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The Great Depression of 1929:
Effects Were Felt Around The World
The introduction of the discussion will focus on the origins of the Great Depression
and the escalating events that led to it. This will provide adequate foundations to bring
up questions and attempt to answer them in an objective fashion as to why and how the
Depression affected different industrialized countries in different ways. The core
of the debate will consist of detailed comparable analyses of the consequences of the
Depression with an emphasis on the economic aspects. The conclusion will provide a
brief overview of the ways used by the different governments to get out of that dark
episode of world economic history.
When studying the Great Depression and it's effects, it is not unusual for historians
to choose World War I as a starting point for their investigation. The reason for that is
the importance of the repercussions the conflict had on the economies of all the countries
that were involved in it.
First of all, the War made it impossible for Europe to maintain previous levels of
production. For example, before the War, France, the U.K. and Germany accounted for about
60 percent1 of the world's exports of manufactured goods, a share of the market which they
could not sustain during the conflict. Consequently, Europe took many of its markets to
the U.S. and Japan. The stunted growth of the European economies meant a lower demand for
raw materials, which in turn lowered the demand for European exports.
In agriculture, things didn't look any better, as it was the sector which employed the
most people. At the end of World War I, Europe was forced to import food from the U.S..
Moreover, these transactions were conducted on a credit basis since Europe could not
afford to pay for its purchase at that time.
Clearly, the U.S. was going from being a traditional debtor of Europe before World War
I to becoming its creditor: America had financed the war and it was issuing loans for its
reconstruction. However, the attitudes in the U.S. were evolving in an unusual direction:
an increasing number of American financiers were starting to literally seek ut potential
borrowers which led to competition among U.S. banks and the spreading of unsound lending.2
The main object was to "do the most business", even at the expense of essential
What seemed like a beginning of recovery from the Great War, was in fact an immense
accumulation of debts, which made the international economic order vulnerable to
depression. Analyzing these events with the insight we have today, they seem even more
unbelievably audacious given the high instability of the borrowing nation. (i.e., Europe)
The triggering event was the crash of the Wall Street stock market in October of 1929.
The stock market collapsed after steady declines in production, prices and incomes over
three previous months which forced the speculators to revise their expectations. Anxiety
soon gave place to panic which led to the crash. However, the depression affected the
different industrialized countries in various ways and degrees of intensity.
The depression was of especially great magnitude in the U.S. because there were not any
welfare benefits for laid off workers. In the period between 1929 and 1933, money income
fell by 53 percent (real income fell by 36 percent.)3 As a consequence, demand fell
significantly, which in turn led to lower production and more layoffs-- up to a high of 25
percent rate of unemployment in 1933.
Despite the severity of the situation, the Federal Reserve did not pursue a monetary
expansion on policy which would have stimulated the economy through lower interest rates
and increased the stock of money in circulation. This inaction is often attributed to the
fact that market interest rates in 1930-1931 fell to very low levels, much lower than in
the earlier recessions (of 1924 and 1927), and therefore, the Federal Reserve Board
wrongfully saw no need to pursue an expansionary monetary policy.4 An indicator of that
inaction is that open market operations did not provide sufficient money reserves for a
banking system faced with depositors anxious for liquidity (monetary expansion would have
filled that need). If the Federal Reserve had provided additional funds to the banking
sector after 1930, bank failure would not have been so numerous and the run on the banks
would have been (at least) slowed down.
Still, it would not be accurate to make the Federal Reserve responsible for all these
problems. Other factors contributed to the precipitation of what began as a cyclical
recession into what we now know as the Great Depression. One of those is the Hawley Smoot
tariff of 1930 which in essence made America more protectionist than ever, sending import
duties to record highs. Evidently, retaliation from other countries was quick to come. The
new tariff act accelerated the downfall of American trade volume, which was probably the
last thing the U.S. needed at that stage. President Hoover had always been in favor of
protective tariffs which he considered a strictly domestic issue and he supported the
Howley Smoot Act. Therefore, he clearly failed to see the implications of such a move.
Soon, the Depression was spreading to the rest of the world, especially to Europe.
There, the single country that was most affected was Germany whose very weak economy could
not cope with the slow disappearance of American capital. Let us mention that Germany was
still paying reparations (for World War I), which made its situation even more delicate.
Germany was forced to borrow from Great Britain and France which could not compensate for
the decline in U.S. lending.5 The trap in which Germany found itself was quite
disconcerting: she had to pursue deficienary policies to gain the confidence of investors
in order to attract foreign funds. At the same time, devaluaton posed a major problem. It
increased the burden of the external debt (through the exchange rate mechanism) which was
payable in foreign currencies.
The United Kingdom represented another major force on the global economic scene. The
British economy was not hit immediately as violently as Germany's. However, as the
repercussions of the world crisis became increasingly clear, Great Britain experienced a
notable decline in its exports which was even greater than the decrease in its imports.
