Economic Impact of World War I and the Great Depression

Posted on Dec 12, 2024 in Economy

Economic Chaos of the Postwar Era

Governments tried to return to pre-war economic practices, but the international economic scene had changed substantially. Gold reserves were depleted. Due to military needs, many had been forced to resort to the production of banknotes or large releases of public debt. Monetary disorder reigned during the war and the postwar pattern. It was necessary to abandon the Gold Standard. The war had caused great destruction; spaces were fragmented, and economic infrastructure and the industrial base were devastated. The costs of the war had led to an immediate currency crisis: states were totally indebted.

Hyperinflation in Germany

If there was a country that was affected by the postwar economic crisis, this was Germany, especially in 1924, due to a number of factors:

  • The Franco-Belgian occupation of the Ruhr basin.
  • The difficulties shown by Germany in meeting the payment of reparations.

The Weimar Republic then decreed a series of measures, such as the indefinite suspension of payment of reparations. This caused hyperinflation. To finance these measures, the government issued paper money in an uncontrolled manner, accelerating inflation and causing the loss of value of the Mark.

The Birth of Consumer Society

Economic recovery brought a period of splendor known as the Roaring Twenties, which was characterized by optimism that spilled over to boost the emergence of a consumer-oriented society. The reasons for this change in habits are:

  • The application of technological innovations in industrial production led to a cheapening of costs and, therefore, greater social accessibility to products.
  • The claims of the working class had made possible an increase in their income and a reduction in their working hours.
  • The new marketing and sales systems, the implementation of systems of credit and hire-purchase, facilitated the arrival of new products and changed lifestyles and customs in cities.

Advertising played a major role in the expansion of new consumption patterns. Due to this, the streets of major cities were filled with cars, shops, and places of recreation and leisure. Mobility was multiplied by the new means of public transport (tram and metro). The main avenues, streets, and houses were lit up by the extension of electricity networks, while new equipment made life easier at home.

International Detente: The Spirit of Locarno

Since 1923, tension was reduced, making way for a new era in which understanding among states dominated. This change in international politics came about with the proclamation of Gustav Stresemann as German Chancellor, who decided to stop passive opposition to the occupation of the Ruhr and showed his intention to assume the payment of reparations. The direct consequence of that decision was the implementation in Germany of the Dawes Plan and the consequent improvement in the conditions of payment of compensation, which resulted in an immediate change in diplomatic relations between Germany and the victors of the war, culminating in the Locarno Agreements of 1925.

In this pact, a series of key actions for the political stabilization of Europe were taken:

  • Germany recognized the borders that had been imposed by the Treaty of Versailles compared to Belgium and France.
  • In return, they accepted the revision of war reparations and guaranteed their access to the League of Nations.

The Locarno Agreements opened a new period in international relations marked by understanding and harmony that were represented by a series of agreements:

  • In 1926, Germany and the Soviet Union in 1934 were finally admitted to the League of Nations.
  • In 1928, the Kellogg-Briand Pact was signed, sponsored by the French Prime Minister and the US Secretary of State. The agreement was a joint declaration renouncing war as a mechanism to defend national interests.
  • In 1929, the Young Plan was approved, which revised the terms of payment of reparations from Germany and, in turn, withdrew the troops from the Rhineland occupation.
  • In 1930, the Conference on Disarmament was held in London, which elaborated on the agreements adopted at the Washington Conference on naval arms.

The 1929 stock market crash and the subsequent economic depression of the thirties ended the conciliatory spirit that emerged in Locarno and ushered in a new phase in international relations, which resulted in the outbreak of World War II.

The Crisis of 1929 and the Great Depression

The End of Prosperity

The prosperity of the twenties hid structural problems in some economic sectors, so that since 1928, the US economy began to show signs of exhaustion:

  • There were difficulties in the agricultural sector, immersed in a process exacerbated by over-indebtedness incurred by farmers to mechanize their operations.
  • Traditional industry entered a crisis, while the industrial sectors that had emerged in the Second Industrial Revolution showed considerable strength.
  • Speculation acquired an excessive role, both by private individuals and trust banks, with high levels of investment in the stock market.
  • The excessive weight of the dollar had caused the depreciation of other currencies and the emergence of a generalized inflationary process.

Despite these symptoms, euphoria was still present in the moments before the crisis.

The Crash of ’29

In the spring of 1929, the economy began to show signs of exhaustion, with sharp falls in prices followed by rapid recoveries. Faced with this delicate situation, the Federal Reserve, the regulatory agency of the financial system, was torn between different solutions:

  • Alerting to the risks of a drop in the stock market could trigger panic.
  • Raising interest rates to curb the spiraling credit could ruin small investors in debt.
  • Staying on the lookout, which it definitely did, in hopes that the situation would not worsen.

On Thursday, October 24, sales of shares soared on Wall Street. Large investors bought to halt the decline of a stock market in panic, in which some actions came to lose two-thirds of their value. The fall was slowed at the end of the morning thanks to massive investment by banks. But what happened on Black Thursday was just the beginning. After a short-lived recovery, on Tuesday, October 29, the crash of the New York Stock Exchange inevitably burst. Sales orders multiplied. Securities plummeted. Money suddenly disappeared from the stock market. It was Black Tuesday.

The Great Depression

The crash of the New York Stock Exchange caused a ripple effect that affected all economic sectors:

  • The crisis initially affected the financial system. Faced with economic difficulties, banks stopped lending money and demanded payment of claims from savers ruined by the fall of the stock market.
  • Consumer ruin provoked a drop in demand, as companies built up large stocks, this forced them to stop or reduce their production due to the decline in sales.
  • The fall in production shot up unemployment, which further reduced consumer demand and expanded precariousness.
  • Pockets of poverty appeared, and the agricultural sector went bankrupt due to falling prices and demand. Thousands of farmers could not meet their debts, so they were stripped of their lands and swelled the unemployment figures.

The Expansion of the Crisis to Europe

Almost immediately, the US economic crisis affected the European continent. The reasons were:

  • The United States drastically reduced its imports, which caused a crisis of overproduction.
  • Foreign investments were paralyzed, and capital was repatriated, which had been the basis on which the recovery had been based.

Solutions in the United States: The New Deal

In the early thirties, in the United States, there were fourteen million unemployed in an atmosphere of overproduction and falling prices. The policy of the Republican President Hoover proved ineffective in dealing with the depression, and cities were populated by slums, the Hoovervilles. To Hoover, a representative of orthodox capitalism, the crisis would be temporary and brief.

In 1933, the Democrat Franklin D. Roosevelt won the elections, proposing a program to overcome the crisis, the New Deal. The New Deal gave a new economic orientation, denounced by liberals as interventionist and pro-socialist:

  • The dollar was devalued to encourage exports.
  • To retrieve the income of farmers, production was limited, prices were increased, and agricultural exports were subsidized.
  • Industry was favored in technological innovation, and a broad program of grants was initiated to revitalize production.
  • The reform of the banking sector was undertaken in order to control the activities of financial entities.
  • A program of grants and subsidies for the unemployed was launched with the aim of reducing unemployment and reviving the economy.
  • The Industrial Relations Act was enacted to protect trade union negotiation and dignified working conditions, by reducing working hours and establishing a minimum wage.

Two were the most significant aspects that Roosevelt’s program brought:

  • It broke with the inhibition of the government, and since then, it intervened to correct imbalances and boost the economy in times of crisis.
  • It served to mitigate the most serious social effects of the crisis. Despite this, economic activity in 1937 had failed to regain 1929 levels.