Great Depression
Deepest crisis of the capitalist economy in the twentieth century, lasting from 1929 to 1933.
Economic and financial relations between the United States and Europe and in particular between the United States and Germany played a major role in the crisis, both with respect to its causation and with regard to the impact of the crisis, as both Germany and the United States were the two countries hardest hit by it.
Furthermore, the Great Depression marked a wa-tershed in twentieth-century history, and as such its significance lies beyond the socioeconomic events. The economic crisis stimulated major political changes in the United States and Europe and contributed significantly to the political radicalization and the breakdown of parliamentary democracy in Germany.
Despite being characterized by a series of contractions and expansions, the American economy experienced overall growth in the 1920s. In fact, during this decade the American economy was strong enough to pull the advanced western European economies on a growth path with it. Thus, the Great Depression was preceded by an economic boom that was particularly strong in the United States and in Germany. During the early 1920s, Germany suffered from inflation and in 1923 even from hyperinflation, but by 1925, the economy had recovered, and Germany entered a period of relative stabilization. However, having experienced the difficulty of stopping inflation from spinning out of control had made German politicians predisposed toward anti-inflationary policies.
After World War I, Germany was required to make significant payments to the European Allies as war reparations. France and Great Britain in turn used a significant portion of these payments to repay their war loans to the United States. Since Germany had completely exhausted its financial resources in the war, it depended on capital streams from the United States to meet its obligations under the reparations regime.
However, this triangular financial relationship had a major weakness: U.S. loans to Germany were given to German commercial banks as mediators on a revolving but short-term basis. Even as the German banks distributed and invested the capital primarily through long-term loans, they were refinancing themselves largely through short-term loans. In fact, during the 1920s, about 50 percent of net investments in Germany were financed through capital from the United States. As long as the financial streams were not interrupted, this system functioned well enough because the short-term loans from the United States were continuously renewed.Although the German economy had already been inching toward a recession before the fall of 1929, the Great Depression as a global crisis was triggered by successive stock market crashes in the United States in 1929. Overspeculation ended suddenly with news of higher interest rates and slower economic growth prospects. Starting with very heavy sales on October 23, a panic developed very quickly on October 24 (“Black Thursday”). Massive intervention by commercial banks achieved a temporary stabilization of the market toward the end of the week. But on October 28 (“Black Monday”) and primarily on October 29 (“Black Tuesday”), the stock market collapsed completely. On the last day alone, more than 16 million stocks were sold at the New York Stock Exchange. Due to the time difference, the effects at the German stock markets were felt with only a short delay. The major stock market crash in Germany happened on October 25 (“Black Friday”). The initial shock was followed by a protracted crisis, which resulted in a decline of stock prices by more than 3 quarters over the following three years. Given the fact that many lenders could no longer service their debt because their col- lateral—stocks—had decreased dramatically in value almost overnight, the stock market crash quickly created a major banking and financial crisis.
Very rapidly the financial crisis turned into a global economic crisis and spread to Europe, which was tied to the U.S.
economy through a financial arrangement that was centered on Germany. With the financial crisis in the United States, American lenders called their money back in two waves: In the immediate aftermath of the stock market crash in New York and again after the German election of 1930, in which Hitler’s National Socialist German Workers’ Party (NSDAP) made significant gains, American creditors did not renew their loans to German banks but withdrew their capital instead. The cumulative effect of this policy and the quickly developing American banking crisis was the collapse of the international financial arrangement, which led to a serious aggravation of the economic crisis.The first bank to collapse in Europe was the Austrian Creditanstalt in May
1931. However, since its financial practices had been similar to those of its German competitors, a run at all major German banks ensued, with depositors attempting to withdraw their funds immediately. This response was in no small part caused by the German experience of hyperinflation not even a decade before. Under those circumstances, deposits with a bank would loose their value very quickly. The only option left to most was to withdraw their money and invest it in durable goods. The immediate and collective withdrawing of a significant percentage of the deposits following the stock market crash in October 1929 created a genuine banking crisis in Germany and aggravated the overall economic crisis even further.
The stock market boom that had preceded the crash in October 1929 had partially masked a fundamental economic problem: the structural deficit in demand. As long as the stock market boom continued, speculation generated capacity for demand. But once the system of overspeculation collapsed, it exposed four major forces that combined to bring the whole economic system to a crushing halt. First, for years investors had been overly optimistic regarding the market for durable consumer goods. Overestimating the demand in this field had fueled the stock market boom to a good part.
