globe? In this lesson, you’ll learn how the world’s biggest financial crisis spread from the United States to other industrialized nations and how they responded to it.
The Roaring 20s
The Roaring 20s promised many a young veteran that the worst days of his life were over. He could live in the moment, buying anything his heart desired on credit, including stocks. The American economy was also ‘living it up,’ leading the world in production, investing, fueling a post-war boom in Europe, as well.But things were not as good as they seemed. U.
S. farmers had expanded too quickly at the start of WWI and now found themselves with too much debt, too much product, and falling prices. American city dwellers over-borrowed. And even though demand drove prices on the stock market ever higher, many of the industries behind Wall Street were barely breaking even.Meanwhile, Germany strained under the burden of war reparations to France and Britain, who, in turn, owed billions of dollars in war debts to the United States.
To keep the payments flowing, American bankers lent money to Germany, which it could use to pay its reparations to the Allies, who would then use it to repay debts to the U.S. This fragile cycle was known as the Dawes Plan and its successor, the Young Plan.
1929: The Wall Street Stock Market Crash
And then, over two days in late October 1929, the New York stock exchange abruptly lost a quarter of its value, ultimately tumbling nearly 90%. Americans lost more money than the nation had spent on WWI.
Businesses went under. Unemployment climbed steadily. Banks failed at alarming rates, evaporating the life savings of many people.And like so many other products, the U.
S. exported the Great Depression to its trading partners. Australia, with a 10% unemployment rate before the crash, was one of the first to fall. Latin America, which had depended on selling raw materials to U.
S. industries (whose doors were now closed), also felt the pain early. Industrialized nations in Africa, Asia, and Europe faced economic collapse.One of the most common responses everywhere, sooner or later, was a change in government, some more radical than others. Some Latin American countries turned to military dictatorships to restore stability. Germany, Italy, and Japan looked to fascism. The Depression helped establish a totalitarian form of communism in the Soviet Union, while many westernized nations developed what’s been called welfare capitalism in which governments assume much greater power and control over the well-being of their citizens.
By 1930, cash-strapped Americans were withdrawing capital from European investments and banks in the United States demanded repayment of loans they had made to European countries during WWI. As a result, European banks began to fold. Then in June 1930, the United States passed the Hawley-Smoot Tariff, which nearly doubled the taxes on certain imported goods. Britain soon passed its own protectionist tariff, as did many other nations. Intended to protect domestic manufacturing, it had the effect of bringing international trade to a standstill.Germany was the first of the European nations to crash. Funding from the Dawes and Young Plans dried up.
With industrial output down 40%, German workers lashed out against the fledgling Weimar Republic instituted after WWI. Labor unrest led to social and political dissent and in 1930, voters sent 77 Communists and 107 Nazi party members to the legislature.
Austria stumbled next. In May 1931, Austria’s largest bank (which financed 2/3 of Austrian industry and held 70% of the country’s banking assets) went bankrupt. This prompted a run on other European banks. In the next two months, Germany’s central bank lost $2 billion in withdrawals.
When the Weimar Republic announced that it would not be able to pay its reparations, the U.S. suggested a worldwide moratorium on all debts for a year.
But France and Britain were dependent upon this cash from Germany and their economies began to slip. Throughout 1931, France’s industrial production fell 29%; British production dropped 14%.Britain’s Parliament changed hands. After slashing the budget in September 1931, Britain abandoned the gold standard, meaning its currency could exceed its gold reserves. This allowed the government to increase the amount of money in circulation and stimulate spending within the nation. Sweden, Canada, New Zealand, and other nations followed suit.
But the widespread abandonment of gold increased the value of silver. China, one of the few nations on a silver standard, faced declining exports as fewer nations could afford to do business with them. Japan set its sights on the struggling giant.
By 1932, U.
