Great Depression


Great Depression, the name given to the profound global economic crisis that lasted from 1929 to 1939. At first, each country coined its own title for the economic collapse, although every country in the world was affected by a crisis that also had serious consequences for social and political life. In Britain it was called “The Slump” and in Germany “Die Krise” (The Crisis). In time, however, the American term “The Great Depression”, which in Britain was reserved for the period 1873 to 1896, has come to dominate.


During the course of World War I, the United States took over Britain’s role as the premier global economic power: the “world’s banker”. American financiers had become the world’s most powerful bankers thanks to the way that the Entente countries had come to depend on American loans to fund their war effort. As a result, the health and wealth of the world economy were now strongly intertwined with that of the United States. As the British economist, John Maynard Keynes famously put it, when America sneezed, the rest of the world caught a cold.

American and, to a lesser extent, Japanese businessmen also had become wealthy thanks to increased demand around the world for their products while their British, German, and French competitors were preoccupied with producing goods for the war. In the 1920s American economic supremacy was further underlined by its enthusiasm for new technologies and methods of working, such as the first assembly lines, with the average worker in American factories producing twice as much per hour as his or her counterpart in Europe’s most industrialized countries. Not only were American manufactured goods cheaper than those made in Europe, so, too, were many American agricultural and primary products. Only the large, intensively farmed lands of the Commonwealth—in Canada, Australia, and New Zealand—were able to compete successfully.

America’s new-found financial power and enthusiasm for selling its products overseas was to give it a special role in the way Europe, in particular, recovered from the effects of waging World War I. Between 1918 and 1924 countries who were on the losing side, like Germany, Austria, and Hungary, or those whose lands had witnessed the most intensive military campaigns, notably Belgium and France, were overwhelmed by the scale of their problems. For most countries, it did not prove as difficult to rebuild factories and homes and restore farmland that had been destroyed in the bloody slaughter, as to return the economy and society to a peacetime setting. The peace treaties negotiated between 1919 and 1923, like the Treaty of Versailles, added to the woes of those who had lost the war. Not only did the defeated Central Powers have to pay heavy reparations to the Allies (although not the United States), they were also banned from working together to overcome their economic problems.

World War I also helped to generate political change that affected how economic policy was made and what it was expected to achieve. Politicians were now expected to deliver improved social provision and work opportunities, and when governments failed to manage the national economy to the benefit of the majority of voters, they were increasingly likely to be booted out of office. The fact that many countries were much more democratic after the war than before it only made it easier to be rid of governments who did not deliver on electoral promises when it came to economic policy. In the longer term, the need to manage the home economy to the satisfaction of the electorate complicated relations between nation states. With governments increasingly responsive to the demands of farmers or industrialists to protect the home market from cheaper foreign imports, the 1920s witnessed a growing number of “tit-for-tat” trade wars that damaged both diplomatic relations and the international economy.

The first big test for governments had come in the early 1920s when, thanks to the impact of the war, levels of inflation began to rise dramatically. The problem was especially acute in Germany, Hungary, Poland, and Austria where inflation reached the giddy rates of 2000 per cent a year. In Britain, inflation ran at about 25 per cent, shockingly high by today’s standards, but at the time it was the lowest in Europe. The experience of inflation had a profound impact around the world. Governments now made currency stability the primary goal and their efforts centred on resurrecting the international gold standard (a fixed exchange rate mechanism) because it was widely believed the gold standard had generated the tremendous expansion of the international economy in the 19th century. Forty-five countries joined the gold standard between 1924 and 1929 (most of the British Empire and Commonwealth joined in 1926).

The gold standard bound the fate of national economies more closely together. So, too, did the increase in international lending after 1924, which was essential to its reconstruction. Without international organizations rich enough to help out countries who faced serious financial difficulties, private banks in the world’s wealthiest nations stepped in to help. Britain continued to be a significant source of overseas investment, but the United States was now the most important. Between 1924 and 1929 private American investors lent some US$7.8 billion, with US$4 billion alone invested in Germany.


The collapse of the American stock market on Wall Street in October 1929 is usually taken to mark the onset of the economic collapse. The world economy had already begun to turn downward in 1928, with demand for both agricultural and industrial goods, as well as for construction work, beginning to decline. Indeed, these trends were evident in the United States and helped to trigger the wave of selling on the American stock market. But it was not the Wall Street Crash itself, but the policy response to it, which tipped the world economy into the greatest depression ever known.