Companies that produced— or at least claimed to produce—modern durable consumer goods were generally considered to have significant economic upside, and their stocks soared accordingly. Second, during the post-World War I recovery, an overall optimism prevailed and led to the buildup of additional productive capacity on top of the already significant and ongoing improvements in efficiency, which were achieved by rationalization. Due to the overall assumption of further economic growth, the increased capacity was very quickly transformed into additional production. The buildup of overcapacity was, third, not limited to industrial production but also affected the agricultural sector in Europe and the United States. Here too, rationalization and increased capacity led to overproduction. Fourth, significant tariff increases and policies of protectionism on both sides of the Atlantic meant to stabilize the national economies actually worsened the global economic crisis, as world trade volume decreased by one-quarter between 1929 and1932. High protective tariffs brought whole export industries to a standstill. This was particularly fateful for Germany, which had relied on its exports not the least to the United States to generate foreign currency revenue for reparations and to finance its debt payments. Moreover, high tariffs also translated into high market prices, which were exactly the opposite of what was needed, according to prevailing economic theory. The recession was supposed to bring the prices down to a new market clearing price. High tariffs, however, kept the prices at an artificially high level.
With a structural imbalance between demand and supply, the global capitalist system collapsed, reinforcing the economic crisis on either side of the Atlantic. In the wake of the crisis, the American and German banking systems collapsed, and industrial production contracted dramatically. In fact, Germany and the United States were the hardest hit by the decline in industrial production among the major industrialized countries.
As a result, countless companies had to close or significantly reduce hours of operation and cut their workforce, which in turn generated high unemployment. At the high point of the unemployment crisis in 1933, over 6 million Germans were officially unemployed (over one-third of the total workforce). In the United States, 13 million were registered as unemployed in 1933—an unemployment rate of almost 25 percent. Economically, these high unemployment rates widened the gap between supply and demand as millions of households lost part or all of their income. Socially, the impact of the Great Depression remains immeasurable, as whole societies were thrown into turmoil. The political developments of the 1930s in the United States (the New Deal) and Germany (the rise of fascism) can be linked in part to the situation produced by the Great Depression.The initial political responses to the crisis, both in Germany and the United States, were delayed and flawed. Past experience with periods of economic depression as well as economic dogma suggested to U.S. president Herbert Hoover to simply wait for the next upturn in the business cycle. His lack of decisive action was thus not passivity but rather a conscious policy choice. Nonaction was considered the best policy in this particular situation. Still, given the magnitude of the crisis, Hoover did not refrain completely from intervening. Although designed to alleviate the situation and stimulate a recovery, the policies that the United States implemented actually worsened the crisis. Raising tariffs (most significantly with the so-called Smoot-Hawley Tariff of 1930) was certainly intended to support the U.S. economy; but by artificially raising prices and contributing to further price rigidity, the policy actually prevented prices in the United States from coming down and reaching a new market-clearing price. Only with the Roosevelt administration (1933—1945) did the United States change its economic policy fundamentally toward government intervention and deficit spending.
In Germany, a policy similar to Hoover’s was chosen by the Bruning government (1930-1932). Viewing the crisis as economically necessary (Reini- gungskrise), Berlin pursued a policy of nonintervention, rejecting a policy of deficit spending to create demand and thus trigger an economic recovery. Given the still recent experience with hyperinflation in Germany, an anti-inflationary policy seemed to make particular sense. Furthermore, one of Heinrich Bruning’s
major foreign policy objectives remained to renegotiate the Young Plan of 1930, which had settled German reparations payments. In order to achieve this goal, he favored an anti-inflationary policy of tightening expenses in times of economic crisis. Hence, not only did German policymakers see good economic sense in a policy of nonintervention, they had additional political reasons to not act in a countercyclical way. Thus, Bruning’s response actually aggravated the crisis.
The Papen and Schleicher governments that succeeded Bruning benefited from a slow improvement in the economic climate but initiated more constructive policies at the same time. Given the severe social repercussions of the economic crisis, a labor program made economic as well as social sense. And although Franz von Papen aimed at stimulating private investment by supporting the supply side, Kurt von Schleicher focused more on the demand side by utilizing public expenses. In fact, Germany had already left the low point of the Depression behind and was getting on the road to recovery when Adolf Hitler gained power in January
1933.
Matthias Maass
See also Bruning, Heinrich; Dawes Plan
References and Further Reading
Galbraith, John Kenneth. The Great Crash, 1929. Boston: Houghton Mifflin, 1997.
Harold, James. Deutschland in der Weltwirtschafiskrise, 1924—1936. Stuttgart: DVA, 1988.
------, ed. The Interwar Depression in an International Context. Munich: Oldenbourg, 2002.
Kindleberger, Charles P. The World in Depression, 1929—1939. Berkeley: University of California Press, 1986.
McElvaine, Robert S. The Great Depression: America, 1929—1941. New York: Times Books, 1993.