The Great Depression, 1929-1939

The Great Depression, 19291939
Democracy on the Ropes
Economic Cycles post-WWI
• 1919-22—
unemployment and
• 1923—hyperinflation in
Germany (4.2 trillion
DM = $ 1!!) & Ruhr
• 1924-29—temporary
recovery and growth
• 1929-late 30s—
Structural Economic Problems
• Strong inflationary pressures (rationing,
depreciated currencies, borrowing)
• Low commodities prices (world glut)
• Indemnities/Reparations—disrupts investment,
creates circular flow of capital
• Disrupted markets—due to WWI, Asia, North
and Latin America gain relative to Europe
• Economic nationalism—tariffs and protectionism
(Smoot-Hawley Tariff, 1930)
The Hinge
• Reparations cause fluctuations in currency
• Gold standard returns after war (British
pound overvalued)
• Currency values affect trade and cause
drain of gold on treasuries
• French v. British financial policies
• Depression causes currencies to abandon
gold standard
Role of United States
• Unwillingness to act as financial leader
• 1924—Dawes Plan (U.S. begins to supply
2/3 of German capital)
• 1929—Young Plan
• Tariff and trade policies
• Easy money policy and stock market
bubble (purchasing on margin)
• Stock market crash of 1929 (shuts off
capital flow)
Elements of Great Depression
• Massive unemployment
and the downward
spiral (33-40% in
• Investment dries up
• Bank and financial
failures (Credit-Anstalt,
• Protectionism and
tariffs—world trade
Muddled Responses
• Classical economics—deflationary policies
and budget cuts (cf. J.M. Keynes, 1936)
• Reparations finally canceled in 1931
• British pound collapses in 1931—off gold
standard (U.S. in 1934)
• Weak response of the democracies
• Rise of extremist movements, especially in
Central and Eastern Europe