American bankers believed that speculation in the stock market had been encouraged by easy access to cheap credit, so their response in 1929 and 1930 was to increase interest rates. This had a dramatic effect on countries around the world. The flow of American loans that had smoothed over some of the cracks in the world economy of the 1920s dried up completely, and, thanks to the “rules” governing the operation of the gold standard, other countries had to copy the American move and raise interest rates too. The consequences were dramatic: it became increasingly difficult for farms and businesses to pay off loans and to borrow the money needed to combat the onset of depression. Governments, too, began to feel the squeeze as their levels of revenue from taxes fell dramatically just when they needed to spend money on social assistance and public work schemes to mop up unemployment, and to kick-start recovery.


Members of the gold standard were also less able to combat the depression because the “rules” of the system helped to determine how countries should make economic policy. In particular, the “rules” called for governments to maintain a balanced domestic budget (governments could only spend as much as they made in revenue) and a positive balance of trade (member countries should export more than they imported). This was a demanding and inflexible policy regime when the world economy turned downward, and it acted as a straight-jacket on government economic policy. Around the world, governments were soon in a bitter dispute over whether to slash government spending to meet the “rules” of the gold standard. Thanks to their painful memories of the chaos caused by the post-war inflation, they found it very difficult to forsake the gold standard.

In 1930 many economic forecasters believed the crisis would be short-lived but by the following year confidence in the future had evaporated. Not only were governments cutting back on spending, so, too, were companies, farms, and households. Demand for industrial and agricultural products now dried up and this caused prices to fall yet further. By the summer of 1931, many economies began to crack under the strain of falling prices, a lack of demand, and spiralling levels of unemployment. Across much of the world, economic, political, and financial pressures combined to produce a financial crisis that swept the world like a flash flood. Events in Austria and Germany were among the most dramatic. With some of their most prestigious banking houses facing ruin, the German and Austrian governments were forced to become directly involved in managing the financial system.

In Britain, it was not commercial banks that came under pressure in 1931, but the central bank, the Bank of England. Britain’s financial crisis culminated in the British Empire and Commonwealth countries leaving the gold standard (Australia left in 1929 and South Africa in 1932). This was a key turning point in the Great Depression. These countries took the first tentative steps on the road to recovery.


No part of the world was left untouched by the Great Depression, although there were national variations. Industry and agriculture were engulfed by a rising tide of bankruptcy. On a human level, the most visible measure that the world economy had failed was the tremendous and unprecedented surge in unemployment. The official figures are impressive, peaking at around 6 million unemployed in Germany, 14 million in the United States, and 2.7 million jobless in Britain. It is very likely the real figures were even higher. Many of the unemployed remained without work for three or four years, with younger age groups hit disproportionately hard. Rural unemployment, too, led to acute poverty but was often disguised as underemployment.

Social tensions increased considerably, with a rising intolerance towards groups or individuals who were perceived to be “economic rivals” or “outsiders”. Many people began to blame their neighbours for the economic collapse, be it other countries or competing for economic groups—industrialists, bankers, farmers, and workers—or those who simply appeared to be different from themselves, like Roma (Gypsies) and Jews. The depression also heightened the division of experience between men and women. In some cases, married women workers were forced from the workplace by state legislation in a campaign against so-called “double earners” (because their husbands also brought home a wage packet). Women teachers were sacked in Britain and Germany on this basis. However, in some industries, employers kept on women workers in preference to men because they were cheaper and more prepared to work part-time.

The Depression took a heavy toll on the physical and mental health of society. In Hamburg, for example, over 50 percent of all young men were unemployed for more than two years and they were especially hard-hit by the social and psychological effects of unemployment. Malnourishment, too, was widespread and its effects on national health long lasting. In the mid-1930s, a routine medical inspection identified over 21 per cent of schoolchildren in Pontypridd, Wales, as malnourished.

There was not much help to be had from state-led efforts to help the jobless. Although many countries had rudimentary welfare systems—a notable exception was the United States—the very scale of the problem, coupled with budget orthodoxy, soon exhausted the welfare budget. Where they existed, state schemes to support the unemployed were simply not designed to cope with either the sheer volume of jobless or the length of time people were out of work. Private charities and small relief schemes, like the soup kitchens that sprang up in towns and cities across the United States, tried to step in to fill the vacuum left by failing government programmes.

The failure of governments to combat the depression effectively caused domestic politics to become increasingly turbulent. In much of central and eastern Europe, as in the Weimar Republic, when politicians from moderate, centrist parties (Liberals, Conservatives, Democratic Socialists) failed to introduce policies to tackle the crisis, they lost out to extremist parties to the Far Right and Left of the political spectrum. Britain, in 1931, sought to combat this trend by forming a National Government made up of members of the Conservative, Liberal, and Labour parties to “generate national unity”. There were similar developments in France, Belgium, and the Netherlands in the mid-1930s. But it is important not to oversimplify the relationship between economic misery and political radicalism. Many countries around the world experienced intense economic hardship, yet did not succumb to political extremism; the United States, which endured the most acutely depressed economy of the western world, is the most notable.

