State Responses to the Great Depression

Financial Collapse

In the late 1920s, American economic prosperity largely sustained the world economy. If the U.S. economy weakened, the whole world’s economic system might collapse. In 1929, it did.

A Flawed U.S. Economy

Despite prosperity, several weaknesses in the U.S. economy caused serious problems. These included uneven distribution of wealth, overproduction by business and agriculture, and the fact that many Americans were buying less.

By 1929, American factories were turning out nearly half of the world’s industrial goods. The rising productivity led to enormous profits. However, this new wealth was not evenly distributed. The richest 5 percent of the population received 33 percent of all personal income in 1929. Yet 60 percent of all American families earned less than $2,000 a year. Thus, most families were too poor to buy the goods being produced. Unable to sell all their goods, store owners eventually cut back their orders from factories. Factories in turn reduced production and laid off workers. A downward economic spiral began. As more workers lost their jobs, families bought even fewer goods. In turn, factories made further cuts in production and laid off more workers.

During the 1920s, overproduction affected American farmers as well. Scientific farming methods and new farm machinery had dramatically increased crop yields. American farmers were producing more food. Meanwhile, they faced new competition from farmers in Australia, Latin America, and Europe. As a result, a worldwide surplus of agricultural products drove prices and profits down.

Unable to sell their crops at a profit, many farmers could not pay off the bank loans that kept them in business. Their unpaid debts weakened banks and forced some to close. The danger signs of overproduction by factories and farms should have warned people against gambling on the stock market. Yet no one heeded the warning.

The Stock Market Crashes

In 1929, New York City’s Wall Street was the financial capital of the world. Banks and investment companies lined its sidewalks. At Wall Street’s New York Stock Exchange, optimism about the booming U.S. economy showed in soaring prices for stocks. To get in on the boom, many middle-income people began buying stocks on margin. This meant that they paid a small percentage of a stock’s price as a down payment and borrowed the rest from a stockbroker. The system worked well as long as stock prices were rising. However, if they fell, investors had no money to pay off the loan.

In September 1929, some investors began to think that stock prices were unnaturally high. They started selling their stocks, believing the prices would soon go down. By Thursday, October 24, the gradual lowering of stock prices had become an all-out slide downward. A panic resulted. Everyone wanted to sell stocks, and no one wanted to buy. Prices plunged to a new low on Tuesday, October 29. A record 16 million stocks were sold. Then the market collapsed.

The Great Depression

People could not pay the money they owed on margin purchases. Stocks they had bought at high prices were now worthless. Within months of the crash, unemployment rates began to rise as industrial production, prices, and wages declined. A long business slump, which would come to be called the Great Depression, followed. The stock market crash alone did not cause the Great Depression, but it quickened the collapse of the economy and made the Depression more difficult. By 1932, factory production had been cut in half. Thousands of businesses failed, and banks closed. Around 9 million people lost the money in their savings accounts when banks had no money to pay them. Many farmers lost their lands when they could not make mortgage payments. By 1933, one-fourth of all American workers had no jobs.

A Global Depression

World trade among trade and nontrade blocks. The trade blocks considered are the Sterling block (Australia, New Zealand, Denmark, Finland, Ireland, Norway, Portugal, Sweden, and the United Kingdom), Reichmark block (Austria, Germany, Greece, and Hungary), and Gold block (Belgium, France, the Netherlands, and Switzerland)

The collapse of the American economy sent shock waves around the world. Worried American bankers demanded repayment of their overseas loans, and American investors withdrew their money from Europe. The American market for European goods dropped sharply as the U.S. Congress placed high tariffs on imported goods so that American dollars would stay in the United States and pay for American goods. This policy backfired. Conditions worsened for the United States.

Many countries that depended on exporting goods to the United States also suffered. Moreover, when the United States raised tariffs, it set off a chain reaction. Other nations imposed their own higher tariffs. World trade dropped by 65 percent. This contributed further to the economic downturn. Unemployment rates soared.

Effects Throughout the World

Because of war debts and dependence on American loans and investments, Germany and Austria were particularly hard hit. In 1931, Austria’s largest bank failed. The impact on Weimar Germany was particularly dire. Germans were not so much reliant on exports as they were on American loans, which had been propping up the Weimar economy since 1924. From late 1929, no further loans were issued while American financiers began to call in existing loans. Despite its rapid growth, the German economy could not endure this retraction of cash and capital. Banks struggled to provide money and credit. In 1931, there were runs on German and Austrian banks and several of them folded. In 1930, the United States, by then the largest purchaser of German industrial exports, put up tariff barriers to protect its own companies. German industrialists lost access to U.S. markets and found credit almost impossible to obtain. Many industrial companies and factories either closed or shrank dramatically. By 1932, German industrial production was at 58 per cent of its 1928 levels.

The effects on German society were devastating. By the end of 1929, around 1.5 million Germans were out of work. Within a year, this figure had more than doubled. By early 1933, unemployment in Germany had reached six million, more than one-third of its working population.

In Asia, both farmers and urban workers suffered as the value of exports fell by half between 1929 and 1931. The crash was felt heavily in Latin America as well. As European and U.S. demand for such Latin American products as sugar, beef, and copper dropped, prices collapsed.

The World Confronts the Crisis

The Depression confronted democracies with a serious challenge to their economic and political systems. Each country met the crisis in its own way.