S. industrial output had fallen 45% and like other countries, elected new leaders. Congress felt it could not continue to suspend Germany’s reparations payments any longer. Germany’s European creditors could see that the payments would undermine not only Germany’s economy, but its rapidly failing republic. France and the U.K. proposed canceling Germany’s reparations payments as well as their own war debts to the U.
S.; incoming President Roosevelt refused. America’s hard line caused resentment throughout Europe and deepened Germany’s recession. A third of its workforce was now unemployed. Germany turned increasingly inward, favoring nationalist policies regardless of their effects on any other countries.
Although statistics vary, as of 1933, nearly 29% of Denmark’s available workforce was unemployed. In Germany, 26%; in the U.S. and Sweden, about 24%; Belgium, more than 20%; Britain, 14%. Desperate citizens everywhere demanded that their leaders take aggressive measures to solve the economic problems of their own country.
Radical groups promising stability grew in strength around the world.In January 1933, Adolf Hitler was chosen as Germany’s chancellor and almost immediately, he created excuses to suspend German laws. He set to work disentangling Germany from world finances and permanently stopped reparation payments. Around the same time that President Franklin Roosevelt announced his New Deal to help revive the American economy, Hitler began his New Order, a sweeping program of economic, military, industrial, and social reform designed to build Germany into the world’s leading power. Among the programs introduced in 1933 was the German highway system, known as the ‘autobahn’, as well as racial and political persecution.
In April of 1933, the U.S. finally abandoned the gold standard. London’s World Economic Conference in June brought leaders from more than 60 nations and revived hopes of a united effort to address the Great Depression. But most world leaders were focused on the needs of their own countries above all else and the conference proved futile.
By the middle of 1933, nearly all nations that owed money to the United States had defaulted on their loans.
1934 and Beyond: Recovery
By 1934, the darkest years of the Depression were finally behind most nations. But the crisis was far from over and recovery varied dramatically from nation to nation.Of the major European powers, Britain perhaps fared the best.
Its economy had not sunk as low as most and recovered relatively early. Employment in most European nations had rebounded by 1936, though Belgium and France were slower to recover industrial output. The largest Latin American economies, Argentina and Brazil, had largely recovered by 1935.In 1934, Roosevelt reengaged the U.
S. with the world’s economy by signing reciprocal trade agreements with 19 nations and creating the Import-Export Bank. But America continued to struggle for much longer than most countries. As late as 1939, the U.S. unemployment rate was still 17% and the economy did not return to its pre-Depression industrial output level until 1942.
When Germany’s president died in August 1934, Hitler assumed totalitarian powers. A key component of his New Order was the need for more ‘living room’ and resources to support a growing German population, and many of his programs worked toward this end goal. Hitler built up military industrialization as the path to full employment. By 1938, Germany’s industrial output had grown by 75% and the nation had a labor shortage.
A post-WWI boom in the United States fueled economic prosperity throughout many parts of the world. But there was too much credit, and industry and agriculture were deeply troubled. Then the U.S.
stock market crashed in October 1929, triggering a recession that spread quickly throughout industrialized nations everywhere. Known as the Great Depression, the financial crisis was deepened by an abrupt decline in world trade, resulting in sharp cuts in production and employment. By the mid-1930s, many nations had begun to recover, but the U.S.
suffered until the onset of WWII.
Lesson at a Glance
The United States and the rest of the world saw economic prosperity after WWI. However, with the stock market crash in October 1929, there was a domino effect that caused many industrialized nations to fall under a recession.
Unemployment rates soared, production and trade ceased, and businesses and banks went out of business. Recovery was quicker for some nations than others, with the United States not fully recovering until WWII.
Upon completing this lesson, you should be able to:
- Explain how the Dawes Plan and the Young Plan failed to support the world’s economies
- Tell how the Great Depression helped Adolf Hitler rise in power in Germany
- Compare Roosevelt’s New Deal with Hitler’s New Order
- Describe the recovery process for Latin America, Europe, and the United States