DEPRESSION.

The cyclical downturn in the U.S. economy that began in summer 1929 has overcome all rivals to the title Great Depression. It challenged and overturned the confidence of Americans at the end of a decade in which the United States had stamped its political and economic dominance on the world. The pictures of long lines of hopeless men with no job to look for, of crowds besieging banks with no money to pay out, serve as a potent reminder of the fallibility of economic institutions and of prosperity. They still serve as a prompter to the American conscience and as a permanent stimulus to explain why the Depression occurred. However, what made it so great a depression was that neither its causes nor its consequences were limited to the United States. It was a worldwide phenomenon whose length, depth, and violence revealed the extent of the United States' involvement in and dependence on the international economy.

ORIGINS OF THE DEPRESSION:
THE UNITED STATES

The conclusion that the Great Depression's origins lay in the United States is often drawn from the long decline in prices on the Wall Street stock exchange after September 1929. The decline accelerated violently in the panic selling of 24 and 29 October, still the two worst days in the history of the U.S. stock exchange, when twenty-eight million shares were sold. When the market temporarily stopped falling in November, however, its level was as high as it had been in mid-1928. Only about 8 percent of the population owned stocks, and they were the wealthy, so that any fall in national consumption from this event was small. Furthermore, the stock market financed only about 6 percent of gross private national investment. But longer periods of declining stock prices were still to come in 1931, and the downward trend continued into 1933.

So long a trend was evidently a deflationary force in the economy, but it was by no means the greatest such force. More influential for the whole economy were the declining prices for foodstuffs and other primary products. The falling incomes from farming in 1931 left farmers unable to pay their debts, provoking numerous bank failures. Repossessions from those failures drove the stock market down from April that year until shares in manufacturing were barely more than a quarter of their value in November 1929.

There is some evidence that the fall in the stock market was related to certain aspects of consumption in the 1920s, notably the purchase of automobiles, radio equipment, and housing, acquisitions that depended on credit. Sales of U.S. automobiles for export began to decline a year before the onset of the stock market crash, for domestic consumption as early as March 1929. Domestic purchases had fallen by one-third by September 1929. The housing market began to slow down in summer 1929. Nevertheless, the steepness of the general economic downturn in 1929 was not so exceptional, compared to other downturns, as to indicate the subsequent length and severity of the Depression. The Wall Street crash undoubtedly did reveal some of the risks of new methods of selling consumer goods as well as the inequalities of personal income distribution in the United States, but such factors were not sufficiently influential to account for the totality of what followed, although they played their part in the bank crashes. Consumer durables did not suffer the biggest falls in sales and output.

The Depression's severity is sometimes attributed to errors of monetary policy in the United States. The growth of money supply was deliberately reduced by the Federal Reserve Bank from 1928 to check stock market speculation. Supply fell by 33 percent between August 1929 and August 1933. Shortage of liquid funds is blamed for the many bank failures in 1931. Authorities, however, believed monetary policy to be too lax because interest rates were lower than in earlier cyclical downturns in the decade. It is difficult to see how an increase in the money supply to the American economy in late 1930 could have prevented the abandonment by other countries of the existing international trade and payments machinery, especially the United Kingdom's departure from it in September 1931, when it gave up the gold standard. The outstanding characteristic of the Great Depression was its international scope. Country after country was caught in a vortex of declining output, earnings, and employment, and this makes the contribution of monetary policy in the United States, while it may have been unwise, too small a factor to account for so cosmic an event.

Of the major industrial countries, the United States and Germany were the hardest hit. Even in those more lightly hit—Sweden and the United Kingdom, for example—the decline in industrial production was severe. Beyond industrialized America and western Europe, however, foodstuff and raw material suppliers, such as Argentina, Brazil, Australia, and New Zealand, suffered declines in agricultural output, with severe drops in gross domestic product. The relentless devaluation of bond earnings was matched by a relentless and more widespread fall in agricultural profits. In other aspects too the American deflation marched in step with a worldwide deflation.

ORIGINS OF THE DEPRESSION IN GERMANY

The First World War established financial links between the United States and Germany that go some way to explaining the similarity of their experiences from autumn 1929 onward. There are those who see the origins of the Great Depression in these links or, indeed, in Germany itself. The postwar adjustment to a world in which the First World War had promoted the protection of new industrial developments made life more difficult for Europe's two major industrial producers, Germany and Britain. Those difficulties were reflected in their balance of payments problems after 1918, but for Germany these were exacerbated by the imposition of so-called reparations to be paid to the victors. The American insistence on the repayment by its allies in the war of all loans to them from the United States added an extra burden on the international payments system. It encouraged, moreover, the biggest borrowers, France and the United Kingdom, to demand reparations payments from Germany in full in order to repay their American loans. The weight of these transfers on the German economy, the temptation not to resist inflation of the currency too strenuously, when it might make reparations a lighter burden or even persuade the Allies that it was an impractical solution, played their part in the spectacular collapse of the exchange value of the German mark. Its value against the dollar fell from 103.65 in January 1920 to 414,000 at the end of July 1923 and to 3,300,000 in August 1923. The social disorder that long adherence to the gold standard had averted triumphed in defeat, occupation, and hyperinflation, soon to be followed by the political disorder of the National Socialist Party.

