Topic 8.5 Global Economic Crisis The difficulty lies, not in the new ideas, but in escaping from the old ones. —British economist John Maynard Keynes, The General Theory of Employment, Interest and Money, 1930 Essential Question: What were the causes and effects of the global economic crisis of the 1920s and 1930s? n October 1929, the U.S, stock market crashed, setting off the Great Depression, It quickly spread to Europe, which was still economically recovering from World War I. Weaknesses international trade also contributed to the Depression, As citizens faced rising unemployment and. hunger, radical political responses to the crisis spread throughout Europe. Before it was over, the Depression became a major factor in undermining Western Furopean democracies. Worldwide Economic Weaknesses One reason for the rapid spread of the Great Depression to Europe was that most countries determined the value of their currency based on its worth in a fixed amount of gold, a monetary practice known as the gold standard, There was no flexibility to let the value of a currency and its exchange rate with other currencies change as economic conditions changed. ‘There were many causes of weak economies throughout the world after World War I. Tied to the gold standard, the currencies of countries had depreciated, or declined in value, after the war, European countries had spent billions of dollars waging the war, leading to massive debt and the need to borrow for rebuilding. Countries on the losing side, especially Germany, were burdened by the requirement to pay huge reparations to the victors, especially France and Britain. European economies had barely started recovering from. the war by 1922. Other problems weakened the economies further. Overproduction ‘Countries geared up agriculture and manufacturing production to meet the requirements of total war. When demand fell after the war, overproduction led to declining prices. Farmers and businesses had to cut back production to adjust. Many had gone into debt to increase production during the war and. now did not have the revenue to pay off that debt. < 517/718 > \aLeconomiccrisis 517Tariffs and Trade By the mid-1920s, many European countries began to impose tariffs, or taxes on imported goods, to protect their domestic agricultural and manufacturing sectors, interfering with the free flow of goods and hindering trade. These nationalistic tariff policies led to higher prices for imported goods or closed markets ta some foreign goods completely. In addition, countries in Europe that had their factories and infrasteucture damaged during the war lost out on trade to the United States. For example, heavy industry in the Wallonia region of Belgium (the country’s southern half) was almost totally destroyed during German occupation. This region had historically preduced iron, steel, woolen goods, glass, and weapons. Speculation In the United States, stock prices rose faster than other prices during the 1920s; investors began to put more money into the stock market in the hopes of reaping huge returns. Stock prices rose rapidly, and more and more people were tempted to invest in the market. This led to speculation, which is making high-risk investments hoping that they will eventually pay off well. People often bought on margin, which meant they were borrowing a large portion of the money needed to buy stocks. Such investors believed they could pay back their borrowing from the profits they made, Stock prices rose beyond the value of the companies’ worth, revealing the underlying weakness in the economy. =e Financial Collapse STOCK VALUES € The Dawes Plan of 1924 IN RECORD ST, reduced = German war 5 reparations and provided a $200 million loan for German recavery. The plan had also encouraged U.S. investment in Europe. American bank loans to Germany created prosperity from 1924 to 1929. In 1928, investors began diverting capital from Europe to invest in the U.S. stock market. When stock prices started to decline, investors lost confidence and pulled their money quickly out of the market. This selling off of stocks caused the 1929 stock market crash in October, Souree: Getty Images! Frederic Levis ‘The front page of the The Philadelpieia Inquirer newspaper Published one day after the Wall Street Crash of Back ‘Thursday (Gctober 24, 1929) 518 EUROPEAN HISTORY:/ << 518/718 >As a result of the crash, capital stopped flowing from the United States to Europe. This loss of capital in turn led to the collapse of major banks in Germany and other parts of central Europe. Without American funds, trade and industry declined and unemployment increased. Individual countries’ economies were affected by the problems of international banks. Attempts to Overcome the Great Depression Western democracies tried a variety of economic and political strategies to overcome the Great Depression. However, their results fell short. Extremist movements weakened democracy throughout the continent. Rethinking Economic Theories and Policies The traditional government response to a typical economic depression was a policy of balanced budgets, which required lowering wages and raising protective tariffs, in order to let the depression run its course, During the Great Depression, however, this approach tended to make the situation worse. Britain changed one policy by going off the gold standard in 1931; this change produced some recovery. ‘The British economist John Maynard Keynes (1883-1946) proposed a new and different economic approach. Instead of balanced budgets and tariffs, he advocated increased government spending to increase consumer demand, even if this spending resulted im budget deficits, For example, he stated that government spending on infrastructure projects could help create jobs, giving consumers more money to spend and thus provide a reason for other businesses to hire workers to produce more products. Such a program required greater government involvement in the economy, but British politicians did not have the will to do that in the 1930s. Forging Political Alliances Several European governments found it necessary to forge political alliances among parties that usually competed rather than cooperated. For example, in Britain, a national government was formed in 1931 that was a coalition of all three parties—Conservative, Liberal, and Labour. This coalition government was successful in cutting unemployment from about 3 million in 1932 to about 1.6 million in 1936, using traditional economic policies. France felt the effects af the Depression later than other countries because its economy had more balance between agriculture and industry. However, fascist groups in France became stronger as the Depression worsened, The French Popular Front government, formed in 1936, was a response to the rise of fascism. This coalition government included Communists, Socialists. and Radicals—all left-wing groups. The Popular Eront introduced new policies that favored workers, such as a 40-hour work week, paid holidays, and collective bargaining. However, these policies did not effectively solve France’s economic problems. By 1939, France and Britain were the only major European countries with democratic governments. < 519/718 > \ALeconomiccrisis 519aes Source: Getty Images! Keysiane Members of the Front Populaire (French Popular Front} carrying a huge portrait of Socialist eader Léon Blum duringa gathering in the Place de la Republique, Paris, to protest high unemployment Cooperative social action in Scandinavia under socialist leaders successfully dealt with the Great Depression. Capitalists and socialists worked together to increase social welfare benefits, including retirement pensions, maternity allowances, subsidized housing, and unemployment insurance. In Sweden, they used large-scale deficits to finance public works and promote employment. However, the eventual price for all of the spending was high taxes on most Scandinavians. German Extremism Germany suffered more from the Great Depression than any other European nation due to the high reparations and German dependence on American investment as a result of the Dawes Plan. By the end of 1930, almost 4.5 million people were unemplayed; the number had increased to 6 million two years later, The Weimar Republic’s inability to deal with this level of economic suffering and the fear that followed in its wake opened the door for Hitler's Nazi Party to come to power. The Nazis held out the hope of restoring Germany to order and prosperity. REFLECT ON THE ESSENTIAL QUESTION Essential Question: What were the causes and effects of the glabal economic evisis of the 1920s and 19303? 520 EUROPEAN HISTORY:) << 520/718 >KEY TERMS Great Depression ‘speculation Popular Front gold standard John Maynard Keynes depreciate national government MULTIPLE-CHOICE QUESTIONS ‘Questions 1-3 refer to the table below. Netherlands Czechoslovakia Soures ‘chang ntl Gut nSalocodErapaa Coun om BEB fo 1992 and from T92B to 1837/8, Following the Great Depression” stanista.com 1. One similarity among countries listed in this table where industrial production declined was that they were (A) the first countries to industrialize (B) the lowest in population or small in area (C) the most dependent on agriculture in the 1930s (D) the ones located in central Europe 2. The historical context that most directly influenced the changes shown in the table was that Europe faced economic problems because of (A) the results of World War I and the treaties that ended it (B) the new technology developed during and after World War I (C) the threat of the spread of Russian communism into other countries (D) the impact of disarmament agreements on employment < 521/718 » \aALeconomicecrisis 521