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At first, the widespread conviction among politicians and their advisers that there was little alternative to gold-standard orthodoxy meant that government economic policy made things worse rather than better. Britain’s departure from the gold standard showed the way out of the crisis. Sterling became a floating currency in September 1931 and its value fell by some 30 per cent, which immediately made British exports much cheaper. Government economic policy was now also freed from the rigorous demands of the gold standard. Interest rates were cut, making it easier for businesses and government to borrow money. The state could afford to spend more, and, as confidence in the future began to rise, so, too, did society’s willingness to buy goods. A virtuous circle had now set in. Britain’s recovery strategy also developed a strong regional dimension thanks to special trade concessions given to members of the Empire and Commonwealth in 1932. These countries had left the gold standard with Britain and formed an informal currency group, the Sterling Bloc.

In April 1933 the Democrat Administration of Franklin D. Roosevelt in the United States opted to abandon the gold standard. This meant the new administration was freed from the rules of the gold standard and could draw up new spending plans to give a “New Deal” to the American people. Because the American economy was so large, its recovery brought immediate benefits to the rest of the world.

In Germany, as in a number of other countries in central and eastern Europe, the road to economic recovery took rather a different form. Under the Nazi government that took office in January 1933, emergency measures were taken by previous governments, like the exchange restrictions introduced in the summer of 1931, evolved into a complex system of trade and monetary restrictions. The Nazi government used and expanded these measures to control the domestic economy and Germany’s relations with the wider world. The regime managed trade, the movement of foreign exchange, prices, wages, private investment banks, and all other aspects of investment. This level of control enabled Germany to ignore the rules of the gold standard to introduce a programme of government spending to generate demand and expand income. Between 1933 and 1934 government investment doubled as money was spent on employment schemes, industrial investment, and reconstruction plans. During 1935 government investment increased by a further 60 per cent, rising again during 1936 as the Nazi state began its rearmament drive in earnest.

Germany’s drive for national self-sufficiency (autarchy) was in marked contrast to the commitment of Belgium, the Netherlands, and France to the internationalism of the gold standard. They all clung to gold until the mid-1930s, which meant they experienced their deepest economic and political crisis in the mid-1930s, the worst possible timing when it came to facing German and Italian expansionism.

But although some semblance of recovery had been achieved by the end of the decade, it was neither complete nor sustained. Levels of international trade and investment remained very depressed, and if it had not been for the demand generated by preparations for World War II, it is very likely the world would have entered a new depression in 1937.


Relations between countries were profoundly disrupted by the Depression. Agriculture and industry demanded the government protect the domestic market from the threat of cheap imports, and levels of trade protection began to rise dramatically. Most startling were Britain’s retreat into protectionism in the autumn of 1931, ending a commitment to the ethos of Free Trade that had lasted 85 years. After 1932 the world was divided into competing for trade blocs, with wide-ranging implications for international peace. For Germany, Italy, and Japan, economic nationalism was the first step on the road to building new empires, while Britain, France, and the United States found it very difficult to cooperate to face this threat thanks to the atmosphere of intense economic competition that now raged between them.

The history of the world economy after World War II was very different to that after World War I. Although the war waged between 1939 and 1945 was far more destructive, the 20 years that followed the war were among the most prosperous and stable of the 20th century. The change was brought about by new domestic and international policies. On the international level, not only had the United States emerged from the war wealthier and stronger than it had ever been before, it was now also determined to provide the leadership and policies to generate economic reconstruction, recovery, and stability in the capitalist world. There were also new organizations designed to facilitate reconstruction and to maintain an open world economy: the International Bank for Reconstruction and Development, the International Monetary Fund, and the General Agreement on Tariffs and Trade. Other countries also recognized the value of creating regional organizations, such as the European Coal and Steel Community, to promote economic cooperation and growth.

World War II had also taught governments lessons about how to manage the domestic economy and provided new tools. The war had, for example, triggered a tremendous expansion in the amount and reliability of statistical information, with much more trained economists employed by the state. The government now understood the importance of investing in the domestic economy. There was also a new recognition that people were a vital resource, with government policy reflecting the importance accorded to educating and training the workforce. Taken together, these new policies and attitudes demonstrated that lasting lessons had been learned from the history of the “Hungry Thirties”.

Contributed By:
Patricia Clavin