By the late 1920s, European nations were rebuilding war-torn economies. They were aided by loans from the more prosperous United States. In the United States, Americans seemed confident that the country would continue on the road to even greater economic prosperity. One sign of this was the booming stock market. Yet the American economy had serious weaknesses that were soon to bring about the most severe economic downturn the world had yet known.
Europe After the War
In both human suffering and economic terms, the cost of World War I was immense. The Great War left every major European country nearly bankrupt. Only the United States and Japan came out of the war in better financial shape than before. Neither had been a wartime battlefield. In fact, both had expanded their trade during the war. In addition, Europe’s domination in world affairs had declined since the war. The long and brutal fight had drained the continent’s resources.
New Democracies Are Unstable: War’s end saw the sudden rise of new democracies. From 1914 to 1918, Europe’s last absolute rulers had been overthrown. The dynasties of the Hohen-zollerns in Germany, the Hapsburgs in Austria-Hungary, the Romanovs in Russia, and the Ottomans in Turkey all ended. The first of the new governments was formed in Russia in 1917. The Provisional Government, as it was called, hoped to establish constitutional and democratic rule. However, within months it had fallen to a Communist dictatorship. Even so, for the first time, most European nations had democratic governments.
Many citizens of the new democracies had little experience with representative government. For generations, kings and emperors had ruled Germany and the new nations formed from Austria-Hungary. Even in France and Italy, whose parliaments had existed before World War I, the large number of political parties made effective government difficult. Some countries had a dozen or more political groups. In these countries, it was almost impossible for one party to win enough support to govern effectively. When no single party won a majority, a coalition government, or temporary alliance of several parties, was needed to form a parliamentary majority. Because the parties disagreed on so many policies, coalitions seldom lasted very long. France, for example, endured some 40 changes of government from 1919 to 1939.
Frequent changes in government made it hard for democratic countries to develop strong leadership and move toward long-term goals. In peaceful times, a country could get by with weak leadership. However, the weaknesses of a coalition government became a major problem in times of crisis. Voters in several countries were then willing to sacrifice democracy for strong, totalitarian leadership.
Weimar Republic Is Weak :Germany’s new democratic government was set up in 1919. Known as the Weimar (WY•mahr) Republic, it was named after the city where the national assembly met. The Weimar Republic had serious weaknesses from the start. First, Germany lacked a strong democratic tradition. Furthermore, postwar Germany had several major political parties and many minor ones. Worst of all, millions of Germans blamed the Weimar government, not their wartime leaders, for the country’s defeat and postwar humiliation. It was, after all, the Weimar government that had signed the Treaty of Versailles.
Inflation Causes Crisis in Germany :Germany also faced enormous economic problems that began during the war. Unlike Britain and France, Germany did not greatly increase its wartime taxes. To pay the expenses of the war, the Germans simply printed money. After Germany’s defeat, this paper money steadily lost its value. Burdened with heavy reparations payments to the Allies and with other economic problems, Germany printed even more money. The result was the value of the mark, as Germany’s currency was called, fell sharply. Severe inflation set in. Germans needed more and more money to buy even the most basic goods. For example, in Berlin a loaf of bread cost less than a mark in 1918, more than 160 marks in 1922, and some 200 billion marks by late 1923. People took wheelbarrows full of money to buy food. The mark had become worthless.
Consequently, people with fixed incomes saw their life savings become worthless. The money people had saved to buy a house now barely covered the cost of a table. Many Germans also questioned the value of their new democratic government.
Attempts at Economic Stability: Germany recovered from the 1923 inflation thanks largely to the work of an international committee. The committee was headed by Charles Dawes, an American banker. The Dawes Plan provided for a $200 million loan from American banks to stabilize German currency and strengthen its economy. The plan also set a more realistic schedule for Germany’s reparations payments.
Put into effect in 1924, the Dawes Plan helped slow inflation. As the German economy began to recover, it attracted more loans and investments from the United States. By 1929, German factories were producing as much as they had before the war.
