Europe, Great Depression in

views updated


World War I exacerbated old problems and created new challenges. The struggle to overcome these difficulties played an important role in determining the character and duration of the Great Depression in Europe.


The first challenge was to overcome the loss and suffering of war. Somewhere between nine and eleven million Europeans had died, with even greater numbers seriously injured. The slaughter cost France and Germany around 10 percent of their male workforce, Austria-Hungary and Italy more than 6 percent, and Britain 5 percent. If this unprecedented slaughter was not bad enough, widespread famine and a voracious influenza epidemic brought yet more death in the aftermath of the war. The conflict also damaged industry, transport networks, and homes, with France, western Russia, Poland, and Belgium the worst affected. But, however deeply the pain of this destruction was felt by Europe's population, it did not take long for the workforce and infrastructure to recover. By the mid-1920s population levels had begun to rise, and factories, farms, and railways had been rebuilt.

Of greater consequence to Europe's long-term prospects were many of the economic and financial changes induced by the war. While Europe's leading industrial powers had been preoccupied with producing war supplies, American and Japanese businessmen had grown rich thanks to both increased demand and the absence of European competition. The disruption to established patterns of trade was damaging to the European economy and made it hard to recover the financial costs of the war. It proved difficult for Europe to recapture these markets, especially as American economic supremacy was underlined by its enthusiasm for new technologies and innovative ways of managing labor, with the average American factory worker producing twice as much per hour as his or her counterpart in Europe. Europe's nineteenth-century strength in heavy industry, by contrast, was now a source of weakness, and the war exacerbated an overcapacity in industries like coalmining and shipbuilding that was already evident in 1913.

Not only were American manufactured goods usually superior to and less expensive than those made in Europe, so too were many American agricultural and primary products. This disadvantage hit central and eastern Europe especially hard, inasmuch as around 70 percent of its workforce relied on the land to earn a living. The peace treaties negotiated between 1919 and 1923 added to the challenge of effecting economic stability in this part of Europe. Such new countries as Yugoslavia had to build the trappings of a modern national economy almost from scratch, while the defeated Central Powers were banned from working together to overcome their economic problems (the consequences of this prohibition were especially difficult for Austria and Hungary), and they were forced to pay heavy reparations to the European Allied Powers, although not to America.

Reparations were payments of money and goods levied against Germany and its Central Power allies at the peace conference in 1919. Britain and France demanded an indemnity to cover not just the physical damage wrought by the war, but the cost of waging the entire conflict. It took until 1921 for a reparations commission to fix a precise amount; Germany, for example was to pay 132 billion gold reichsmarks. The findings of the commission's report were, and remain, highly controversial. In American "Reparations" to Germany, 1919–1933 (1988) Stephen Schuker argued that although Germany was plagued by temporary difficulties, the long-term prospects for Germany's capacity to pay were excellent given the economic record of the German Empire before 1913. But this view was challenged by Gerald Feldman in The Great Disorder (1993), which underlined the profound harm done by reparations to the Weimar Republic.

Anglo-French demands for reparations were also fuelled by the need to pay back their war debts to the United States. Although President Woodrow Wilson declined to demand reparations from the Central Powers, successive U.S. administrations insisted that Britain, France and Italy, among others, pay back some $12 billion worth of loans. As President Calvin Coolidge put it, "They hired the money, didn't they?" After 1919, the victorious European powers hoped to trade concessions they might make on reparations for a reduction in their war debts. Although many European countries were able to negotiate some kind of reduction in the amounts owed, the United States consistently denied any link between the ability of the Central Powers to pay their reparations to the Allied ability to meet its war debts.

World War I also generated political change that affected how economic policy was made and what it was expected to achieve. After the sacrifices demanded of them in war, voters now expected politicians to deliver improved social provisions and work opportunities, and when governments failed to manage national economies to benefit the majority of voters, they were increasingly likely to be voted out of office. This tendency was all the more pronounced in Europe because many countries, like Germany and Austria, became democracies for the first time, while established democracies extended the franchise. Britain, for example, gave women and young men the vote for the first time in 1921. The need to manage the home economy to the satisfaction of the electorate also complicated relations between countries. In the 1920s, there were a rising number of trade wars both within and beyond Europe's frontiers as governments tried to meet the expectations of farmers and businessmen to protect home markets. These economic conflicts damaged diplomatic relations, the operation of the gold standard, and prospects for long-term stability of the international economy.

