What caused the Great Depression of 1939

The Great Depression 1929-1932

With thanks to Julian Lutz

Table of Contents

  1. Presentation of the topic
  2. Course of the economic crisis - general
  3. The way out of the crisis - Roosevelt's New Deal
  4. Germany - pathetic rescue attempts
  5. Political Impact on Germany
  6. Conclusion
  7. References

Presentation of the topic - considerations

Everyone has actually heard of Black Friday. The names Brüning and Roosevelt should also be familiar to many. These three terms are key words when it comes to the subject of the Great Depression of 1929 in the USA and Germany.
After questioning a few schoolmates and acquaintances, I came to the conclusion that there is little knowledge of this undoubtedly very important event in our history. Among other things, this was the reason why I decided to write a term paper in the subject of history on the subject.
This time is also particularly exciting to investigate, especially since events such as World War I or the Weimar Republic are among the causes of the crisis. The concatenation of so many important historical events is particularly visible here.

In my opinion, the subject of the global economic crisis is not that far back in the past. The current interconnectedness of the economies of large industrialized nations and many overvalued companies on stock markets harbor a great risk. One hears constantly of fears about the bursting of the so-called real estate bubble. This topicality of the topic and also the reasons mentioned above aroused my interest in it and solidified my considerations to create this term paper.

In my GFS I would like to focus on the world economic crisis and crisis management in the USA and especially in Germany. There are two different approaches to addressing this problem. One concept had its effect and led out of the crisis, while the other laid the foundation for an even worse crisis. But more about that later.

It is now necessary to examine where the differences lie in the two forms of crisis management and for what reasons one concept failed and the other worked relatively successfully.
I would like to deal with this question in the following and hope to be able to answer it in the end.

How did the world economic crisis come about? - The history

A market economy like the one that prevailed in Germany and the USA in the 1920s and 1930s is designed to regulate the prices of products on the market through the relationship between supply and demand. Simply put, there are three states:
1) The supply is greater than the demand: in this case there is an oversupply of goods on the market. This leads to the fact that the goods lose value due to their large number and the price thus falls. If there is an overproduction of goods, there is an extreme drop in prices.
2) The demand is greater than the supply: A high demand for a product that is only available in limited numbers can also be described as a high level of interest in it. The logical consequence of this great interest is that the price of this product is increasing.
3) Supply and demand are balanced: This case describes the situation in which as many goods are in demand as there are on the market. The result is stagnation in prices.

In order to understand the causes and consequences of the Great Depression of 1929, it is precisely these mechanisms that must be understood.

The crisis after World War I had its origins in the USA. Having emerged victorious from the war, the USA was able to secure a particularly strong position in the world economy. They were the greatest power in the world in both the industrial, agricultural and financial sectors.
Unharmed by the war - after all, it was not waged on its soil - the United States quickly regained economic power and was able to take advantage of the post-war situation, in which many countries had to show great damage caused by the war.
In addition to the USA, there were three other economically strong states - Great Britain, France and Germany - but the USA had already outstripped the three European states taken together economically in 1913.
In addition, there were still existing war debts of the said countries, which consequently weakened them even further.
England had to pay off debts of approximately $ 4.7 billion to the USA. France owed the United States a similar sum. At $ 4 billion, they had to pay the United States 1 billion more than their debt to the British.
Great Britain and France in turn demanded reparations from Germany. In addition, large payments from Germany to the USA were still outstanding.
To finance the war debts to the United States, the German government took out a loan of 800 million gold marks in the United States.
The resulting money cycle stimulated the German economy immensely.
By repaying debts to Great Britain and France, which in turn had to settle debts to the USA, whereby the USA granted further loans to Germany, the German economy prospered enormously between 1924 and 1929. This is also the reason why this period was also called the "Golden Twenties".
In the USA, the money raised through war debts was mainly invested in expanding and modernizing production.
The introduction of these new production methods, such as assembly line work, greatly increased productivity (e.g. Ford).
Many new technologies and the manufacture of long-lasting products, such as cars or household appliances, led to great euphoria on the part of buyers. Since there was initially enough purchasing power despite the high productivity, the number of employees and their wages rose equally.