Efforts at a Lasting Peace :As prosperity returned, Germany’s foreign minister, Gustav Stresemann (STRAY•zuh•mahn), and France’s foreign minister, Aristide Briand (bree•AHND), tried to improve relations between their countries. In 1925, they met in Locarno, Switzerland, with officials from Belgium, Italy, and Britain. They signed a treaty promising that France and Germany would never again make war against each other. Germany also agreed to respect the existing borders of France and Belgium. It then was admitted to the League of Nations.
In 1928, the hopes raised by the “spirit of Locarno” led to the Kellogg-Briand peace pact. Frank Kellogg, the U.S. Secretary of State, arranged this agreement with France’s Briand. Almost every country in the world, including the Soviet Union, signed. They pledged “to renounce war as an instrument of national policy.”
Unfortunately, the treaty had no means to enforce its provisions. The League of Nations, the obvious choice as enforcer, had no armed forces. The refusal of the United States to join the League also weakened it. Nonetheless, the peace agreements seemed a good start. In addition, Europeans were enjoying an economic boom based largely on massive American investment.
The Great Depression
In the late 1920s, the world economy was like a delicately balanced house of cards. The key card that held up the rest was American economic prosperity. If the United States economy weakened, the whole world’s economic system might collapse. In 1929, it did.
A Flawed U.S. Economy: Despite prosperity, three weaknesses in the U.S. economy caused serious problems. These were
- Uneven distribution of wealth
- Overproduction by business and agriculture
- Lessening demand for consumer goods.
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, Wall Street, in New York City, 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 feel that stock prices were unnaturally high. They started selling their stocks, believing the rates 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 sank quickly. The wild shouting of 1,000 brokers and their assistants at the Stock Exchange became what one observer called a “weird roar.” Prices plunged to a new low on Tuesday, October 29. A record 16 million stocks were sold. Then the market collapsed.
In the stock market crash, billions of dollars in “paper wealth” simply vanished. 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, or depression, followed. The Great Depression, as it came to be called, touched every corner of the American economy. 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: 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 support American workers. The government was trying to force Americans to buy American goods. This policy backfired. Conditions worsened for the United States. Many countries who 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.
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. This started a financial panic in central European countries and sent their economies plunging.
In Asia, the Japanese economy also slumped. Japanese farmers suffered greatly during the Depression. In the rice- growing areas of the northeast, crop failures in 1931 led to famine. Starving families ate tree bark and the roots of wild plants. City workers suffered, too, as the value of exports fell by half between 1929 and 1931. As many as 3 million workers lost their jobs, forcing many to go back to their rural villages.
The economic crisis fell heavily in Latin America as well. Many of its nations were tied to the global economy by trade in such cash crops or raw materials as sugar, beef, copper, and tin. During the 1920s, world prices and market demand for these products were already dropping. As European and U.S. demand for Latin American products dried up in the 1930s, prices for these goods collapsed. At the same time, the cost of imported goods rose, pushed up by high tariffs.Latin American nations that had borrowed heavily from other nations could not repay their debts. The worldwide crisis spread rapidly.
The World Responds to 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: Because its economy depended on foreign trade, the Depression hit Britain severely. To meet the emergency, British voters elected a multi-party coalition known as the National Government. This government’s policies were designed to rescue the nation from economic calamity. It passed high protective tariffs, increased taxes, and regulated the currency. 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: Unlike Britain, France had a more self-sufficient economy. In 1930, it was still heavily agricultural and less dependent on foreign trade. Thus, France was somewhat cushioned against the Depression. Nevertheless, by 1935, one million French workers were unemployed.
The economic crisis contributed to political instability. In 1933, five coalition gov- ernments formed and fell. Many political leaders were frightened by the growth of anti-democratic 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. These reforms included pay increases, holidays with pay, and a 40-hour work week. Unfortunately, price increases quickly offset wage gains. Unemployment remained high. Yet France also preserved democratic government.
Socialist Governments Find Solutions: The Socialist governments in the Scandinavian countries of Denmark, Sweden, and Norway also met the challenge of the 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. Under this program, both private and cooperative businesses prospered. Democracy remained intact.
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 reform that he called the New Deal. Large public works projects helped to provide jobs for the unemployed. New govern- ment 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. Despite these efforts, recovery was slow.
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.