Global Economic Crisis

By the end of this lesson, students will be able to:

• Account for the causes and effects of the global economic crisis of the 1920s and 1930s (Skill 5.A; LO G).
• Account for KC-4.2.III.A: how First-World-War debt, nationalist tariff policies, overproduction, depreciated currencies, disrupted trade patterns, and speculation produced weaknesses in economies worldwide.
• Account for KC-4.2.III.B: how dependence on post-First-World-War American investment capital led to financial collapse after the 1929 stock market crash.
• Account for KC-4.2.III.C: how Western democracies failed to overcome the Great Depression and were weakened by extremist movements.
• Apply Skill 5.A: identify patterns among the principal causes of the crisis and connections between the economic crisis and the political instability of the 1930s.

Topic 8.5 covers the global economic crisis of the 1920s and 1930s in three parts: the structural weaknesses that produced it, the post-1929 cascade that spread it across the Atlantic, and the principal Western democratic responses that failed to overcome it. KC-4.2.III captures the central frame: the Great Depression, produced by weaknesses in international trade and in monetary theory and practice, undermined Western European democracies and produced radical political responses across Europe.

The structural weaknesses (KC-4.2.III.A). First-World-War debt, nationalist tariff policies, overproduction, depreciated currencies, disrupted trade patterns, and speculation produced weaknesses in economies worldwide across the 1920s. The principal weaknesses included the unstable post-Versailles reparations-and-war-debt circulation: Germany paid reparations to France and Britain (using American loans under the 1924 Dawes Plan and the 1929 Young Plan), France and Britain paid war-debt service to the United States, and the United States re-exported the capital to Germany. The system depended on continued American capital exports and on the underlying solvency of the German payment regime.

Agricultural overproduction was a second principal weakness. The 1920s saw a substantial decline in agricultural prices across Europe and the United States, driven by the recovery of pre-war European agricultural production combined with continued expansion of agricultural production in North America, Australia, and Latin America. The agricultural sector's share of European employment was still substantial in the 1920s (roughly 35-50 percent in Eastern Europe; roughly 25-35 percent in Western Europe), so agricultural distress translated rapidly into broader economic weakness.

Nationalist tariff policy was a third weakness. The principal European powers and the United States raised tariff barriers across the 1920s in response to agricultural and industrial competition. The American Fordney-McCumber Tariff of 1922 and the later Smoot-Hawley Tariff of June 1930 (the latter raised average American import duties to roughly 60 percent on dutiable goods) substantially restricted international trade flows. European retaliation produced cumulative trade contraction; world trade volume fell roughly 25 percent between 1929 and 1932.

The late-1920s American speculative boom was a fourth weakness. The Dow Jones Industrial Average roughly tripled between 1924 and 1929, with substantial late-period gains driven by margin trading and the broad participation of American retail investors. The Federal Reserve's tightening of monetary policy from early 1928 onward (intended to discourage speculation) produced the conditions for the eventual market correction.

The 1929 trigger and the Atlantic cascade (KC-4.2.III.B). Dependence on post-First-World-War American investment capital led to financial collapse when, after the 1929 stock market crash, the United States cut off capital flows to Europe. The Wall Street crash of 24-29 October 1929 (Black Thursday on 24 October; Black Tuesday on 29 October) wiped out roughly $30 billion in American stock-market value over the course of the week. The crash by itself did not produce the global Depression; the cumulative effect of the American banking failures, the cessation of American capital exports, and the international monetary contraction produced the broader cascade across the next four years.

The European cascade developed through a sequence of specific institutional failures. The Vienna Creditanstalt (Austria's largest bank, holding roughly 70 percent of Austrian banking assets) collapsed in May 1931, producing a Central European banking panic. The German Danatbank (the country's third-largest bank) collapsed in July 1931; the German government closed all banks for three weeks and imposed exchange controls on the Reichsmark. The British government left the gold standard on 21 September 1931 in response to the post-Creditanstalt run on sterling; the pound depreciated roughly 30 percent against the dollar over the following weeks. The Bank of France, the Federal Reserve, and the Bank of England did not coordinate effective lender-of-last-resort intervention; the result was a deflationary spiral across the Atlantic economy through 1932-1933.

The cumulative European economic damage was substantial. Industrial production in Germany fell roughly 50 percent between 1929 and 1932; in Britain roughly 20 percent; in France roughly 30 percent. German unemployment reached roughly 6 million (about one-third of the workforce) by January 1933. British unemployment reached roughly 3 million (about 22 percent of the insured workforce) at its 1932 peak. The political consequences were visible across the European political map: the rise of the Nazi Party in Germany (covered in Topic 8.6), the polarization of French politics, the rise of authoritarian regimes across central and eastern Europe, and the cumulative pressure on the parliamentary-democratic political form across Europe.