The emerging problem can also be clearly seen in the example of agriculture. New fertilizers and the increasing mechanization of agriculture increased the yields enormously.
However, the demand for wheat on the world market suddenly stagnated, while production continued to rise. This oversupply led logically to a rapid fall in the price of agricultural products, which resulted in numerous farmers in the USA having financial difficulties with their credit institutions, which in turn plunged small and medium-sized banks into ruin.
In industry, the same process resulted in mass layoffs and closures of over 100,000 factories in the United States alone.

Here, however, the cycle was triggered by the manufacture of increasingly durable products (e.g. cars, refrigerators, vacuum cleaners), which after a while led to the satisfaction of needs and an oversaturation of the market.
This vicious circle triggered by this (see graphic) is spreading the crisis more and more to various branches of industry in the USA.

At the same time, the speculative fever in the USA had taken hold of many laypeople who, ignorantly and often on credit, brought a lot of money into the market. As a result, stocks rose even further and, logically, led to gross overvaluation of companies. One speaks of overvaluation when the market value, i.e. the value of all shares in a company, is greater than the actual value of the stock corporation.
The now beginning decline in economic growth triggered panic sales of the securities between October 23 and 30. Some stock prices fell 50% on Black Friday, October 25th. Much more pronounced falls were noted on October 24, when the Dow Jones Index lost 12.8% in value.
This short-term withdrawal of capital plunged the American economic system into major liquidity problems; the American economy collapsed completely.

At this point in time, however, one could not speak of a “global economic crisis”, as only the American economy had been directly affected so far. However, the loans granted to Europe now became a problem:
Due to the money problems in the USA caused by the processes described above, they withdrew their loans from Europe, especially from Germany, at short notice. At the same time, they continued to insist on repaying the outstanding debts in order to get new capital. In this way the crisis continued to widen.
This had far-reaching consequences for credit-dependent Germany, which at the time was in a politically and economically unstable state.
Although the economic curve in Germany was relatively steep after World War I, this modernization was mainly financed through foreign investments.

This economy on credit was also financed by short-term loans, since the hyperinflation of 1923 had not been completely forgotten, which ultimately enabled the atypically quick withdrawal of the loans.

After the USA, Germany was the country hardest hit by the economic crisis, with high unemployment in particular often being seen as symptomatic of the crisis itself. However, it must be noted that high unemployment in Germany was a permanent problem in the Weimar Republic.

Caring for these unemployed turned out to be extremely problematic. Originally designed for around 800,000 unemployed people who received between 35% and 75% of their last income for 26 weeks, the Reichsanstalt für Arbeitsvermittlung und Arbeitslosenversicherung had to care for 6 million unemployed in 1933.
Since this was simply not possible, only 900,000 unemployed received state benefits.
The mass poverty and inability to pay state benefits led to mass impoverishment among the German population.
The initially only economic crisis eventually turned into a political and social crisis.
The grand coalition of the SPD, Zentrum, DPP and DVP broke up in March 1930. The death of Foreign Minister Gustav Stresemann in October 1929 and the different views in the areas of economic and social policy between the SPD and DVP ultimately led to the breakup of the government.
There was disagreement and uncompromisingness between the parties. There were no proposed solutions for overcoming the economic crisis.

The way out of the crisis - Roosevelt's "New Deal"

The tide turned for America in 1933. The candidate Franklin D. Roosevelt lands in the presidential elections of the year in question against the incumbent President Herbert C. Hoover with 472 to 59 electors a more than clear victory. The key to Roosevelt's victory was the so-called New Deal, the re-shuffling of the cards (so-called in the cardplayer milieu) with which he could win the votes in the election campaign.
With the New Deal, Roosevelt wanted to overcome the economic depression and dampen the social tensions it caused. It should fight poverty and unemployment in the country and provide social security for American citizens. Deflation should be combated by a targeted inflation policy and the banking system reformed.

