The world depression of 1929-1932 was unprecedented both in its intensity and impact. It witnessed a world slump in agriculture, finance and industry. It put to all hopes of a continued period of peace and prosperity. The slump in agriculture was caused by over production in certain regions and misdistribution. Agricultural slump in US was aggravated by the slump in finance caused by the speculation and withdrawal of funds from Europe .The slump in the industry was caused by a fall in exports and internal consumption resulting from shortage of capital leading to reduced industrial production etc.
The roots of the depression lay in a fundamental imbalance in the economic structure aggravated by the peace settlement following World War I. The US economy had experienced occasional periods of depressed business activity even earlier but until the 1930s it had not lasted more than a year. Each year in the 1920s on an average 600 banks failed along with nearly 20,000 other business concerns. Most of the time unemployment had averaged 2.2 million almost 5% of the work force. Mining, farming and textile industry was in shambles and in 1928 the construction boom had ended. In 1929,Europe had not fully regained the economic levels it had attained before World War I. Prices and incomes throughout the world were depressed because under-developed nations aided by US loans had over expanded their raw material production capacity. The 1919 Peace of Paris was not economically lopsided. Punitive reparations, loss of colonies and changes in national boundaries made German and mid- European economic growth nearly impossible and contributed to the spirit of revenge.
American economist John K. Galbraith in his book The Great Cash 1929 ascribed the depression to five main causes – unequal income distribution which limited the consumer good market and made investment and luxury spending erratic. Fraudulent business rose like flood of corporate theft. Banking structure which contained too many independent units causing bankers to yield to over optimism or to act foolishly and once one bank failed the whole system collapsed .The new creditor position of the USA which besides resulting in unwise foreign lending was coupled with tariffs so that foreign countries could not service their debts by increasing exports resulting in default and inability to pay. The poor state of economic intelligence. Its effects were maximized not only by the disastrous foreign debts and tariff policy but also by some particular results of uncontrolled private ownership and enterprise. The unbalanced nature of US economy made recovery very difficult. The needs of the rich had been catered for and the less fortunate were made to suffer. It was easy to wipe out overnight the demand for expensive motorcars, new mansions and luxury goods etc. Soon factories, mills and shipyards were closing down, unsaleable expensive cars piled up and their owners went bankrupt. At the beginning of 1933 nearly 20 million people were said to be facing starvation. American investment in Germany ceased in 1929.
The Credit Anstalt the bank that financed most of Austrian industry faced bankruptcy. The British Labor Government was thrown out of power and pound lost a fifth of its value. London had been the financial center of the world and international trade was now in chaos. The only country unaffected by this depression of 1929-1932 was the USSR because it did not maintain any significant trade and commercial links with the western world. The mass unemployment reached tragic proportions. In March 1933 the number of people out of work in the US was estimated at over 14 million or a fourth of the total labor force. In Britain the jobless were numbered at nearly 3 million. Germany was worst off with more than 2/5th of trade unionists wholly unemployed and another 1/5th on part time work. There was misery and deprivation everywhere. In Britain where unemployment was chronic the situation was worse. A substantial proportion of a whole generation was growing up with little opportunity or prospect of finding employment. In Germany with its higher percentage of jobless people the frustrations and tensions were more acute.
The World Depression had such severe consequences both economic and socio-political that even reluctant governments could not stand aside. The price of non-intervention was social revolution and intervention was a weapon of counter-revolution as under the Nazi regime in Germany. The tendency towards economic nationalism was reinforced as governments imposed tariffs or raised existing ones and added quotas and other devices to protect home producers. As the depression continued protection tended to be used increasingly aggressive to bargain with other countries and penetrate foreign markets. The disintegration of multilateralism was replaced by bilateral trading agreements accompanied the decline of world trade. The immediate affect of all these measures was to reduce the volume of international trade and create conditions of trade war. Along with this went the breakdown of the gold standard.
The currencies became subject to government action and some form of exchange control had to established if balance of payments difficulties were not be exaggerated by speculative currency movements. The World Depression shook capitalism to its foundations and was the major formative influence on political and social-economic life. Recovery came slowly and in many countries was far from complete by World War II.In Germany this was chiefly war production and in Britain although rearmament in the late 1930s helped recovery it had earlier depended upon expansion of the home market the shift to new industries and the continuous rise in service activities. The real innovation came in Germany and US. The National Socialist Policy adopted in Germany by Hitler in 1933 that prepared the most powerful industrial nation in Europe for a new war. The other is the New Deal that Roosevelt proposed to the American people. These two experiments can also be considered as alternative ways of saving capitalism.
The German recovery was based on a war economy. The Nazis established a full employment economy based on war as its inevitable outcome. The Nazis did not establish a new economic system they simply imposed greater state control on an economy that still rested upon private ownership and private profit. The New Deal enabled Roosevelt to overcome the emergency based on relief, recovery and reform. To give jobs to many of the 14 million unemployed public work projects were started. The National Recovery administration attempted to guide business and industry in limiting production and in ending unfair competition. The Tennessee Valley Authority built dams began a conservation program and supplied cheap electricity to the people. Social security was created providing payments to the elderly, insurance for the jobless and minimum wages were established. It did not fully succeed in bringing about recovery. It took the colossal expenditures of World War II finally to overcome the Depression.