Britain Takes Steps to Improve Its Economy

Through the 1920s, Britain's economy was already struggling to pay for the effects of World War I. The Depression of the 1930s further weakened the British economy. The Labour Party failed to solve the nation's economic problems and fell from power in 1931. To meet the emergency, British voters elected a multiparty coalition known as the National Government. It passed high protective tariffs, increased taxes, and devalued the currency to increase the money supply. It also lowered interest rates to encourage industrial growth. These measures brought about a slow but steady recovery. By 1937, unemployment had been cut in half, and production had risen above 1929 levels. Britain avoided political extremes and preserved democracy.

France Responds to Economic Crisis

Members of the Popular Front celebrate electoral victory in the late 1930s.

Unlike Britain, France had a more self-sufficient economy. In 1930, it was still heavily agricultural and less dependent on foreign trade. Nevertheless, by 1935, one million French workers were unemployed. The economic crisis contributed to political instability. In 1933, five coalition governments formed and fell. Many political leaders were frightened by the growth of antidemocratic forces both in France and in other parts of Europe. So in 1936, moderates, Socialists, and Communists formed a coalition. The Popular Front, as it was called, passed a series of reforms to help the workers such as the right to collective bargaining, a 40-hour workweek in industry, and a minimum wage. Unfortunately, price increases quickly offset wage gains. and unemployment remained high. Yet France also preserved democratic government and did not succumb to revolution.

Socialist Governments Find Solutions

The Socialist governments in the Scandinavian countries of Denmark, Sweden, and Norway also met the challenge of economic crisis successfully. They built their recovery programs on an existing tradition of cooperative community action. In Sweden, the government sponsored massive public works projects that kept people employed and producing. All the Scandinavian countries raised pensions for the elderly and increased unemployment insurance, subsidies for housing, and other welfare benefits. To pay for these benefits, the governments taxed all citizens, but issued higher taxes for the wealthy, and engaged in deficit-spending (i.e., governments purposefully incurring debt and spending more money than they have). The result was that democracy remained intact in these states.

The "mild" Scandinavian Depression

Latin America

Beginning in the 1920s, the United States began to replace Great Britain as the key investor in Latin America, and thus, large segments of Latin America's export industries (e.g, beef and wheat from Argentina, nitrates and copper from Chile, coffee and cotton from Brazil, bananas from Central America). Thus, their economies were closely tied to the successes and failures of the American economy.

The Great Depression was a disaster for Latin America's economy. Weak U.S. and European economies meant less demand for Latin American exports, especially coffee, sugar, metals, and meat. The total value of Latin American exports in 1930 was almost 50 percent below the figures for the years 1925 through 1929. The countries that depended on the export of only one product were especially hurt

PEMEX: Mexico's government seizes the oil industry from foreign investors

The Great Depression, however, had one positive effect on the Latin American economy. When exports declined, Latin American countries could no longer buy manufactured goods from abroad. Thus their governments began to encourage the development of new industries to produce manufactured goods. The hope was that industrial development would bring greater economic independence.

Often, however, individuals could not start new industries because capital was scarce in the private sector. Governments then invested in the new industries. This led to government-run steel industries in Chile and Brazil and government-run oil industries in Argentina and Mexico.

Recovery in the United States

In 1932, in the first presidential election after the Depression had begun, U.S. voters elected Franklin D. Roosevelt. His confident manner appealed to millions of Americans who felt bewildered by the Depression. On March 4, 1933, the new president sought to restore Americans’ faith in their nation.

Roosevelt immediately began a program of government reform that he called the New Deal. Large public works projects helped to provide jobs for the unemployed. New government agencies gave financial help to businesses and farms.

Large amounts of public money were spent on welfare and relief programs. Roosevelt and his advisers believed that government spending would create jobs and start a recovery. Regulations were imposed to reform the stock market and the banking system.

The Roosevelt administration instituted new social legislation such as the Social Security Act, which created a system of old-age pensions, to be collected at age 65 by those no longer working. It also supplied unemployment insurance, or temporary income to workers who at lost their jobs. Finally, this legislation also provided small welfare payments to others in need, including those with disabilities.

The New Deal did eventually reform the American economic system. Roosevelt’s leadership preserved the country’s faith in its democratic political system. It also established him as a leader of democracy in a world threatened by ruthless dictators.

A Disastrous Response in Germany

The Weimar government could muster no effective answer to the Great Depression. The usual response to any recession is a sharp increase in government spending to stimulate the economy – but Heinrich Bruning, who became chancellor in March 1930, seemed to fear inflation and a budget deficit more than unemployment.

Rather than ramping up spending, Bruning increased taxes to reduce the budget deficit. He then implemented wage cuts and spending reductions, an attempt to lower prices. Bruning’s policies were rejected by the Reichstag but the chancellor was backed by President Paul von Hindenburg, who in mid-1930 issued his policies as emergency decrees.

Bruning’s measures failed and only contributed to increased unemployment and public suffering in 1931-32. They also revived government instability and bickering between parties in the Reichstag. In the turmoil, a radical political party known as the National Socialists (NSDAP, or Nazis) grew in size and popularity.

Heinrich Bruning

...meanwhile, in the Soviet Union...

Excerpts from McDougal's Modern World History, McGraw-Hill's World History, Culture, & Geography, alphahistory, and Encyclopedia Britannica.

Page updated

Google Sites

Report abuse