The following measures have been taken by the government:

On May 18, 1933, the independent government organization Tennessee Valley Authority, TVA for short, was founded. One of its tasks was to support and build up the Tennessee Valley, which was heavily exploited in the past. The TVA supported the farmers in the 1930s through the development of fertilizers and through further training opportunities in special courses.
Around 28,000 workers found employment through the construction of dams and hydroelectric power stations. In addition, the protection against floods and the supply of electricity through the TVA brought decisive improvements in the standard of living.

In order to overcome the stagnation of the economy, state work programs were started that offered work to several million people. A total of $ 11 billion was spent on renovating and building schools, roads, hospitals and bridges. This should increase purchasing power and stimulate the economy.

Numerous state interventions, actually untypical for a market economy, in which usually only framework conditions are set, should regulate the economy: The control of the banks and the stock exchanges by the so-called Bank Emergency Act as well as the state supervision of labor negotiations of the trade unions, whereby these had the freedom of association , are examples of this.
Minimum wages for industrial workers were also enforced by Roosevelt's government and are more reminiscent of socialism than of a free market economy, in which state intervention is usually absent apart from the establishment of framework conditions.

In a second phase of the New Deal from 1935 onwards, the Roosevelt government turned primarily to social legislation.
This was also urgently needed, since in 1933 over 35% of the entire population was unemployed. In addition to the already mentioned right of the trade unions to organize themselves freely, Roosevelt's government also introduced nationwide unemployment and pension insurance.
Pension insurance, founded with the Social Security Act, is financed through contributions and taxes and still exists today as the world's largest state social insurance project.
Other social policy measures were employment and social assistance, which brought American citizens more social security and confidence in the system, which had fallen sharply during the times of crisis described.
The introduction of a progressive tax system, which enforced low tax rates for the poor and high tax rates for the rich, also ensured social justice.

In addition to numerous investment programs, however, savings have also been made. For example, the so-called Savings Act decided to cut the salaries of federal employees by 15%. Administration has also been simplified in order to save further costs.

Franklin D. Roosevelt's New Deal undoubtedly helped the US out of the crisis. The US gross domestic product rose from $ 55.6 billion to $ 90 billion. The form of government, democracy, could also be preserved.
However, the American state was in great debt: an average of 20.01% increase in debt during Roosevelt's presidency; from $ 22.5 billion to $ 40 billion.
With this approach, the government carried out politics after the English economist John Maynard Keynes. Its demand-oriented policy had in mind the indebtedness of the state in favor of full employment as the key to macroeconomic success.
However, it is very difficult to assess the concrete, long-term results of Roosevelt's policy, since 1941 returned to the war economy and armament.

Crisis Management Germany - Brüning's Deflation Policy

The world economic crisis is inevitably associated with a name in Germany, that of Chancellor Heinrich Brüning. The central politician, valued as a financial expert in his party, succeeded Hermann Müller (SPD) in 1930 after his grand coalition had failed due to questions of unemployment insurance. Hopes for saving Germany from the crisis were placed in him.

From March 30th, Brüning led his government with the aim of restoring the ailing state budget and ending reparation payments. Brüning's government was appointed by Reich President Paul von Hindenburg, as it was no longer possible for the parties to form majorities capable of governing.
Through the emergency ordinance law in Article 48 of the Constitution and Article 25, the dissolution of the Reichstag, Hindenburg secured the capacity of this presidential government to act.

With his so-called deflationary policy, Brüning's policy was exactly the opposite of that of America.
To prevent inflation and further national debt, he decreed iron thrift.