The first big test for the ability of Europeans to deal with new economic problems came early in the 1920s as the demands of reconstruction and reparations unleashed inflation in many European countries, notably in Germany, Austria, and Hungary. At first the German government was unwilling to take decisive action to calm the rising currency crisis, but after the French invaded Germany's industrial heartland, the Ruhr, in January 1923, inflation spiraled to over 2,000 percent, and decisive action to save the most important economy in Europe became imperative. It came in the shape of a plan devised by the American general Charles G. Dawes, who proposed a revised schedule for reparation payments and a German return to the gold standard. Announced in 1924, the plan also encouraged foreign investors to purchase German bonds. But the scheme quickly snowballed beyond the expectations of its inventors. By 1928, almost eight billion dollars had been sunk into Europe, with four billion dollars invested in Germany alone.

The impact of the postwar inflation that spiraled into hyperinflation in much of central and eastern Europe played a crucial role in shaping government economic policy after 1924. The dominant preoccupation of government policy became currency stabilization centered on the gold standard. But the determination to avoid inflation or any significant shift in monetary policy, both of which were seen as a gateway to currency chaos, was to make little sense in the world after 1929, with falling prices, diminishing demand, and rising levels of unemployment. The reconstructed gold standard helped to tie the fate of the European economy to that of the United States. So, too, did the messy tangle of war debts, reparations, and Dawes Plan loans. Although each type of debt was notionally separate, in practice one type of payment was seen as dependent on the other. When American commercial loans began to dry up, as they did after 1928, the European economy was in very big trouble.


By 1928 it was clear that the Dawes Plan was failing. The once mighty stream of American investment into Europe had slowed to a trickle. Negotiations for a new scheme, dubbed the Young Plan, were underway when Wall Street crashed and the Great Depression set in. The American Federal Reserve's decision to increase interest rates in 1929 and 1930, coupled with the economic downturn in the United States, meant that the American loans that had helped to smooth over the cracks in the European economy were no longer available. By 1931, the level of U.S. investment in Europe dropped to zero. In response, European countries tried to be as "good as gold"; they raised interest rates and tried hard to prevent the national budget from sliding into deficit, with the aspiration of attracting back some of the foreign investment they had lost. But the strategy had painful consequences. Political developments also played a role. Any disputes about taxation increases or government spending, like those that gripped Germany in the summer of 1931, had serious financial implications, as well as political consequences.

By June and July 1931 British banks were struggling to fill the breach in central European finances left by the United States. But as much as politicians from the left and right of the political spectrum blamed "greedy, foreign capitalists" for their woes, many of the problems facing banks in central Europe in the summer of 1931 were homegrown. Not only had much of the foreign investment on which the region had become so dependent been spent on unproductive projects designed to generate prestige rather than profits (in Romania over 30 percent of international loans had been spent this way), banks in central Europe also had a close relationship with local industry that made them especially vulnerable. Austrian industry, for example, was very dependent on bank loans, while the banks, in turn, owned a large number of shares in Austrian industry. When industry failed, so did the banks. Until the summer of 1931, Austrian banks worked hard to cover up industrial losses, in part by merging with other banks. But the wheels came off this strategy in spectacular fashion on May 8, 1931, when it was revealed that Austria's largest bank, the Creditanstalt, had incurred losses of 140 million schillings. Investors rushed to the bank to withdraw their savings; over a period of twelve days the bank lost more than 300 million schillings in domestic withdrawals, and a further 120 million schillings were removed by foreign investors. No private institution had sufficient funds to bale out the Creditanstalt, so the Austrian government reluctantly stepped in to end the crisis by effectively taking control of the bank. As a consequence, the Austrian state became the owner of sixty-four different Austrian companies and 65 percent of the nominal capital in Austrian businesses.

The collapse of Austria's banks also triggered a wave of selling in the Austrian schilling that the Austrian government was powerless to stop. It was only by breaking the "rules of the gold standard game" in October 1931, through the introduction of exchange controls designed to restrict the amount and destination of gold and foreign currency leaving Austria, that the crisis came to an end. These controls became an elaborate network of bilateral payment agreements that controlled the movement of money and goods between Austria and other countries.

