The most dramatic economic shock the world has ever known began on October 24, 1929, “Black Thursday.” After years of large-scale speculations, with millions of investors borrowing money to chase the dream of easy riches and hundreds of banks willing to accept stocks as collateral, stock prices eventually far exceeded the companies’ actual productivity, and the bubble burst. The collapse of the New York stock exchange continued through October 29 (“Black Tuesday”), and during the following days and weeks countless investors found themselves broke, while hundreds of banks were forced to default on their loans.
By the early 1940s Dow Jones stock prices were still approximately 75 percent below the 1929 peak, a level that was only reached again in 1955. The Federal Reserve refused to provide emergency lending to help key banks to at least partially recover from their losses, so that the number of banks in operation almost halved over the next four years, driving thousands of business owners to the wall as their banks called in loans to stay afloat. Furthermore, because the banking system could no longer supply the necessary liquidity, new business enterprises could not be undertaken, and millions of workers lost their jobs with little hope of regaining them in the near future.
In 1933 and 1934 one-half of the total U.S. workforce was jobless or underemployed. To make things worse, home mortgages and loans had produced a huge amount of consumer debt, and although incomes decreased, debts did not. Predictably, consumer spending declined dramatically: Between 1929 and 1933 expenses for food and housing went down by more than 40 percent, with crop prices following the same downward path.
The crisis in the financial markets had set off a domino reaction, but U.S. president Herbert Hoover was a steadfast advocate of laissez-faire principles and believed that the “invisible hand” of the market and the moral fiber of the American people would ensure that everything would eventually work out. In keeping with the contemporary tendency to manage economic problems by trade measures, Hoover adopted austerity policies, and on June 17, 1930, he signed the Hawley-Smoot Tariff Act, which doubled import duties on selected goods, causing other Western countries, already burdened by war debts and reparations dating back to the Versailles Treaty of 1919, to react by raising their own import tariffs. This provoked a major disruption of world trade.
World Economic Disaster
Internationally, a combination of high external debt, falling export prices, government fiscal difficulties, and internal banking crises spelled disaster for the world economy. Latin American countries, the most dependent on selling raw materials to U.S. industries, were the first to default on their debts. Bolivia defaulted in January 1931, Peru in March of the same year, Chile in July, and Brazil and Colombia in October. Europe was hit in 1931, when several banking crises translated into foreign exchange and fiscal crises. Hungary, Yugoslavia, and Greece were forced to default in 1932, followed by Austria and Germany in 1933.
Austria’s largest bank, Vienna’s Kreditanstalt, failed in May 1931, an event that sent shockwaves across Europe. Depositors rushed to withdraw their money from banks that were perceived to be in weak financial conditions and, in so doing, they compromised the stability of the entire banking systems of several countries. By mid-June, many German banks had collapsed. The three largest Italian banks were rescued by the Fascist regime.
One of the main consequences of this chain reaction was that trust in sovereign loans was shattered. The social and political repercussions were catastrophic. Industrial unemployment in the United States averaged 37.6 percent in 1933, while Germany reached its highest rate at 43.8 percent, the United Kingdom at 22.1, Sweden at 23.7, Denmark at 28.8, and Belgium at 20.4 percent. In western Canada more than one-fifth of the labor force remained unemployed throughout the 1930s. Meanwhile, in the United States, the penal system became increasingly punitive. More executions were carried out than in any other decade in U.S. history, and there was also a sharp rise in imprisonment. Crime rates did not significantly rise, but the mass media popularized the idea that the social order was on the verge of collapse, generating a “crime wave” frenzy among the public.
By the early 1930s, the economic slump had destabilized the international political order, the erosion of liberal values was at an advanced stage, and welfarist costbenefit analysis had gained appeal and credibility. Prompted by the need to cut down on public spending and by the moral panic generated by the Great Depression, several governments of the most advanced democratic countries lost confidence in the effectiveness of social reforms and undertook programs for the involuntary sterilization of thousands of citizens. It was argued that under exceptional circumstances, basic rights could be withheld and that in order to reduce the burden on the public purse, social services should only be granted to those whose social usefulness and biological capability were past doubt. In the Weimar Republic, the country hardest hit by the depression, this ideological shift produced a radicalization of medical views on racial hygiene and “euthanasia.”
Trade protectionism, nationalism, and the growing appeal of fascism were among the most tragic results of the depression. Earlier enthusiasm for internationalism, cosmopolitan law, and international institutions completely disappeared, replaced by the feeling that large-scale conflicts between powers were once again inevitable.
In the Far East during the 1920s, hundreds of villages in the Chinese hinterland had seen their consumption patterns change dramatically as a consequence of the marketing campaigns of transnational corporations, which employed hundreds of thousands of Chinese peasants. However, the progressive internationalization and connectedness of the Chinese economy meant that it became increasingly vulnerable to trade fluctuations. When the depression took place, the entire structure of Chinese agricultural production was hit with unprecedented force: The process of pauperization of the countryside population seemed unstoppable. Two major consequences ensued, the strengthening of the Communist Party and a major diaspora of Chinese emigrants seeking a better future abroad.
In Japan, a country that was heavily dependent on foreign trade, unemployment soared, and labor disputes became more and more frequent and violent, as did anti-Japanese insurgent movements in Korea and Taiwan. Rural debt forced poor tenant farmers to sell their daughters as prostitutes, and thousands of small businesses were gradually absorbed by the zaibatsu, huge financial combines that pushed for more authoritarian and imperialistic policies.
In the United States, Hoover’s seeming idleness was interpreted by millions of U.S. voters as callousness, and the presidential candidate for the Democrats, Franklin D. Roosevelt, who evoked a more interventionist and caring state, won a landslide victory in 1932. His presidency will be forever identified with the New Deal, a series of Keynesian relief, recovery, and reform measures. This program revitalized the economy by reinvigorating mass consumption through deficit spending and restored psychological confidence and people’s trust in U.S. institutions and in the future by effectively reshaping their expectations. Ultimately, the U.S. economy was reinvigorated by these measures but also by the industrial demands brought about by the coming of World War II.
Deficit spending for government-funded public works programs was successfully used to aid economic recovery in Social Democratic Sweden but also in Nazi Germany, Fascist Italy, and imperialist Japan. These countries were among the first to overcome the crisis. On the other hand, in Britain and France, two countries whose currencies were pegged to the gold standard, mostly for reasons of national pride, a genuine recovery only began when large-scale rearmament was undertaken as a reaction to the National Socialist threat. It is noteworthy that those countries that remained on the gold standard fared far worse than those that did not.
In the final analysis, the depression lasted for about a decade and was aggravated by a steadfast and selfdefeating loyalty to the gold standard, as well as by increased wealth inequality and financial speculation. It was brought to an end not by the concerted effort of fair-minded and judicious leaders committed to the cause of world prosperity and peace, but by a vast military buildup leading straight into World War II.
- Basingstoke, Patricia C. The Great Depression in Europe: 1929–1939. New York: MacMillan, 2000;
- Bernanke, Ben S. Essays on the Great Depression. Princeton, NJ: Princeton University Press, 2000;
- Garside, William R., ed. Capitalism in Crisis: International Responses to the Great Depression. London: Pinter, 1993;
- James, Harold. The End of Globalization. Lessons from the Great Depression. Cambridge, MA: Harvard University Press, 2001;
- Parker, Randall E. Reflections on the Great Depression. Cheltenham, UK: Edward Elgar, 2002;
- Rothermund, Dietmar. The Global Impact of the Great Depression: 1929–1939. London: Routledge, 1996.