The content of his policy included the following measures:

As in the USA, the salaries of public servants have also been cut in Germany. However, the cut at Brüning was significantly higher at 25% compared to the USA, where the salaries of federal employees fell by only 15%.
Brüning's government also increased the income tax. Accordingly, income of over 8,000 Reichsmarks was taxed 5% more than usual.

Austerity measures in the area of ​​unemployment insurance - expenditure was reduced from 1,821 million Reichsmarks to 721 million Reichsmarks - and an increase in unemployment insurance contributions from 3.5% to 4.5% are just as characteristic of politics as the introduction of a single tax of 10%. .
The restructuring of the Reich's finances, which Brüning carried out drastically at the end of 1930, was intended to reassure foreign investors and also to keep open the possibility of further borrowing.

In fact, the Chancellor succeeded in reducing government spending by 19% in the 1931 financial year compared to the previous year, but in the same period income also fell by a full 20% due to the still high unemployment, which did nothing for the success of Brüning's policy meant less than a disaster.

Another problem was the reparations payments still to be made. On March 12, 1930, the so-called Young Plan, which stipulated the remaining debt of 113.9 billion Reichsmarks in total, to be paid in 59 annual installments up to 1988, was adopted by the Reichstag.
The high unemployment due to the austerity policy and the great misery in the population were intended to demonstrate to the Allies that it was still no longer possible to pay the reparations claims. Some even accuse Brüning of a conscious policy that should lead to an increase in unemployment.

The goal of finally being able to end the reparation payments was achieved at the Lausanne Reparations Conference, which met from June 16 to July 9, 1932. A final payment of 3 billion Reichsmarks was nevertheless requested.
At the end of the Lausanne conference, the decisive shackle for German economic policy fell; the population even felt subdued optimism, which was expressed in a noticeable recovery in investment. In any case, this was one of the decisive factors in Germany's way out of the crisis.

Political Impact on Germany

Mass unemployment - in 1930 22.7% of the people were registered as unemployed - and the increasing impoverishment led to a further problem, which became more prevalent as a result of the crisis: political radicalization was taking place.

At the government level, the increasingly frequent use of emergency ordinances to pass laws resulted in a regression of democracy in the Weimar government system, which is most clearly reflected in the disempowerment of the Reichstag. In 1930 94 sessions of the Reichstag were held, the number had fallen to 13 by 1932.

Through the tolerance of the Briining government - to which the extremely unpopular austerity measures were due - on the part of the SPD, the KPD and NSDAP, i.e. the outermost parties, formed the only two real opposition parties. With their radical course of confrontation with the government line, they were able to garner so many votes from the protest voters.
The massive election wins of the NSDAP should also be seen in this context. On September 14, 1930, the mandates of the NSDAP increased by almost 900% compared to the previous Reichstag (from 12 to 107 mandates).
Furthermore, between 1930 and 1932, Adolf Hitler's party made it into the state governments of Anhalt, Braunschweig, Mecklenburg, Oldenburg and Thuringia.

The biggest political winner from the global economic crisis, however, was the KPD; the ideal of socialism appeared to be very tempting, especially in times of need and a lack of social security for the individual. The KPD often referred to the Soviet Union as a model, which was largely spared the global economic crisis and grew to become Germany's most important trading partner. With this tactic, the Communist Party tripled its membership between 1928 and 1932.

This clear radicalization of German parliamentarism was of course received particularly critically abroad.
The unrest of the National Socialists against the Young Plan had already been viewed with concern, and after the results of the elections of September 1930, when the NSDAP made the leap to the second largest faction, about 700 million Reichsmarks were withdrawn from foreign lenders, which was the economic situation in Germany could only worsen.

The time had come in the Reichstag elections on July 31, 1932. With 37.4% of the vote and 230 seats, the NSDAP was the strongest party in the Reichstag.
With its aggressive propaganda technique, the party succeeded in gaining supporters from all walks of life; the number of members of the party doubled to 800,000 between 1930 and 1931.