The actual sum required in reparations after the hyperinflation was between 50 and 125 million pounds sterling annually. To pay such a sum in manufactured exports to the protectionist United States was not seriously contemplated in Washington. Insofar as it was paid, it was so from the stream of dollar capital imports into Germany for postwar reconstruction. New capital issues, specifically for Germany, guaranteed or controlled by the U.S. government amounted to $176.3 million in 1928. Corporate issues without government guarantee or control amounted to $10.1 million. In 1930 government guaranteed issues amounted to $143.3 million; non-guaranteed issues to $23.5 million (figures from Secretariat of the League of Nations, pp. 320–321.) These transfers were established on a flexible basis in 1924 by the Dawes Plan, which through its transfer committee tailored the sums annually to what seemed feasible. The Dawes Plan constituted an official framework for American capital exports to Germany. With this seeming extra security, capital imports into Germany amounted to about 3 billion marks per year over the period 1924–1927. In that period the peak year for reparations payments amounted to almost 1.6 billion marks in 1927.

The inflow of American capital began to shrink in 1928 after an increase in American interest rates and a deepening unease about economic conditions in Germany. Opinion remains divided about whether the downturn in the German economy in 1929 was domestic in origin, resulting from a decline in investment, or external, from the recall of American capital investment due to, or perhaps earlier than, the onset in 1929 of the Wall Street crash. The evidence points more to international origins. In either case, the German response was to cut back on commodity imports, wages, and public expenditure. The government of Heinrich Brüning could see no way forward to meet the cost of imports plus reparation payments other than through cuts deep enough to preserve a balance of payments surplus, which was in fact achieved in 1932. By that date the world's two biggest manufacturing producers and exporters, the United States and Germany, were locked together in spiraling deflation, falls in industrial output, and steeply declining national product. A devaluation of the mark to stimulate German exports would have made the dollar value reparations more expensive to meet.

The Young Plan of 1929–1930, in a last attempt to preserve international cooperation in the payment of reparations, further reduced the German government's room for maneuver. Under the Dawes Plan the transfer of payments had been allowed only if the German balance of payments was not endangered. The Young Plan imposed a binding scheme for repayment spread over a longer period but removed in doing so the safeguard against transfers when the German balance of payments was threatened. In theory, this should have deterred foreign lenders, but while net capital imports fell, total capital imports were still high in 1930 and 1931. The lack of any obvious explanation of this trend only strengthened the German government's commitment to a balanced budget, achievable only by a deflationary policy, worsening the international crisis. This policy did produce substantial export surpluses for paying reparations to a similarly deflationist United States.

THE NECESSITY AND THE FAILURE
OF INTERNATIONALISM

In retrospect the Dawes Plan appears as the one instance of an internationalized solution that offered a way forward to the United States, to Germany, and thus, if the framework could have been extended, to America's other European debtors. After the events of 1929 it was perhaps too late. Perhaps, also, genuine internationalism could not have been born from so violent an event as the Franco-Belgian invasion and occupation of the Ruhr and the Rhineland in January 1923, intended to compel Germany to pay the reparations. The devaluation of the German mark was one consequence, well illustrating the fundamental reality that effective international trade and payments machinery depends absolutely on international political cooperation. It was lacking.

For ten countries to be recompensed by operations from Germany, for the United States to be repaid by its wartime allies, the prewar machinery for international trade settlements—the gold standard—would be put under heavy strain because of the economic and political boundary changes resulting from the First World War. Evidently, if war debts and reparations were to be repaid, Germany had to remain a prosperous and stable society, if only because it was one of the world's three major trading powers. Instead, it was riven by recriminations, denunciation of reparations, bitter internecine political struggle, and, by 1931, the climb to power of the National Socialist Party, threatening to end the democratic constitution and to overturn the Treaty of Versailles. Yet about three-quarters of the borrowing by German credit institutions and by local governments was from the United States, and the flow continued even in 1931.

