The Great Depression was a World Depression

It was appropriate that the terrible economic slump of the 1930s started in the United States, to which Europe seemed to have surrendered economic leadership during the Great War and on which she had been dependent ever since.

Stock Market Crash

The stock market crash that began on a black Friday in October 1929 and deepened in the ensuing months had immediate repercussion in Europe. Indeed, even before this, the superheated boom in stock prices that marked the bull market of 1928 siphoned money from Europe. The pricking of the bubble sent shock waves throughout the world.

Large exports of American capital had helped sustain Europe, besides providing an outlet for American surpluses of capital, during the 1920s. Investment in European bonds now contracted sharply and swiftly, as banks that were "caught short" with too many of their assets invested in securities desperately tried to raise money. By June 1930, the price of securities on Wall Street was about 20 percent, on average, of
what it had been prior to the crash; between 1929 and 1932 the Dow-Jones average of industrial stock prices fell from a high of 381 to a low of 41!

Cycles of depression

An economic depression was by no means a novelty. Severe and prolonged ones had afflicted the world in 1873-1878 and 1893-1897. others had been shorter. They were usually preceded by a speculative and inflationary boom. A typical boom had immediately followed the war, in 1918-1919, giving way o a short and sharp slump in 1921-1922, which had in turn led to the general prosperity of the years up to late
1929. 

The exceptions to this we already know: Great Britain remained in a kind of chronic slump, which was the result of her loss of overseas markets and which was intensified by her refusal to devalue the pound in the 1920s. Germany had experienced the strange agony of the massive inflation, climaxing in 1923, because of the continuing struggle with France over war reparations. The Communist revolution had largely cut Russia off from the world economy, despite its limited toleration of capitalism from 1921 to 1928. Carving up the Hapsburg monarchy left Austria a charity case, and in 1931 a fresh wave of economic disasters started with the failure of the Austrian central bank.

These exceptions may seem more numerous than the rule, but the United States and most parts of Europe did enjoy relatively favorable economic conditions between 1924 and 1930. But it turned out that this prosperity rested on American loans and American markets, which now almost vanished. A European economy still recovering from the trauma of the war and its aftermath was too frail to weather this storm.

The Great Depression

According to the economic theory dominant throughout the nineteenth century and still uppermost in the minds of public leaders, these periods of depression represented a temporary disequilibrium that would soon right itself. The traditional wisdom did not see any role for government in an economic crisis further than to provide "financial stability," which meant balancing the budget and evading inflation. The idea of
having the government borrow and spend it order to counterbalance deflation in time of depression ran counter to orthodox economic theory in 1929-1932. unpleasant no doubt in the short run, the orthodox policies were supposed to restore economic health, like a nasty medicine needed to cure a disease. 

Thus, at the cost of unemployment, deflation would lower prices and lead to the recovery of markets. interest rates would fall, again attracting capital investment. The needle of the business cycle meter was supposed to hover around full employment, and there would be maximum use of resources under "normal" conditions. The natural operation of forces would soon draw the economy back upward, unless a ham-fisted government in its ignorance tampered with the delicate machinery. This machinery was supposed to function under conditions of a stable currency, political stability, international free trade, and a competitive economy.

Historian Arnold Toynbee called 1931 the terrible year. This year of descent into the economic depths of mass unemployment, hunger, breakdown of international exchange, failure of great financial institutions was also a year of floundering governments, the rise of the National Socialist party in Germany, and Japan's absorption of Manchuria. Japan's move, at least partly inspired by economic desperation, later looked like the beginning of the decay of international order leading to World WAR II. From the vantage point of a despairing West, caught in what looked like the last capitalist crisis, Stalin's First Five-Year Plan appeared as a beacon of hope. In fact, however, Soviet Russia went through the awful experience of the Communist government's forcible extermination of peasant landed property, a veritable war that cost millions of lives.

The New Deal

In 1933 the United States elected Franklin Delano Roosevelt to replace Hoover as president. With unemployment near twenty five percent of the workforce, he initiated a number of government programs to increase liquidity and provide jobs, which jointly are called the New Deal. Some believe that these actions helped bring the country out of the depression--though there is considerable controversy over the extent to which this is true--and provided some of the infrastructure, including roads that are still in use today.