4.12 The Great Depression

The Interwar Period

Modernism in the arts and modernist theory came of age before, during, and after World War I; some of the most interesting writing and art of the modernist movement occurred during the 1920s. The political order of Europe (Russia, as usual, was an exception) and the United States during the 1920s was beset by struggle and conflict, but while the economies of the West struggled to recover from World War I, there was at least some economic growth.

Economic Reality

In the 1920s, following the Great War, European countries were recovering from the physical devastation of large swaths of their lands and peoples – the infrastructure of industry and production. At the same time, the United States, already one of the most productive countries in the world prior to the war, experienced no physical destruction on the home front. The US recovery was thus very quick compared to those European countries physically devastated in the war.

American goods such as radios, telephones, sewing machines and automobiles were things that everyone in Europe wanted. Additionally, with lots of hard money available in the US, American investment abroad more than doubled in the 1920s; as most European countries needed American money to rebuild their infrastructures, the US became the largest creditor nation in the world.

Part of the need for credit had to do with the vindictive penalties imposed on Germany in the Treaty of Versailles. During the Great War, Great Britain and France borrowed money from American banks. The expectation was that with the reparation payments required of Germany by the Treaty of Versailles would offset these war loan payments. But Germany didn’t have the money to recover economically from the war. Ironically, the US agreed to loan Germany money for the recovery effort. Germany used these loans not to rebuild their infrastructure, but to make the reparation payments demanded by Great Britain and France. Great Britain and France then used these reparation payments in part to make payments on the war loans owed to US banks. In essence, the US was paying itself.

While this example suggests the already-intertwined economies of the Western world, the relationship was made devastatingly clear in October of 1929 when the US Stock Market crashed, sending waves of economic panic around the world. The Great Depression was further exacerbated by the actions of governments in reaction to the panic. Many governments imposed punitive tariffs on imports in an effort to protect their own goods, but this stopped consumer spending. Many countries hoarded their gold reserves removing specie from the money supply, and, at the same time, unemployment soared.


“Postwar Europe.” Between the Wars: The Economic Seeds of World War II. 1997. Films on Demand. 2:29.

That growth came crashing to a halt in 1929 with the advent of the Great Depression. The Great Depression has the dubious distinction of being the worst economic disaster in the modern era. It constituted an almost total failure of governments, businesses, and banks to anticipate or prevent economic disaster or to effectively deal with it. The Depression explains in large part the appeal of extremist politics like Nazism, in that the average person was profoundly frightened by what had happened to their world; instead of progress resulting in better standards of living, all of a sudden the hard-won gains of the recent past were completely ruined.

The background to the Depression was the financial mess left by World War I. The victorious alliance of Britain and France imposed massive reparations on Germany – 132 billion gold marks. In addition, the former members of the Triple Entente themselves owed enormous sums to the United States for the loans they had received during the war, amounting to approximately $10 billion. Over the course of the 1920s, as the German economy struggled to recover (at one point the value of German currency collapsed completely in the process), the US government oversaw enormous loans to Germany. In the end, a “triangle” of debt and repayment locked together the economies of the United States and Europe: US loans underwrote German reparation payments to Britain and France, with Britain and France then trying to pay off their debts to the US. None of the debts were anywhere near settled by the end of the 1920s, not least because more loans were still flooding into the market.

The Depression started in the United States with a massive stock market crash on October 24, 1929. The ill-conceived cycle of debt described above had worked well enough for most of the 1920s while the American economy was stable and American banks were willing to underwrite new loans. When the stock market crashed, however, American banks demanded repayment of the European loans, from Germany and its former enemies alike. The capital to repay those loans simply did not exist. Businesses shut down, governments defaulted on the American loans, and unemployment soared. In one year, Germany’s industrial output dropped by almost 50% and millions were out of work. In turn, inspired by liberal economic theories, governments embraced policies of austerity, cutting back the already limited social programs that existed, balancing state budgets, and slashing spending. The result was that even less capital was available in the private sector. In the United States and Western Europe, the Depression would drag on for a decade (1929 – 1939), at which point World War II overshadowed economic hardship as the great crisis of the century.


“Deep Recession and Its Consequences.” Between the Wars: The Economic Seeds of World War II. 1997. Films on Demand. 3:14.


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PPSC HIS 1320: Western Civilization: 1650-Present by Wayne Artis, Sarah Clay, and Kim Fujikawa is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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