The Great Depression

Economic depressions were nothing new. They had occurred in the past at irregular intervals, just as they do today; however the Great Depression was of such severity and magnitude and lasted so long, that it must of necessity be spoken of as a proper name, with capital letters. The entire world was affected from 1920 to 1933, and its effects were only ended by the outbreak of World War II. The end result was the death of the optimism that had previously existed in Europe. Desperate people looked for leaders who would "do something" to end their suffering as millions of people became unemployed and farms failed. Insecurity was a reality for the masses.

The Depression was apparently triggered (although not caused) by the great Stock Market crash of 1929 in the United States, when inequalities in income had created a serious imbalance between realistic investment in the market and wild speculation. Net investment in factories, farm equipment, etc. fell from $3.5 billion to $3.2 Billion, a drop of $300 million in 1929 alone. Stock prices soared on the strength of huge sums of money invested in the market. Dietmar Rothterman, a financial historian has commented in his Global Impact of the Great Depression that "It should have been clear to everybody concerned that a crash was inevitable under such conditions." Sadly, it was not. Irving Fisher, one of America’s most brilliant economists of the day was highly fully invested in the stock market and highly optimistic. With the collapse of the market, he lost everything, and would have been forced to leave his home had not the university at which he taught not bought it and rented it back to him.

Intense buying "on margin" soon led to a collapse of the entire stock market. Those who had lost fortunes bought no new consumer products, and prices fell as production slowed. Unemployment rose and the entire American economy was caught in a downward spiral.

Although the stock market crash indicated the onset of the depression, and in fact may have triggered it, it would be a misjudgment to conclude that the crash was the proximate cause of the depression. Banks had made loans on too easy terms to customers with little prospect of repayment, and businesses had continued to build inventories even when sales slowed. The causes of the depression were complex and multifaceted; so much so that no one reason can be identified as the efficient genesis.

With American bankers, strapped for cash, recalled short term loans, many made to European concerns, gold reserves flowed from European banks to the United States. It became harder for Europeans to borrow money and a panic resulted with the general public withdrawing money from banks. In 1931, Austria’s largest bank collapsed in the face of large withdrawals. World prices collapsed as businesses around the world dumped industrial products and agricultural commodities in a desperate attempt to raise cash to pay debts. This led to a production crisis between 1929 and 1933 when world output of goods fell by 38 percent. Each country turned inward and tried to go it alone. Britain went off the gold standard in 1931, and refused to convert bank notes to gold, while reducing the value of the Pound sterling at the same time. It hoped to make its products cheaper on world markets; but because more than twenty nations, including the United States, went off the gold standard, few countries realized any real advantage. Many countries, including the U.S., raised protective tariffs to the highest levels ever in an attempt to seal off shrinking domestic markets. Recovery finally began in 1933.

Two factors appear as likely culprits for the economic collapse of 1929 to 1833. First, the international economy lacked leadership able to maintain stability. The British had been the traditional leaders of the world economy, but their own economy was seriously weakened. Said one historian, the British "couldn’t and the United States wouldn’t" stabilize the economic system. Intent on preserving its own economy, the United States erected high tariffs and cut back on international lending. Secondly, poor national economic policy played an important part. Governments cut their budgets and reduced spending when they should have run large deficits in an attempt to stimulate their economies. This policy, first advocated by John Maynard Keynes, became established policy after the Depression, but at the time, most traditional economists viewed his theories with horror.

The result of the economic downturn was mass unemployment on a scale never seen before. When the situation appeared hopeless, many people lost their spirit and their dignity. Homes and lives were disrupted or destroyed. Young people postponed marriages and birthrates fell sharply. Suicide rates and mental illness increased substantially. Unemployment on such a massive scale was a time bomb, waiting to explode.

Only Germany was hit harder by the Depression than the United States. The Great Depression marked the end of a period of optimism in America. President Franklin Roosevelt proposed to fight the Depression with a policy of forceful government intervention rather than socialism or government ownership of industry. He called his program the "New Deal." Since it is discussed at length in U.S. History Courses, it will only receive cursory mention. Suffice it to say that Roosevelt adopted many Keynesian economic policies, but these policies alone did not end the Depression.

Response to the Depression in Scandinavia: Scandinavian governments, largely socialist, responded most favorably and successfully to the depression. The Swedish government used a system of large scale government deficits to finance public works and maintain production and employment. Social welfare programs were increased, including old age pensions, unemployment insurance, subsidized housing, and maternity allowances. The high taxes to pay for this system fell on the rich first, but eventually on everyone. Even so, democracy and the economies of the Scandinavian countries thrived. The Scandinavian system seemed to be the proper compromise between cruel Communism and sick capitalism.

Recovery and Reform in Britain and France: British government officials followed orthodox government policy, and maintained a balanced budget. Although they did not follow the Keynesian theory which Franklin Roosevelt espoused, a slow but sure recovery took place. Unemployment went down and production increased. The performance was not brilliant, but it was sufficient. Britain’s recovery was largely the result of the reorienting of its economy to a domestic rather than a foreign base. The old industries of textiles and coal production, geared primarily to foreign markets, declined while domestic markets, particularly automobiles and housing, boomed.

The Depression came late to France, as it was less industrialized and more isolated from the world economy. However, once it arrived, it set up housekeeping and appeared to move in for good. Economic stability seemed to be permanent, and as a result the government was also unstable. The government was made up of numerous political parties which seemed unable to cooperate with each other for very long. In 1933, five coalition cabinets formed and fell quickly. As a result, the unity which had made government instability bearable collapsed. Fascist type groups arose which looked to Nazi Germany and Fascist Italy under Benito Mussolini for inspiration. In February, 1934, French fascists rioted and threatened to undermine the republic. At the same time, French communists were looking to Stalin’s Russia for guidance. Thus, the moderate republicanism that had characterized France was attacked on two fronts.

Alarmed at the prospects of fascism, French communists, socialists and radicals formed an alliance known as the Popular Front for the 1936t national elections. The strongest party after the election were the Socialists, with 146 seats in Parliament. The Communists increased their seats from 10 to 72. Radicals (who were really rather moderate when compared to the Communists) and conservatives lost ground.

The Popular Front, led by Léon Blum, gained inspiration from Franklin Roosevelt’s New Deal. The government encouraged unionism, and created a program which included a forty hour work week and paid vacations. These efforts soon fell victim to rapid inflation and calls for revolution from fascists and communists. Wealthy Frenchmen sneaked their money out of the country and labor unrest grew.

Civil War in Spain fanned the fires of dissent. Communists demanded that France support the Spanish Republicans while the conservatives would have been happy to join Mussolini and Hitler in aiding the Spanish fascists. France was on the brink of civil war when Blum was forced to resign in June 1937 and the Popular Front quickly collapsed. France drifted aimlessly, preoccupied with Hitler and the rearmament of Germany.