Western democratic responses (KC-4.2.III.C). Despite efforts to rethink economic theory and policy and to forge political alliances, Western democracies failed to overcome the Great Depression and were weakened by extremist movements. The principal democratic responses combined macroeconomic-policy experimentation with new political coalitions. None produced a full pre-1929 recovery before the 1939 outbreak of the Second World War.

In Britain, the post-September 1931 National Government (a Conservative-led coalition under Ramsay MacDonald initially, then under Stanley Baldwin from June 1935 and Neville Chamberlain from May 1937) pursued orthodox fiscal retrenchment combined with the September 1931 currency depreciation and the 1932 introduction of imperial preference (a system of preferential tariffs within the British Empire established at the 1932 Ottawa Conference). British recovery was substantial by the mid-1930s: industrial production reached pre-1929 levels by 1934 and the late-1930s rearmament boom produced a further recovery. Unemployment remained elevated through the period.

In Scandinavia, the social-democratic governments of Sweden (under Per Albin Hansson from September 1932) and Denmark and Norway pursued counter-cyclical fiscal policy and expanded social insurance. The Stockholm School of economic theory (Erik Lindahl, Bertil Ohlin, Gunnar Myrdal) developed an account of macroeconomic stabilization that paralleled and influenced the contemporaneous British Keynesian tradition. Scandinavian recovery by the mid-1930s was substantial.

In France, the political response was less coherent. The Popular Front government under Socialist Leon Blum (June 1936 to June 1937) included Socialists, Radicals, and outside Communist support; its principal policies included the 1936 Matignon Agreements (recognition of trade unions, paid vacations, the 40-hour workweek), nationalization of the Bank of France and the principal arms industries, and a substantial increase in public spending. The French recovery was partial; the franc was devalued in October 1936, and Blum's government fell in June 1937. The French political polarization between left and right (and the contemporaneous rise of right-wing leagues such as the Croix-de-Feu) substantially constrained French economic policy through the late 1930s.

The principal interwar theoretical contribution was John Maynard Keynes's General Theory of Employment, Interest, and Money (February 1936), which argued that involuntary unemployment was a stable equilibrium under classical-economic conditions and that government fiscal stimulus was the appropriate macroeconomic policy response to deficient aggregate demand. The Keynesian framework substantially influenced post-1945 American and European economic policy and provided the principal twentieth-century analytical framework for the Depression. The book's immediate political influence in the late-1930s European policy debate was more limited; the principal European economic recovery of the late 1930s came not from Keynesian fiscal stimulus but from rearmament spending in the run-up to the Second World War.

The Skill 5.A argument. Topic 8.5's suggested skill is 5.A (Identify patterns among or connections between historical developments and processes). The skill applies in three principal ways. First, students should identify patterns among the principal causes of the crisis: the post-1918 reparations-and-war-debt circulation, agricultural overproduction, nationalist tariff policy, and the late-1920s American speculative boom were not independent factors but interlocking elements of a single international economic system. Second, students should identify connections between the 1929 American trigger and the 1931-1933 European cascade: the failure of central-bank coordination, the rigidity of the gold standard, and the cessation of American capital exports together produced the broader cascade. Third, students should identify connections between the economic crisis and the political instability of the 1930s: the failure of Western democracies to overcome the Depression provided the conditions for the rise of authoritarian regimes that Topic 8.6 examines.

Three sources framing the crisis: Keynes on the macroeconomic problem, the British National Government's 1931 budget, and a Popular Front program.

1. (Causation, Skill 5.A) Identify the principal structural weaknesses that produced the global economic crisis (KC-4.2.III.A). How did the post-Versailles reparations-and-war-debt circulation, agricultural overproduction, nationalist tariff policy, and the late-1920s American speculative boom interlock?
2. (Causation) Account for KC-4.2.III.B: how did the 1929 American stock market crash produce a cascade across the Atlantic? Cite the Vienna Creditanstalt, the Danatbank, and the British departure from the gold standard.
3. (Causation) Account for KC-4.2.III.C: how did Western European democracies fail to overcome the Great Depression? Compare the British National Government, the French Popular Front, and the Scandinavian social-democratic responses.
4. (Skill 5.A) Identify connections between the economic crisis and the political instability of the 1930s. How did the Depression provide the conditions for the rise of authoritarian regimes that Topic 8.6 covers?
5. (Causation) Account for the principal interwar theoretical responses to the crisis. Compare the orthodox-classical framework that the National Government followed with the Keynesian framework articulated in the 1936 General Theory.

Draft alignment — pending educator review. AP European History codes correspond to the official College Board Course and Exam Description (Effective Fall 2023, V.1). Statements below are paraphrased in the CountryReports voice; refer to the College Board's published CED for verbatim wording.