Economic Collapse: The Great Depression and Its Worldwide Effects
The Great Depression’s Global Origins
Existing connections in the international economy, especially the dependence of the United States on the European economy, caused the Great Depression to spread throughout the world. The falling prices in America affected other industries globally that had higher prices than American goods. These industries, unable to compete, saw their exports drastically reduced. At the same time, the decline in U.S. demand (and hence of its imports) halted exports in many countries, which significantly reduced global trade.
The United States also sought to repatriate capital invested in different countries. This had a particular impact in Germany, which had taken substantial loans from America. Germany had been practically forced to borrow to cope with war reparations stipulated in the Treaty of Versailles, which had to be paid in cash.
The Roaring Twenties: Prosperity and Peril
The U.S. role as a provider of capital and goods accelerated the growth of industrial production. The expansion of its economy was based on changing production methods, dominated by technical innovation and new work organization, characteristic of the Second Industrial Revolution. The use of electricity and oil increased, and mass production chains were widely applied, notably in the automotive sector. The construction of skyscrapers and significant business concentration also marked this era. This period led to a large increase in productivity.
Moreover, the widespread availability of credit purchases allowed a larger proportion of people to increase their consumption. This confidence that the future situation would be better, combined with increased consumption, led to high household indebtedness. The consumer revolution was accompanied by a surge in stock market investment. There was a much more widespread tendency to invest profits in credit and stock market circuits, rather than in productive sectors. The rapid rise in stock prices ultimately gave way to a speculative bubble.
The Great Depression: Causes and Collapse
Many factors played a role in triggering the crisis. However, the underlying cause of this financial disaster, also known as Black Thursday or the Crash of 1929, was excessive speculation. This was fueled by overproduction, credit inflation, poor distribution of wealth in the 1920s, and widespread market speculation that took place during the latter part of that decade.
Wealth was poorly distributed in many ways:
- Money was unequally distributed among the upper and middle classes within the United States.
- There was significant inequality between industry and agriculture.
- There was also an economic imbalance between the U.S. and Europe.
This imbalance of wealth created an inherently unstable economy. Consequently, U.S. economic prosperity began to decline after 1927. The banking crisis was triggered by overproduction, a lack of available money, and a sharp fall in consumption, affecting all economic sectors. Many banks failed, thousands of families were ruined, and millions of Americans lost everything they had. The drastic drop in consumption and investment led to an industrial crisis and a surge in unemployment.
Global Repercussions of the Great Depression
The significant weight of the United States economy in the world ensured the crisis spread globally from 1931. The U.S. was forced to repatriate capital, which led to widespread bank failures in Germany and Austria, and created significant tensions in the British economy. The fall in U.S. prices forced European countries to lower their own prices to remain competitive and find outlets for their goods.
However, the decline in U.S. purchasing power and its subsequent protectionist policies further closed global markets. In Europe, and generally across the world, the crisis mirrored the American experience:
- Plummeting stock prices
- Declining prices, especially agricultural ones
- A sharp fall in credit and investment
- Collapse of industrial production
- Rising unemployment