Banking crises similar to that which had taken place in Austria soon engulfed other countries, including Italy, Bulgaria, Yugoslavia, and Czechoslovakia. But Germany, once again, experienced the most dramatic collapse. The biggest commercial banks—the Darmstädter und Nationalbank (DANAT Bank), the Dresdener, and the Deutsche bank—began to sustain enormous loses as industry failed and nervous investors withdrew their cash. In an effort to hang on to their reserves, the banks put up interest rates and cut back on loans to business, so that even companies that had remained relatively healthy found their working credit withdrawn and faced the prospect of bankruptcy.

Chaos reigned in the German banking system for over two months until 13 July 1931, when all German financial institutions closed down. They reopened after a few days, but the financial, economic, and political landscape in which they now operated had changed dramatically. Political and social changes were immediately visible. Confidence in the future had evaporated, which meant that companies and individuals spent even less. Unemployment rocketed to over six million people, around one-fifth of the German working population, and the extremist political parties, the Communists and the National Socialist Party of Germany (NSDAP, or Nazis), experienced a huge surge in political support. There were also economic and financial changes that were less visible to contemporary observers. The German state, like Austria, had taken on important new powers that enabled it to control the amount of gold and foreign exchange leaving the country. Not only did this mean that American and British investors now found their investments frozen inside Germany, giving Germany important bargaining leverage in diplomatic negotiations with those two countries, it also meant that bilateral payment schemes were set up giving the state power to control German trade. Together, these developments changed the nature of Germany's relationship with the international economy and helped make it much easier for the Nazis to manage the economy after they took power in 1933.

A very different banking crisis took place in Britain in September 1931. Here it was not the commercial banks that came under pressure, but the central bank, the Bank of England. The widespread collapse of confidence in Europe in the summer of 1931 had taken its toll on the British economy: The pound was sold heavily on the international exchange, interest rates rose, and the financial problems for companies, banks, and households multiplied at a frightening rate. As the British government argued over whether, and how best, to cut the rising budget deficit, the political and financial pressure rose. On August 24, 1931, Britain resorted to a new national government comprised of representatives from the Conservative, Labour, and Liberal parties to underline national unity in the face of the crisis. But the step was not enough to keep the pound on the gold standard, nor were the efforts of the world's most powerful central banks. On September 20, 1931, Britain, along with its imperial and commonwealth partners, left the gold standard. It was a move that enabled these countries to take the first tentative steps on the road to economic recovery.


The decision of Britain's leading political parties to work together to present a unified political front was followed by France, Belgium, and the Netherlands in the mid-1930s. The step was triggered, in part, by political developments in central and eastern Europe, where traditionally dominant political parties—the Conservatives (including Nationalists), the Liberals, and the Social Democrats—were discredited by the economic collapse and their failure to develop any new policies. They increasingly lost out to those on the far left and far right, typified by revolutionary Communist and Fascist parties that appeared to offer radical answers to the suffering of an increasingly desperate electorate. But it is important not to oversimplify the relationship between economic misery and political radicalism. Many countries around the world experienced intense economic hardship yet did not succumb to political extremism; the United States was the most notable example.

On a human level the most visible measure that politicians had failed to staunch the crisis by 1931 was the tremendous surge in unemployment. By 1932 the official figures were impressive, with 6 million unemployed in Germany and 2.7 million jobless in Britain, but it is very likely the real figures were much higher. This is especially true in agricultural Europe, where unemployment was disguised as underemployment and characterized by a silent slide into abject poverty.

Some groups in society were hit disproportionately hard. Young men were especially affected by the social and psychological effects of unemployment. Theirs was a strong contributory voice to the rising intolerance of groups or individuals who were perceived to be economic rivals or outsiders. The crisis triggered a rising culture of blame as people began to point accusatory fingers at other social groups, including bankers and industrialists, or at those who appeared to be different from themselves, such as Jews and gypsies. Women workers were also vulnerable in this climate. In Britain and Germany, for example, married women teachers were sacked as part of a campaign against what were called "double-earners" (because their husbands also brought home a wage packet). However, in industries beyond the state's control it was often male employees who lost out to the women because women were cheaper to employ and more prepared to work part-time.


Relations between European countries became increasingly bitter as the Depression deepened. Diplomatic cooperation proved difficult in the atmosphere of intense economic competition, even between countries like Britain and France that shared a common interest in defending democracy and capitalism. Desperate to respond to the clamor of French farmers who demanded protection from cheap imports, by 1932 France had introduced strict quotas on over three thousand different imports, German tariffs had risen by over 50 percent, and most dramatically of all, Britain retreated into protection in the autumn of 1931, ending a commitment to the ethos of free trade that had lasted eighty-five years. Europe was now divided into competing economic blocs.

