8.1: Causes of the Great Depression in Europe and the United States

The Economic Aftermath of World War I

Many of the economic implications were due to the aftereffects of World War I.  In the months immediately following the end of the war, the victorious states from the West joined together to create the Reparations Commission, designed to hold the belligerent powers, most notably the Germans, responsible for the cost and cause of the war.  The Commission, after many months of deliberation, set the cost of the war owed by Germany at 132 billion gold marks (more than $270 billion in today’s currency), and ordered the Weimar Republic to repay that amount to the Allies.  The United States wanted nothing to do with the reparation payments, but they did want the loans that they had made to the Allies repaid, which created a cycle of German reparation payments being made, and then the Allies returning monies to the United States from those payments.  The situation was not long lasting, as the Germans defaulted for the first time in 1923, with the French and British responding by occupying the Ruhr River Valley.  The situation remained at an impasse until the United States agreed to lend Germany money.

The imposition of war reparations meant that these states, previously significant empires in the cases of Germany and the Austro-Hungarian Empire, were forced into recessions, resulting in inflation, hyperinflation, and then poverty for many regular citizens. This economic crisis led to the creation of new political parties that were quick to promise a return to glory, power, and economic prosperity; much of this will be covered in the section about the rise of the fascist autocratic states.  

The Impacts on the United States

While the United States had tried to isolate itself from its European and Asian counterparts, part of the problem for America’s economy was due to the fact that even prior to the war, speculators had been allowed to buy stocks on margin.  This meant that, instead of having to pay the full value, a speculator only needed to produce a percentage of the price to purchase stock.  The idea behind this was fairly simple – the speculators bought the stocks, paying about 10% of the purchase price up front, waited for the stocks to go up, and then sold them, paying back the remainder of the purchase price from the profits and pocketing the rest.  In order to buy the stocks, speculators took out loans, with the understanding that they would profit sufficiently to pay the loans back. 

This system worked fine when it involved a fairly small number of people and the economy was continually growing, but as time passed, average citizens also began to get involved in the purchasing of stocks, believing that it was a quick and easy way to make money.  This continued through the 1920s in the United States.  Then, in October 1929, the United States Stock Market crashed, shrinking the economy, and plunging the US into a depression unlike anything that had been seen before.  

Banks began to recall loans, and speculators and others were forced to default without the benefit of institutional insurance, leading to runs on banks resulting in a general economic collapse.  The United States’ collapse impacted the European states that had been borrowing money and selling goods to the Americans, with Germany and Great Britain particularly hard hit.  Because of the depression in Germany, people began to call for changes to government, leading to the rise of fascism, under the leadership of Adolf Hitler and the National Socialist Workers Party (Nazis). Similar events happened with the rise of Benito Mussolini as the head of the Republican Fascist Party in the wake of Italy’s depression.

Review Questions

• Why did the United States’ stock market fall?  Was the collapse avoidable?
• Why did some nations turn to fascism as the solution to their economic and political problems?