8.5 - Global Economic Crisis

Interwar Period in Europe: Overview

After World War I, Europe entered a period known as the interwar years, which was marked by significant economic challenges rather than prosperity. Despite initial signs of recovery, the period soon turned into a time of profound economic crisis.

Treaty of Versailles and Its Impact

• Reparations: The Treaty of Versailles, which ended World War I, required Germany to pay reparations for the war damage. Initially, Germany managed to make the payments, but soon it became financially strained.

• Hyperinflation in Germany: To cope with its financial obligations, Germany began printing money excessively, leading to severe hyperinflation. For example, the exchange rate of one U.S. dollar went from 4 German marks in 1914 to an astonishing 4.2 trillion marks by November 1923.

The Dawes Plan (1924)

• International Intervention: Recognizing Germany’s deteriorating situation, an international commission introduced the Dawes Plan in 1924. This plan allowed Germany to pay only what it could afford in reparations and injected significant U.S. capital into the German economy.

• Economic Stability: The Dawes Plan helped stabilize Germany's economy, and Europe experienced a brief period of recovery and prosperity.

The Kellogg-Briand Pact

• Renouncing War: Reflecting the optimism of the time, European nations signed the Kellogg-Briand Pact, which renounced war as a means of foreign policy. This was a symbolic gesture of peace, though it proved to be short-lived.

Four Key Problems Leading to the Great Depression

1. War Debt: All major powers involved in World War I had incurred significant debt to finance the war, leading to economic strain across Europe.

2. Nationalistic Tariff Policies: High tariffs were implemented by many nations to protect domestic industries. However, these tariffs restricted international trade, causing unemployment to rise.

3. Overproduction: The war had driven many industries, especially agriculture, to ramp up production. After the war ended, production levels remained high, leading to market saturation and plummeting prices, particularly hurting the farming industry.

4. Speculation: In the United States, the 1920s saw a surge in speculation, where people borrowed money to invest in the stock market. This practice was profitable as long as stock prices were rising, but it set the stage for disaster.

The Stock Market Crash of 1929

• U.S. Influence on Europe: European economic recovery between 1924 and 1929 was heavily reliant on American investments. However, as the U.S. stock market became more attractive, American investors started pulling money out of Europe, particularly Germany.

• The Crash and Its Aftermath: In October 1929, the U.S. stock market crashed, marking the beginning of the Great Depression. The economic downturn quickly spread to Europe, where economies collapsed, and unemployment skyrocketed.

• Unemployment Rates: By 1932, 25% of the labor force in Great Britain and nearly 40% in Germany were unemployed. These figures highlight the severe impact of the Great Depression on European economies.

• Gender Roles: Interestingly, while male unemployment rates were high, women were more likely to find work, often in low-paying jobs. This shift sometimes led to a reversal of traditional domestic gender roles, which caused resentment among many men.

Keynesian Economics and Government Intervention

• John Maynard Keynes: British economist John Maynard Keynes introduced a new economic system during the interwar period, known as Keynesian Economics. He argued that government spending is essential to increase consumer demand and pull an economy out of a depression.

• Government Responsibility: Keynesian theory emphasizes that the government should spend money to correct the economy, even if it leads to significant budget deficits. This approach did not gain traction in Keynes's native Britain but was adopted in the United States under President Franklin D. Roosevelt.

• The New Deal: In the U.S., the federal government, under Roosevelt, spent large sums of money on government projects to provide jobs for Americans. While historians debate the effectiveness of these policies in ending the Great Depression, they marked a significant shift in how governments approached economic crises.

Scandinavian Response: Cooperative Social Action

• Rise of Socialism: In the years leading up to World War I and in the interwar period, socialist parties gained influence in the Scandinavian states (Sweden, Norway, Finland). These governments focused on cooperative enterprises that combined elements of both communism and capitalism to avoid the extremes of either system.

• Welfare State Expansion: The Scandinavian countries expanded their welfare states, funded by higher taxes, to create social safety nets for their citizens. This approach was aimed at mitigating the effects of the Great Depression.

Political Alliances and Responses to the Great Depression

• Great Britain: In response to the economic challenges, Great Britain saw the formation of the National Government, an alliance between the conservative and liberal parties, traditionally bitter rivals. While these parties didn't fully reconcile, they cooperated to address unemployment and other national crises in the 1930s, achieving some success.

• France and the Popular Front: France initially fared better than other countries after World War I, but by 1932, it too was hit by the Great Depression. In response, leftist parties in France united to form the Popular Front government, which included socialists and democrats. Their primary goal was to prevent right-wing fascist policies from taking hold in France. Although the Popular Front made some progress, it ultimately failed to resolve France's economic crisis, leaving the country vulnerable to the growing threat from Germany.

• Spain’s Popular Front: Spain also saw the formation of a Popular Front government with similar goals to that of France, focusing on preventing the rise of fascism.