Freed from gold, the British government dropped interest rates, increased spending, and became the first country in Europe to show signs of recovery. The British government's first priority became fostering domestic recovery; internationalism, characterized by its unwavering support for the gold standard in the 1920s, was at an end. Belgium, the Netherlands, and France, by contrast, clung to gold until the 1935 to 1936 period, which helps explain why they experienced the worst of their economic and political crises during the mid-1930s—terrible timing when it came to facing German expansionism and civil war in Spain.

In Germany, as in a number of other countries in central and eastern Europe, the break with economic internationalism was much more overt than in Britain. Under the Nazis, emergency measures taken by previous governments, notably during the banking crisis in 1931, evolved into a complex system of trade and monetary restrictions. The regime stepped in to manage trade, the movement of foreign exchange, prices, wages, private investment banks, and all other aspects of investment in its drive to achieve national self-sufficiency (autarky).

In common with other countries, the states in central and eastern Europe also became heavily involved in trying to stimulate demand in the economy. But as the international climate deteriorated, it became difficult to distinguish industrial recovery from preparations for national defense. In Poland in 1936, the government introduced a six-year investment plan under which, by 1939, the state controlled about one hundred industrial enterprises and all of Poland's transportation networks. Unfortunately, the strategies adopted to fight the Depression by the smaller countries of central and eastern Europe neither assisted the development of their economies in the long-run, nor helped to secure them from the expansionist ambitions of their neighbors, Germany and the Soviet Union.



Clavin, Patricia. The Failure of Economic Diplomacy: Britain, Germany, France, and the United States, 1931–36. 1996.

Clavin, Patricia. The Great Depression in Europe, 1929–1939. 2000.

Costigliola, Frank. Awkward Dominion: American Political, Economic, and Cultural Relations with Europe, 1919–1933. 1984.

Feinstein, Charles; Peter Temin; and Gianni Toniolo. The European Economy between the Wars. 1997.

Feldman, Gerald D. The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914–1924. 1993.

Garside, R. W. British Unemployment, 1919–1939: A Study in Public Policy. 1990.

Hodne, Fritz. The Norwegian Economy: 1920–1980. 1983.

Jackson, Julian. The Politics of Depression in France, 1932–1936. 1935.

James, Harold. "Financial Flows across Frontiers in the Great Depression." Economic History Review 45 (1992): 594–613.

James, Harold. The German Slump: Politics and Economics, 1932–1936. 1986.

Johansen, Hans Christian. The Danish Economy in the Twentieth Century. 1987.

Jonung, Lars, and Rolf Ohlsson, eds. The Economic Development of Sweden since 1870. 1997.

Kaser, Michael C, ed. The Economic History of Eastern Europe, 1919–1975, Vol. 2: Interwar Policy, the War, and Reconstruction, edited by Michael C. Kaser and E. A. Radice. 1986.

Kent, Bruce. The Spoils of War: The Politics, Economics, and Diplomacy of Reparations, 1918–1932. 1989.

Maier, Charles. In Search of Stability: Explorations in Historical Political Economy. 1987.

Mazower, Mark. Greece and the Interwar Economic Crisis. 1991.

Mouré, Kenneth. Managing the Franc Poincaré: Economic Understanding and Political Constraints in French Monetary Policy, 1928–1936. 1991.

Royal Institute for International Affairs. The Balkan States: A Review of the Economic and Financial Development of Albania, Bulgaria, Greece, Romania and Yugoslavia since 1919. 1939.

Schuker, Stephen. American "Reparations" to Germany, 1919–1933: Implications for the Third World Debt Crisis. 1988.

Teichova, Alice. The Czechoslovak Economy, 1918–1980. 1988.

Tracy, Michael. Government and Agriculture in Western Europe, 1888–1999, 3rd edition. 1989.

Whiteside, Noel. Bad Times: Unemployment in British Social and Political History. 1991.

Williamson, Philip. National Crisis and National Government: British Politics, the Economy, and Empire, 1926–1932. 1992.

Patricia Clavin

About this article

Europe, Great Depression in

Updated About content Print Article