In the Reich presidential elections in March and April 1932, however, Hitler failed against Paul von Hindenburg in the second ballot. Despite the NSDAP's election success in July 1932, Hitler refused to participate in the government. As the leader of the strongest party, he demanded the Chancellery for himself, which Reich President Hindenburg refused for the time being.
Hitler's rigid stance provoked internal clashes and alienated many members and voters of the party. In the Reichstag elections on November 6, 1932, the NSDAP lost over 4 percent of the vote, but remained the strongest party.
Under massive pressure from conservative forces such as Franz von Papen and Alfred Hugenberg, Hindenburg appointed Hitler on January 30, 1933, as Chancellor of a coalition government made up of the NSDAP and DNVP.

Now Hitler was able to realize his program:
"Complete reversal of the current internal political conditions in Germany [...] strictest authoritarian government [...] elimination of cancer damage to democracy [...] fight against Versailles [...] establishment of the Wehrmacht [...] conquest of new living space in the east and its ruthless Germanization" ". Political opponents were terrorized or placed in protective custody, i.e. in prisons and concentration camps.
At the beginning of 1933 the NSDAP had around 850,000 members, at the end of the 3rd Reich there were around 6 million.
The consequences of this dictatorship are well known. The mass murder of Jews in concentration camps and finally the Second World War, triggered by Adolf Hitler, are thus indirect consequences of the global economic crisis, which undoubtedly contributed to the radicalization alongside Brüning's policy.

Conclusion and "What's next?"

After considering both the USA and Germany in relation to the global economic crisis, it has now become clear in which points the two plans to overcome the crisis differ and why the USA was successful in implementing its concept, while Germany was in an even bigger crisis overthrew National Socialism.

Briining's policy was exactly the opposite of Roosevelt's. While Brüning prescribed extensive austerity measures with his deflationary policy, Roosevelt's government cranked it up with targeted investments, which, however, caused him to incur debt to the state.
It is precisely in this contrast, the deflationary policy (Germany) on the one hand and the inflationary policy (USA) on the other, that the decisive difference lies.

Although the liberation of Germany from reparation payments in 1932 by the Lausanne Conference brought with it a revival of investment, it was only Adolf Hitler with the NSDAP from 1933 on that reaped the credit for this.
Although Roosevelt's New Deal did not bring about as great an economic success, it created a general mood of optimism and promoted the principle of the modern welfare state, which can be seen in measures such as the introduction of a pension system.

Seen globally, the economic crisis brought about a departure from classic, very strict, economic liberalism. Increased interventions by the state, such as the control of banks and stock exchanges or the steering of the currency through interest rate and money market policy, are consequences of this event.
Germany in particular has learned a lot from this. The consequences of National Socialism haunt us to this day. At the slightest hint of political radicalization or corresponding statements, the alarm bells are ringing. A dictatorship is no longer possible for constitutional reasons.

But what about a new economic crisis? Numerous books that prophesy a new crisis, an apocalypse of the western economy exist, but are mostly dismissed as black paint.
However, this topic is not that out of date. It wasn't that time again until March 2000, albeit not on such a large scale. The bursting of the so-called “dot-com bubble” in the time of the “New Economy” caused the prices of many technology and Internet companies to drop drastically, similar to the one in 1929. The reasons for this were the overvaluation of the companies, whose prices fell short Time had risen without the company's share prices being covered by corresponding countervalues.
As a result, a new crisis is not as absurd as it seems to some.
The well-known "real estate bubble" in the USA gives many food for thought: real estate prices in the USA are rising immeasurably and mismanagement by the US Federal Reserve in terms of interest rate policy - interest rates were kept low for a relatively long time - worsen the situation even more. Has the foundation stone already been laid for a new global economic crisis?
So far, however, the slump has not materialized. When and if it will come is uncertain. But the Americans say: "All balloons come down sometime" - all balloons come down sometime ...


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