Chapter 23 Revolution, Depression, and the Rise of Totalitarianism

Section 3 The Global Depression

While the Great War had shaken the confidence of Western civilization, during the 1920s many Westerners believed they could still recover and start upward once more on the path of progress. The fragile state of Western culture after World War I, however, was reflected in the global economy that was dominated by the Western industrial nations. Although on the surface the 1920s seemed to be a boom time with growing economic prosperity, the boom was built on foundations of sand. In 1929 peoples’ hopes were shattered once more as the global economy crashed into depression. As people struggled to find security in the face of economic collapse, many began to look for new forms of economic and political organization. Many governments responded to the crisis by turning in on themselves, hoping to re-establish the prosperity of their own citizens. The new round of economic nationalism, or protectionism, however, only added fuel to the depression. Under these strains, both capitalism and liberal democracy began to bend into new shapes – or were discarded altogether. 

The World Economy

By 1924, the nations of the industrial world had finally begun to recover from the economic effects of World War I. Although the question of reparations and war debts remained a sensitive issue, the Dawes Plan seemed to have solved the worst problems for the moment. As investment from the United States flowed into Europe, the European industrial economies once again began to prosper. In agriculture, however, the story was different.

            During the war, large areas of European farmland had been neglected or turned into battlefields, and food production slowed down. Other areas of the world like North America, Australia, New Zealand, Africa, and India increased their own production to supply the warring nations. Both during and especially after the war, improved industrial methods of farming, such as the introduction of motorized tractors and harvesters, as well as the introduction of new disease-resistant seeds, dramatically increased crop productions around the world. As European farmers also got back on their feet after the war, they began producing again. However, the demand for certain crops, such as wheat, coffee, sugar, and other commodities, did not grow at the same rate as production. As more and more products were available, prices dropped and remained low throughout the 1920s, squeezing once prosperous farmers.

            The situation was worst in the United States and Canada. North American farmers had increased their production of wheat to compensate for the loss of crops in Europe during the war. After the war, as Western Europeans began once again to grow their own wheat, and Eastern Europeans entered the world wheat market for the first time, world prices fell dramatically. By 1930 wheat was cheaper than it had ever been since the 1500s. Farmers who had borrowed money in order to bring more land under the plow could no longer repay their loans. Many responded by simply trying to grow more wheat for sale, but this led to an even greater surplus and even lower prices.

            Throughout the world similar problems occurred with other commodities. Cotton prices collapsed, ruining small-time planters in Sudan, Egypt, and India, as well as the southern United States. Coffee planters in east Africa and Brazil, and cocoa producers in West Africa, all suffered similar fates. Although some were able to switch to other products still in demand, most lived in unsuitable climates that made such adjustments impossible. Increasingly, the production of export commodities had become specialized by region, a situation that made flexible responses to changing market conditions disastrously difficult.

            Unable to make a profit on their own farm products, farmers could not afford to buy manufactured items from the industrial countries. Any slowdown in the demands for industrial goods in cities would have potentially disastrous results for the economy as a whole. Since farmers could not take up the slack by purchasing manufactured goods, industrial manufacturers would have to reduce their costs of production in order to reduce the cost of their products. Ultimately, this meant they would have to lay off workers. And since unemployed workers had no income with which to buy any consumer goods, demand for all products would continue to fall. It was precisely this situation that the global economy faced in 1929.

The Great Bull Market. Despite the slump in agriculture, the introduction of new consumer goods in the 1920s at first gave Americans a new sense of prosperity. Anxious to encourage this prosperity, the U.S. government and financial leaders deliberately   kept the cost of borrowing money low. This allowed Americans to buy more goods on credit, further fueling the economy. Business leaders also encouraged people to join in the prosperity by buying stock in their companies.

Financial firms allowed people to buy stocks on margin, which meant purchasers only had to put up about 10 percent of the value of the stock they were purchasing, while the brokers lent them the rest. As long as a stock's value increased, the investor made a profit. If values fell, however, investors would have to come tip with the difference between their down payment and the amount they had borrowed. According to one estimate, 29 to 30 million American families out of a population of about 120 million were eventually involved somehow in the stock market and competition for stocks sent prices booming upward in what became known as the Great Bull Market. By the summer of 1929, however, the American economy had reached the limits of its expansion. 

The crash. In September 1929 the New York stock market began to fall. By October 21 prices were falling so quickly that stockbrokers began to send out margin calls, demanding that their customers put up the rest of the value of the stocks they had purchased on margin. Desperately, people began selling shares to raise the needed cash. On October 24 the market plunged straight down with no one buying and everyone trying to sell. Large crowds gathered in shock outside the Stock Exchange. After a brief respite over the weekend, on Monday the 28th the market dropped again. The next day, October 29th, known forever after as Black Tuesday, investors still desperate for cash to pay their margin calls began selling off even the soundest blue-chip stocks. The entire market collapsed.

Frantically, people began to withdraw their savings to pay their debts. Heavy withdrawals and the need to cover their own unwise investments forced many banks to call in other loans, including those on people's houses and farms. The panic spread, causing a "run" on the banks. Unable to cover all the withdrawals, many banks closed their doors, never to reopen. With them they took the life savings of both the prosperous and the frugal, many of whom had never even dabbled in the stock market. The Great Depression had begun. Gordon Parks, a young African American then working his way through high school, later expressed the bewilderment felt by many:                                   

“By the first week of November…along with millions of others across the nation, I was without a job…. I went to school and cleaned out my locker, knowing it was impossible to stay on. A piercing chill was in the air as I walked back to the rooming house. The hawk had come. I could…feel his wings shadowing me.” 

