42.

Factors in the Great Depression

Between 1920 and 1930 Europe and the world at large passed through a complete business cycle with post-war complications. The liquidation of war and the readjustment to peace was a huge task, even for countries that had been spared revolution or loss of territory. Trade channels had been blocked; some markets had become impoverished; some industries had swollen equipment and labor force; currencies were in chaos; rates of wages, interest, and taxes had found new levels; and many countries had expanded production greatly to supply their own needs or to feed markets formerly served by the belligerents.

By 1925 Europe had made a remarkable recovery in many directions. Its output of wheat, corn, rye, beet, wool, potatoes, coal, iron, and steel was near or above pre-War levels, and its production of the new goods— oil, electricity, electrical appliances, automobiles, and rayon—was mounting. Coal, shipbuilding, shipping, steel, cottons and woolens were sick from lack of buyers or from excess capacity, fierce competition, and fallen prices. Not one of Britain’s staple export industries had regained its pre-War position in 1929, and two-fifths of the unemployed army of a million workers belonged to these industries. Germany’s experience was similar: export markets were more easily lost than regained. Meanwhile, farmers everywhere complained that the price of their produce had fallen too near the cost of production, but that the price of the industrial goods they had to buy remained too high. But while some industries lost customers, others found new ones. In the first place, the devastated areas must be rebuilt; the supply of houses, offices, shops and public buildings must catch up with the demand; suburban "dormitories" were required for those who commuted between a city job and a semi-rural home, while roads must be made or improved to bear the growing load of motor traction. The construction industry was busy, and according to one estimate employed about 14 per cent of the industrial workers of western Europe in 1925. This construction, supplemented by the equipping of new industries and the remodeling of old ones, gave much work to the capital goods industries. In the second place, the demand for new comforts and luxuries, though less strong in Europe than in North America, was broad enough to bring new industries and service occupations into being. Hence the decline in the number of weavers, miners, and shipbuilders was more than counterbalanced by the growth of employment in virtually new occupations, ranging from the making of cars and cycles to the preservation of feminine beauty and the sale of prepared foods.

The expansion of production was encouraged by these capital and consumption needs, by the protection governments were willing to give, by the behavior of prices, and by the comparative ease with which capital could be obtained at home, in London or in New York. The stream of American capital, like the English one a century earlier, ran high to other continents till 1928, and British investors resumed their export of loans and investments, though on a smaller scale than before 1914. After falling rapidly in 1920, prices recovered somewhat and remained fairly steady (in countries with stable currencies) at 40 to 60 per cent above pre-War levels. The trend was slowly downward, but the movement was not marked enough to check production, and schemes for price maintenance helped to keep some prices at a level that encouraged producers to expand output.

The rest of the story is world history rather than European. Till 1928 production and purchase advanced at about the same pace; but hints of saturation then began to be evident, prices of foodstuffs and raw materials began to fall a little more quickly, and surplus stocks grew large enough to overshadow the market. By mid-1929 the prices of minerals were breaking, wool brought much lower prices in the auction rooms, while bumper wheat crops in 1928 and the reentry of Russia wrecked grain prices. This fall came just at a time when the flow of capital to primary producing countries was checked. London, Paris, and New York ceased to export loans, for the money could earn more in the boiling stock markets of New York and London. Hence the debtor primary producers had to pay for their imports and pay their interest bills by sending out produce that was shrinking rapidly in value and by supplementing it with gold from their bank reserves. The silver countries were also hit by a rapid fall in the price of silver.

The depression of 1929 thus began largely as a result of increasing stringency in the agricultural borrowing countries; but other factors played their part. The most urgent replacement and reequipment demands of Europe were eventually met. The flow of American capital, which had financed much reconstruction and had allowed some Europeans to pay their debts and buy goods with borrowed money, came to an end. Instead, there must now be a greater flow of payments to America, and this stream was swollen by funds going to be lent or used for speculation in stocks. Since America was not a great market for European goods, the transfer was made partly in gold. The concentration of gold in New York and Paris weakened the credit basis of many European banking systems, and forced central banks to raise their rates in order to protect reserves from depletion.

Meanwhile Europeans had been sucked into a stock and promotion boom of their own, in which borrowers as well as banks—especially the "industrial banks"—were deeply involved. In January, 1929, an Italian bank came to grief after "bulling the Bourse." A Belgian bank nearly foundered after financing an unhappy cork trust. A big Viennese bank nearly sank under the load of embarrassed firms it was carrying, and a Rothschild had to withdraw funds from New York to save it. Just at that moment (September) the arrest of a flashy British promoter for forging stock certificates upset London, sent stock prices diving down, forced the Bank to raise its rate, compelled investors to sell American stocks to get funds, drove British lenders to pull their loans out of the New York call market, and thus added one more cloud to the Manhattan horizon. Within a month the sky showed nothing but clouds; the major boom in America and the minor boom in Europe had ended. To the fall in prices of primary products was added that in the price of all salable things, but especially of those pieces of paper that had poured out of the financial mills of the electrical, oil, public utilities, and non-ferrous metal magnates.

For three years, till the summer of 1932, gloom grew relentlessly deeper in every part of the world.... The volume of world trade declined about a quarter, and its value about two-thirds. In every country the all-absorbing political problem was to find ways that would bring relief and lead to recovery. Ancient landmarks were swept away, the reestablished gold standards were abandoned, imports were almost throttled. The reparations problem was solved by abandoning payment, and the interallied debts were settled in the same way. . . .

The boom of the nineteen-twenties was the thirteenth—and the greatest—since Waterloo. The depression that followed was the fourteenth—and the deepest. In the second half of 1932 signs appeared to prompt the hope that the worst was over. Prices, production, volume of trade and employment began to rise, were checked by the American crisis early in 1933, and then resumed their ascent. The long depression, like a severe long war, left deep scars on the body politic and economic; but only an incorrigible optimist would assert that the sight of these scars will keep the business world from eagerly embracing its fourteenth boom or precipitating its fifteenth depression. . . .

²² H. Heaton, Economic History of Europe, Harper & Brothers, New York, 1936, pp. 652–655. Reprinted by permission of the publishers.