America's wartime allies could not congratulate themselves on having restored by their own political decisions a durable framework of politico-economic cooperation. Faced with the fragmentation of the Habsburg Empire into its ethnic component parts, with the replacement of the Russian Empire by the Soviet Federation and then the Soviet Union, governed by self-proclaimed international revolutionaries, western European states were mainly concerned to preserve their prewar socioeconomic governing practices. In particular this meant continuing to depend mainly on established import and excise taxes for revenue so that the balance of the fiscal burden did not fall proportionately more heavily on the middle class than it had before the war, a political stance that strengthened their commitment to obtaining reparations from Germany in lieu of tax reform at home. The same conservative longing for the prewar world led in the direction of reestablishing a settlements mechanism for international trade as close as possible to the prewar gold standard, by which the price of gold was kept within narrow limits and either gold or foreign currencies convertible into gold within these limits were kept as central bank reserves and used to settle international debts.

The important question was at what rate the exchange between gold and national currency would be reestablished. Most countries, taking account of the changes in trade patterns caused by the creation of new countries out of the Habsburg Empire, expected initial difficulties in returning to the prewar system and selected lower exchange rates against gold and the dollar than the prewar rate. New countries also aimed at a low rate. The United Kingdom did not. In its own conservative gesture toward its major role in the prewar trade and payments system, it returned to the prewar pound/dollar exchange rate, increasing the price of its exports against those of European competitors.

There was no effort to coordinate internationally the rates of exchange that countries chose. While the new British rate forced deflation on the United Kingdom, France experienced a persistent inflation and currency depreciation until 1926, when the franc was "stabilized" with the backing of legislation shaped to prevent further inflation. This disorderly return to a form of gold standard among the world's major traders became a barrier to their attempts to escape from the worldwide deflation of 1929. It did more to sustain the Depression or, through trade competition, enforce it on others. While the French economy grew vigorously with inflation until 1926–1927, French foreign investment in the United States and the United Kingdom was high. The 1926 stabilization of the franc pushed the United States and the United Kingdom into further difficulties as gold flowed back into France, but the Bank of France was unable, because of the 1926 legislation, to readjust its exchange rate for fear of stimulating inflation.

The variety of national experiences in the timing and depth of the Great Depression reflects the haphazard return to separate national visions of the past and future. A significant element in British post-1918 trade deficits was the decline in Britain's prewar staple exports, already declining after 1890: textiles, cotton thread, ships, coal, and pig iron. In 1928 British shipbuilding was utilizing only about half of its total capacity, cotton about three-quarters. Most of the activity in such industries being regional, the pattern of unemployment was much more regional than, for example, in the United States or Germany. The regions officially characterized as "old industrial"—the north of England, southern Wales, and central Scotland—contributed 50 percent of net national industrial output in 1924, but only 38 percent in 1935. In the Midlands and southern England newer industries, especially automobiles and chemicals, contributed 29 percent of net industrial output in 1924 and 37 percent in 1935. In those newer industrial regions consumer goods sales grew and housing construction boomed, in contrast to the United States' experience. Nevertheless, on the national scale mass unemployment accounted for more than half the British people living in "primary poverty" in 1936, a measure of the slowness with which the United Kingdom adjusted to post-1918 trading conditions.

THE COLLAPSE OF THE GOLD STANDARD

In addition to the adjustment problems after the First World War and the tendency of the restored gold standard to impede recovery from the deflationary pressures that announced themselves in 1929 in the industrialized nations, the low level of prices of primary products was a further persistent source of deflationary pressure on the larger world economy. While the price of agricultural goods fluctuated markedly in the mid-1920s, the overall terms of trade between developed, industrialized states and states that produced mainly raw materials and food moved in favor of the industrialized states in the interwar period. As a market for manufactured exports, the world's primary product producers were weakening before and throughout the Great Depression. Forty percent of British exports, the great body of which were manufactured goods, were exported to primary producers while at the same time declining industries such as cotton thread and textiles were facing increasing competition from slowly industrializing primary producers such as India.

Many large primary producing counties were heavily dependent on a narrow range of products. Raw wool accounted for about 41 percent of Australian exports by value, cotton for about 80 percent of the value of Egyptian exports. From other primary producers foodstuffs dominated exports: 75 percent of Cuba's exports was sugar, 71 percent of Brazil's was coffee. It is not surprising that such primary producers were among the first to abandon the gold standard. Argentina, Brazil, Australia, and New Zealand all did so before 1930. The main markets for the industrialized countries were each other. The fall in their exports to primary producers was of too small a total value to weigh against the value of the interchange between developed economies, but the poverty of the agricultural producers was one more barrier to escaping from deflation.

