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American bankers believed that speculation in the stock market had been encouraged by easy access to cheap credit, so their response in 1929 and 1930 was to increase interest rates. This had a dramatic effect on countries around the world. The flow of American loans that had smoothed over some of the cracks in the world economy of the 1920s dried up completely, and, thanks to the “rules” governing the operation of the gold standard, other countries had to copy the American move and raise interest rates too. The consequences were dramatic: it became increasingly difficult for farms and businesses to pay off loans and to borrow the money needed to combat the onset of depression. Governments, too, began to feel the squeeze as their levels of revenue from taxes fell dramatically just when they needed to spend money on social assistance and public work schemes to mop up unemployment, and to kick-start recovery.
Members of the gold standard were also less able to combat the depression because the “rules” of the system helped to determine how countries should make economic policy. In particular, the “rules” called for governments to maintain a balanced domestic budget (governments could only spend as much as they made in revenue) and a positive balance of trade (member countries should export more than they imported). This was a demanding and inflexible policy regime when the world economy turned downward, and it acted as a straight-jacket on government economic policy. Around the world, governments were soon in bitter dispute over whether to slash government spending to meet the “rules” of the gold standard. Thanks to their painful memories of the chaos caused by the post-war inflation, they found it very difficult to forsake the gold standard.
In 1930 many economic forecasters believed the crisis would be short-lived but by the following year confidence in the future had evaporated. Not only were governments cutting back on spending, so, too, were companies, farms, and households. Demand for industrial and agricultural products now dried up and this caused prices to fall yet further. By the summer of 1931, many economies began to crack under the strain of falling prices, a lack of demand, and spiralling levels of unemployment. Across much of the world, economic, political, and financial pressures combined to produce a financial crisis that swept the world like a flash flood. Events in Austria and Germany were among the most dramatic. With some of their most prestigious banking houses facing ruin, the German and Austrian governments were forced to become directly involved in managing the financial system.
In Britain it was not commercial banks that came under pressure in 1931, but the central bank, the Bank of England. Britain’s financial crisis culminated in the British Empire and Commonwealth countries leaving the gold standard (Australia left in 1929 and South Africa in 1932). This was a key-turning point in the Great Depression. These countries took the first tentative steps on the road to recovery.
No part of the world was left untouched by the Great Depression, although there were national variations. Industry and agriculture were engulfed by a rising tide of bankruptcy. On a human level, the most visible measure that the world economy had failed was the tremendous and unprecedented surge in unemployment. The official figures are impressive, peaking at around 6 million unemployed in Germany, 14 million in the United States, and 2.7 million jobless in Britain. It is very likely the real figures were even higher. Many of the unemployed remained without work for three or four years, with younger age groups hit disproportionately hard. Rural unemployment, too, led to acute poverty, but was often disguised as underemployment.
Social tensions increased considerably, with a rising intolerance towards groups or individuals who were perceived to be “economic rivals” or “outsiders”. Many people began to blame their neighbours for the economic collapse, be it other countries or competing economic groups—industrialists, bankers, farmers, and workers—or those who simply appeared to be different from themselves, like Gypsies and Jews. The depression also heightened the division of experience between men and women. In some cases married women workers were forced from the workplace by state legislation in a campaign against so-called “double earners” (because their husbands also brought home a wage packet). Women teachers were sacked in Britain and Germany on this basis. However, in some industries employers kept on women workers in preference to men because they were cheaper and more prepared to work part-time.
The depression took a heavy toll on the physical and mental health of society. In Hamburg, for example, over 50 per cent of all young men were unemployed for more than two years and they were especially hard-hit by the social and psychological effects of unemployment. Malnourishment, too, was widespread and its effects on national health long lasting. In the mid-1930s, a routine medical inspection identified over 21 per cent of schoolchildren in Pontypridd, Wales, as malnourished.
There was not much help to be had from state-led efforts to help the jobless. Although many countries had rudimentary welfare systems—a notable exception was the United States—the very scale of the problem, coupled with budget orthodoxy, soon exhausted the welfare budget. Where they existed, state schemes to support the unemployed were simply not designed to cope with either the sheer volume of jobless or the length of time people were out of work. Private charities and small relief schemes, like the soup kitchens that sprang up in towns and cities across the United States, tried to step in to fill the vacuum left by failing government programmes.
The failure of governments to combat the depression effectively caused domestic politics to become increasingly turbulent. In much of central and eastern Europe, as in the Weimar Republic, when politicians from moderate, centrist parties (Liberals, Conservatives, Democratic Socialists) failed to introduce policies to tackle the crisis, they lost out to extremist parties to the Far Right and Left of the political spectrum. Britain, in 1931, sought to combat this trend by forming a National Government made up from members of the Conservative, Liberal, and Labour parties to “generate national unity”. There were similar developments in France, Belgium, and the Netherlands in the mid-1930s. But it is important not to oversimplify the relationship between economic misery and political radicalism. Many countries around the world experienced intense economic hardship, yet did not succumb to political extremism; the United States, which endured the most acutely depressed economy of the western world, is the most notable.