Those two factors contributed to generate a deficit in its balance of payments.
Still, compared to most other industrialized countries, the U.K. got through the
Depression in better economic health.6
In the case of France, things went a significantly different way. First of all, out of
the four biggest industrialized countries of the time (U.S., Germany, U.K. and France),
France was the last to be hit by the Depression. Many possible reasons are hypothesized to
explain that fact, but the one that is most often heard is the undervaluation of the
The French economy began to feel the effects of the world crisis in 1932. Around that
time the Depression caught up with the French economy through an important decrease in its
exports (due impart to the shear downsizing trend in the volume of world trade), combined
to an increase in imports. The problems faced by France were also worsened by the fact
that it still was maintaining the gold standard long after all of the other industrialized
countries--starting with Great Britain in 1931--had switched to fleeting exchange rates.
As for Japan, we can safely say that it is the one country among today's industrialized
nations that got through the Great Depression with the least damage to its economy.7
Now that we have illustrated how the world crisis affected various nations in different
ways, it seems only logical that they would put together solutions that were adapted to
their individual problems.
In the United States, Hoover had failed to bring a solution to the Depression, and he
was replaced by Roosevelt in 1932. The new president brought with him the New Deal, which
can be qualified as a collection of programs aimed at stimulating different sectors of the
economy (like the Agricultural Adjustment Act and the National Industrial Recovery Act).
As it turned out, the New Deal was not a particularly successful economic initiative, but
it was definitely a political success, probably because its goal was to help the American
people (even though the means used to accomplish that were never very clear). What proved
more effective at bringing economic solutions to what was really an economic problem was
the "Keynesian theory". In 1938, Roosevelt, facing the semi-failure of his New
Deal, finally gave in to an increasing number of his close advisors who were confident
that Keynes' ideas would be more successful.8 The underlying theory to Keynes' ideas was
that recovery could only come through fiscal expansion--in other words, running a bigger
budgetary deficit. The additional expenditures were pumped into the economy through a
variety of government actions--like major public works--in order to stimulate demand by
providing people with income.
In Germany, the Nazis' victory at the 1933 elections was a major accelerating factor on
the road to recovery. The Nazi program aimed first and foremost at the reduction of
unemployment and it did accomplish at least that. However, the realization of the plans
was conditioned by an omnipotent government which was best described by Peter Hayes'
analogy (1987): "It is perhaps accurate to say that, to German industry, the emergent
economic system was stiff capitalism, but only in the same sense that for a professional
gambler poker remains poker, even when the house shuffles, deals, determines the suite and
the wild cards, and can change them at will, even when there is a ceiling on winnings,
which may be spent only as the census permits and for the most part only on the
One other essential vector that Nazis used toward recovery was rearmament, starting in
1936. Hitler used the defense industry to satisfy two of his im???: recreate a strong
Germany while giving people work.
The case of Great Britain is different. We have mentioned earlier how well (relatively
to other nations) the U.K. got through the Depression years. Let us now attempt to explain
why. Three elements are often mentioned in the British recovery: the abandoning of the
gold standard in 1931, the adoption of higher tariffs and the devaluation of the pound.
When the U.K. abandoned the gold standard, it gave itself a competitive advantage
via-a-vis those countries which did not. The new tariff laws helped by protecting domestic
industries and the 30 percent devaluation of the pound added to the competitive edge of
the U.K by making British products cheaper to the rest of the world.
In the face of Depression, France reacted quite differently from the other
industrialized countries. Confident in its strong economy until 1932, France did not
abandon the gold standard until June 1937 and did not devalue the franc until October
1936. Those two factors made France rather uncompetitive for most of the 1930's, given the
actions taken by the U.S., the U.K., and Germany. Those measures, in time, helped lift
France out of the Depression but the recovery there might have occurred a few years
earlier if the French had only signed their policies to that of the United States and
Great Britain in particular.10
When it comes to Japan, two reasons are proposed to explain its good economic
performance through the Depression: the fact that it had a planned economy, and the early
understanding of the advantages of devaluating the yen. Japan improved its competitive
position that way and it reacted very soon after the Depression hit. As a result, the
effects of the crisis were greatly reduced from the start.
1"The origins and nature of the Great Slump," Fearn.
2"The origins and nature of the Great Slump," Fearn.
3"Capitalism in Crisis,"edited by Garside.
4"La Crise economique dans le monde el en France," Nogaro.
5"The origins and nature of the Great Slump," Fearn.
6"The Great Depression, 1929-1938," Saint Etienna.
7"The Origins and Nature of the Great Slump," Fearn.
8"Capitalism in Crisis,"edited by Garside.
9"Capitalism in Crisis,"edited by Garside.
10"Capitalism in Crisis,"edited by Garside.