40 The Great Depression

“In no nation are the fruits of accomplishment more secure,” President Herbert Hoover told his fellow Americans on taking office on March 4, 1929. “I have no fears for the future of our country. It is bright with hope.”

His mood of optimism was shared across the USA: never had the stock market been so highly valued, as people enthusiastically speculated in the ongoing success of the capitalist system. Seven months after Hoover’s inaugural address, disaster struck. On October 24, 1929, “Black Thursday,” the US Stock Exchange on Wall Street crashed. On that day alone, 13 million shares changed hands, as speculators realized that the real value of their investments bore no relation to the inflated sums they had paid for them. In a few days, $30 billion had been wiped off the value of stocks.

It was not the first speculative bubble to have burst, but the repercussions of the Wall Street Crash were both longer-lasting and wider-ranging than anything the world had seen before. As US banks panicked and recalled huge sums in loans they had made to European countries, particularly Germany, the Crash ushered in the Great Depression, a decade-long period of global economic collapse, and high unemployment.

The path to economic collapse The Great Depression—also called the Slump—was not brought about by the Wall Street Crash alone. The expense of the First World War had caused the combatant countries to accumulate massive debts—largely owed to US banks—and it had also skewed industrial production toward armaments, and boosted the demand for agricultural products. With the coming of peace, industry experienced a brief boom, but soon found that the market for manufactured goods was limited. Similarly, as demand for agricultural products—from wheat to cotton to rubber—decreased, farmers were faced with falling prices. In America, many were forced to mortgage their farms to the banks, while countries that relied on exporting agricultural produce were obliged to borrow large sums.

As well as making loans to US farmers and foreign states, the US banks had happily lent money to stock-market speculators. But when Wall Street crashed, many speculators were left penniless, and the banks—if they did not themselves go bust—implemented a severe squeeze on credit. Thousands of farmers lost their properties as the banks foreclosed on their mortgages, forcing numerous families, especially in the Midwest, off the land and onto the road in search of work. The banks also called in overseas loans, which further reduced the demand for US exports, as few could afford to buy them. In 1930 the USA introduced import tariffs to protect US industry and agriculture, a move described by one historian as “a virtual declaration of economic war on the rest of the world.” Other countries responded by introducing their own protectionist measures. There was a general failure to recognize the global nature of the crisis, and, instead of working cooperatively, the world’s leading powers scuttled into their own blinkered corners.

“Brother, can you spare a dime?”

Yip Harburg song, 1932, which has come to symbolize the Great Depression in America

From laissez-faire to New Deal In the USA, President Hoover initially believed the crisis was just a temporary blip. But as the US unemployment rate rose to one in four in the USA, and one in three in some other countries, even Hoover had to admit there was a problem—but he did not believe that it was the responsibility of the federal government. In the 1932 presidential election, Hoover was swept out of office by Franklin Delano Roosevelt, who promised a “New Deal” for the American people. Roosevelt went along with the ideas of the British economist John Maynard Keynes, who held that the traditional laissez-faire capitalist approach of keeping government spending and government involvement in the economy to a minimum only perpetuated economic downturns. Roosevelt set about subjecting banking, prices and production to strict government control, offered federal loans to forestall bankruptcies and foreclosures on mortgages, and embarked on a massive program of public-works projects, by which the government brought millions back into employment, and thus pumped large sums back into the economy. By 1934 unemployment began to fall, and the economic situation slowly began to improve.

“While it isn’t written in the Constitution, nevertheless it is the inherent duty of the federal government to keep its citizens from starvation.”

President F. D. Roosevelt, quoted in America in Midpassage, 1939

Other governments, such as the Conservative-dominated National Government in Britain, preferred to concentrate on cutting government expenditure and raising protective tariffs. Traditional heavy industries such as ship-building were left to their fates, leading to unemployment rates as high as 70 percent in the northeast, prompting a number of “hunger marches” on London, such as the 1936 “Jarrow Crusade.”

The effect of reparations

In 1919 the British economist J. M. Keynes had warned of the disastrous consequences of the Treaty of Versailles (see The shadow of Fascism). Germany had been one of the biggest economies in the world, but the requirement imposed on it by the treaty to pay vast sums in reparations severely hampered its return to economic health, and so a major market was denied to exporters in other countries. By 1923 Germany was suffering hyperinflation—to such an extent that it required a wheelbarrow to carry enough banknotes to buy a loaf of bread.

Although the German economy recovered to some extent, helped by a rescheduling of reparations and a massive US bank loan in 1924, the Wall Street Crash brought more financial difficulties, and in 1930 a further rescheduling was arranged, together with another large loan. But it made no difference: as German banks collapsed and unemployment soared, in 1932 the international community eventually agreed to cancel all reparations. But the damage was done: in that year’s election, the Nazis became the biggest party in the German Reichstag. In 1919 Keynes had foreseen something of the kind. “But who can say how much is endurable,” he had written, “or in what direction men will seek at last to escape from their misfortunes?”

In Germany, the effects of the Depression were particularly acute, and helped Hitler to power in 1933. The Nazis blamed international Jewish bankers for the suffering of the German people, and promised to restore national pride. In their latter aim they succeeded, reducing unemployment by a variety of means—principally by the reintroduction of conscription and a massive program of rearmament, as Hitler prepared the country for another war. As the 1930s rolled on, and international tensions began to rise, other countries, such as Britain, embarked on programs of rearmament, and these injections of government money served to stimulate the economy and reduce unemployment. But it was really only the outbreak of the Second World War that brought the Great Depression finally to an end.

the condensed idea

The worst economic slump of the 20th century