Reactions in the Western Democracies

As the depression deepened, unemployment spread like a plague around the world. In the industrial countries alone, 32 million people were reported without jobs in 1932. Untold millions more in the non-industrial countries of Asia, Africa, and Latin America, went unreported. With so many out of work, social and political tensions soon began to rise. On top of everything else, in North America 1930 saw the beginning of record droughts that soon turned the Midwest, the Great Plains, and the southern United States into a "Dust Bowl."[3][3]

            As the full devastation of the depression unfolded, however, economists disagreed about the best methods for tackling the problem. Classical economists insisted that this was simply another "bust" in the boom and bust business cycle and that it must be allowed to run its course. Others, led by the British economist, John Meynard Keynes, believed that government intervention could halt the cycle by pumping large amounts of money into the economy to "re-inflate" it. The United States was the first major industrial nation to adopt Keynes's method.

            As tensions grew and violence began to break out among farmers and union workers in American cities, President Hoover and his successor, Franklin Roosevelt, accepted the need for major government intervention in the economy to preserve the free-market system from radical revolution. "No president before has ever believed there was a government responsibility in such cases," Hoover later wrote, "there we had to pioneer a new field."[4][4] Fearing that direct relief payments for the destitute that might undermine peoples’ sense of independence, Hoover instead cut taxes and greatly expanded public works projects such as dams, highways, and bridges, to create jobs for the unemployed.

            As violence continued, however, and many began to call for the same kind of socialist policies being implemented in the Soviet Union, after his inauguration in 1933 President Roosevelt pursued an even greater interventionist policy. Calling his program the New Deal, he and his advisors, known as the "Brain Trust," instituted immediate relief for the destitute as well as massive government spending programs to pump money into the economy. Finally, he also enacted major economic reforms, giving the government extensive and permanent powers to oversee and regulate the economy, in order to prevent such a calamity from ever happening again.

Together with a gradual recovery of the economy as surplus products were slowly absorbed by consumers, the peaceful revolution of the New Deal headed off any more serious violent revolution. Yet despite its massive involvement of government in the economy and the lives of ordinary people, prosperity remained illusive throughout the 1930s. Meanwhile, other leading industrial nations implemented similar interventionist measures. 

Britain. Despite the apparent return to normalcy, Britain's economy had never fully recovered from the post-war depression that had hit the country immediately after World War I. Consequently, when the great depression hit in 1929, Britain felt the pain less than more prosperous countries like the United States. Once again, the faltering economic crisis brought the Labour Party to power under Ramsay MacDonald's leadership. Initially, however, the Labour Government pursued traditional conservative economic policies to battle the depression. Instead of increasing government spending, they curtailed it. The Labour Chancellor of the Exchequer also refused to go off the gold standard or to abandon free trade. By 1931, however, nothing could stop the flow of gold out of the country and the government had no choice but to give it up.

            Meanwhile, MacDonald himself became convinced that only a protectionist policy would help fight the depression. In 1931 he broke with his own Labour Party and with Conservative support formed instead a National Coalition Government. Under his leadership, in 1932 parliament passed the Import Duties Bill, establishing a high tariff barrier to all non-British goods, but lower tariffs to goods from other countries in the British Empire. Several months later, at the Ottawa Imperial Economic Conference, the Dominions reluctantly agreed to go along with this policy and to maintain lower tariffs inside the Empire, a policy known as imperial preference.

            Although many economists believe that the growing restrictions on world trade actually worsened and prolonged the Depression, in Britain they seem to have helped recovery. As the British began to restructure their economy away from exports and to focus more heavily on domestic goods and services, after 1932 the economy began to recover steadily. Low interest rates led to a growth in the housing industry, for example, and sales of both cars and home appliances increased considerably. In the last half of the 1930s, many in Britain were actually better off than they had been before the depression. In 1937, Britain was producing nearly 20 per cent more than it had been in 1929, before the depression began. On the other hand, traditional industries such as steel, coal, and cloth manufacturing had declined.        

Social and political unrest in France.  In France, too, the Depression brought significant upheaval and fears of revolution that led to growing government intervention in the economy. Although the French suffered less than other more heavily industrialized nations, by 1931 trade and manufacturing had declined and unemployment had begun to rise. As financial crisis gripped the government, the divisions in French society that had developed over the Dreyfuss affair a generation earlier resurfaced. Monarchists and other anti-republicans began publicly to complain about the weaknesses of the Republic itself. After 1931 many small fascist groups openly patterned themselves after both Italian fascism and German National Socialism. Finally, in February 1934, riots broke out in Paris as a huge crowd poured into the Place de la Concorde, where once the guillotine had stood, and openly called for the violent overthrow of the Assembly. As police charged the crowds, hundreds were injured and several people were killed. This open threat to the Republic finally brought all center parties and the socialist and communist left into an anti-fascist coalition.

            In 1936 the anti-fascist coalition, known as the Popular Front, led by the Socialist Party, won a large majority in the elections. The Socialist Prime Minister, Leon Blum, took office promising to protect the Republic against all threats, and to take measures to alleviate the depression and to improve the conditions of workers. Calling his plan the French New Deal, after president Roosevelt's programs in the United States, over the next year Blum passed major reforms that permitted unions to bargain collectively for their contracts of employment, reduced the work week to 40 hours, required employers to provide paid vacations, and helped farmers by providing government subsidies for grain production. He also nationalized the arms industry.

            Although workers were reasonably happy with all these measures, conservatives became fearful that Blum was aiming at a socialist "revolution." In 1937, under heavy pressure from both moderate and extreme conservatives, the government fell. The Popular Front quickly fell apart, and a new, more conservative government took power under Edouard Daladier. As storm clouds gathered on the horizon of foreign affairs at the end of the 30s, France remained a sharply divided country, both politically and socially. Many conservatives had even been heard publicly to say, "Better Hitler than Leon Blum." Such sentiments proved prophetic.