The manufacturing economies held out longer on the gold standard. The collapse of the Credit Anstalt bank in Austria in 1931 led in July to the imposition of exchange and trade controls by Hungary. In the same month Germany also imposed exchange and trade controls. In September the United Kingdom abandoned a century of the pursuit of free trade when it left the gold standard and simultaneously devalued the pound sterling against the gold dollar by 30 percent while preparing a general tariff. The exchange rate of the pound, technically floating, was thence-forward determined by the Bank of England's management of the floating rate. As the 1930s turned increasingly toward war, quantitative trade controls, mainly import quotas, supplemented protectionism. In Germany and much of central Europe, annual bilateral trade agreements strictly controlled the goods traded and the value of their currency. The new German Reichsmark, for example, was not convertible. France and Germany became insignificant trading partners of each other. British trade, directed by tariff preferences and the retention of sterling as a convertible currency within the Commonwealth, increased with distant Australia and New Zealand and decreased with neighboring European industrial producers. None of these outcomes was conducive to recovery. Protection of domestic agriculture from foreign imports became general in Europe and the United States. It was to be well into the 1950s before these trade barriers began to be carefully and slowly reduced and the automatic convertibility of European currencies into gold/dollars began to be reinstated.

The search for national causes of the Great Depression, whether in the United States or Germany or elsewhere, seems a somewhat limited enterprise when so much evidence shows that the system of international settlements was so

defective, without central authority or agreed objectives, while being so effective at transmitting deflation to each and every one of the main trading nations. Consider but the case of the United Kingdom, whose central bank had played so facilitating a role in the pre-1914 gold standard. With large prewar surpluses on goods, turned by 1920–1924 into a small deficit, and with a deficit on long-term capital flows, it was in no position to return to the exchange rate against the dollar of the years when it had been seen as a manager of the system. There was no manager of the system in the interwar period.

To blame the United States, as some do, for not stepping into the role of "hegemon" is greatly to exaggerate the authority that a hegemon could have exerted in so divided a world. Hegemony would in any case have been no substitute for international agreement but only a prop to it. International agreement had to wait for a much greater sense of common purpose, such as came in the Cold War of the 1950s, furthered, no doubt, by the terrible consequences of the National Socialist government in Germany.

RECOVERY

If the first step toward recovery was to break the constraints of the gold standard, one would expect the countries that stayed on gold until the late 1930s to show a lower rate of recovery than those that left it. France, Belgium, and the Netherlands, three countries that stayed longer on gold, do show a lower level of recovery by 1937/38 than others. The spectacular recovery of Germany to full employment and high levels of output reflects the extent of concentration on rearmament, broadly defined. The two countries that had suffered the worst falls in output, Germany and the United States, showed the biggest gains, although in the United States this recovery was much less attributable to rearmament than in Germany. Yet by summer 1938 there were undeniable indications of another economic downturn. It would be no exaggeration to say that the threat of another world war led to a more convincing upturn in 1941 in the United States.

A more apt comparison is between France and Belgium on the one hand and the United Kingdom on the other. Breaking the shackles of the gold standard in the way that the United Kingdom did was a serious blow to international cooperation; Britain could be fairly accused of pursuing a beggar-my-neighbor policy. It is not, though, necessarily true that all countries that abandoned the gold standard were making things harder for those, like France, who remained on it, for they were relinquishing gold for those who sought, like France, to acquire it. Furthermore, the evidence from all countries, including those that left the gold standard, is that reflation was undertaken only cautiously. The theoretical demonstration by the British economist John Maynard Keynes that increased public expenditure was necessary for a return to economic equilibrium after so catastrophic a slump made more impact toward the end of the decade than at the start of the recovery. Concentration of expenditure on rearmament and public works, as in Germany, cut off the economy from its long-established trade relations with neighboring states that stayed on gold. German trade with France was insignificant by 1937. British trade and income recovered only slowly. Even after six months of war and military conscription and seven years of increasing rearmament expenditure, about a million working-age men in Britain were still registered as seeking work in early 1940. Only in Germany did public works expenditure, on express highways and on the stimulation of the automobile market, produce large increases in employment by 1935/36. Its objective, however, was not a return to equilibrium, at least not within Germany's existing frontiers. Germany imposed such draconian controls on the national currency as to make it unwanted beyond the national frontier. Fear of hyperinflation gnawed at the heart of all countries that had experienced it in the 1920s. In these circumstances the increase in money supply that freedom from the gold standard permitted helps to explain less than half the adjustment to higher capacity utilization of manufacturing plants in the major industrial countries by September 1939. The shadow of the Great Depression thus hovered over all who had been caught in its coils, whatever their subsequent governments or their actions in seeking recovery.

See alsoBretton Woods Agreement; Capitalism; Inflation.

BIBLIOGRAPHY

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Eichengreen, Barry. The European Economy, 1914–1970. London, 1978.

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Alan S. Milward