16.7: The Great Depression

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During the 1920s, some of the most interesting writing and art of the modernist movement occurred. The political order of Europe and the United States was beset by struggle and conflict. Yet, there was at least some economic growth. That growth came crashing to a halt in 1929 with the advent of the Great Depression.

The Great Depression was the worst economic disaster in the modern era. It constituted an almost total failure of governments, businesses, and banks to anticipate or prevent economic disaster. Nor could they effectively deal with it. The Depression partially explains the appeal of extremist politics like Nazism. The average person was profoundly frightened by what had happened to their world. Instead of progress resulting in better standards of living, all of a sudden the hard-won gains of the recent past were completely ruined.

Why did the Great Depression happen?

World War I had left a financial mess. As part of the Treaty of Versailles, massive reparations were imposed on Germany - 132 billion gold marks. In addition, the former members of the Triple Entente owed approximately $10 billion to the United States on loans. Over the course of the 1920s, as the German economy struggled to recover, the US government oversaw enormous loans to Germany. In the end, a “triangle” of debt and repayment locked the economies of the United States and Europe. US loans underwrote German reparation payments to Britain and France, with Britain and France then trying to pay off their debts to the US. At the end of the 1920s, none of the debts were anywhere near paid off, and more loans were still flooding the market.

The Great Depression actually started in the United States with a massive stock market crash on October 24, 1929. When the stock market crashed, American banks demanded repayment of the European loans, from Germany and its former enemies alike. The capital to repay those loans simply did not exist. Businesses shut down, governments defaulted on American loans, and unemployment soared. In one year, Germany’s industrial output dropped by almost 50% and millions were out of work. At the same time, inspired by liberal economic theories, governments started cutting back on social programs, balancing state budgets, and slashing spending. So, even less capital (money) was available.

In the United States and Western Europe, the Great Depression would drag on for a decade (1929 - 1939), at which point World War II overshadowed economic hardship as the great crisis of the century.