AP European History
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8.5 Global Economic Crisis: The Great Depression
Verified for the 2025 AP European History exam•Citation:MLA
The Great Depression, which began in 1929, was a global economic crisis that had significant political, economic, and social consequences across Europe. It was a direct result of several interrelated causes stemming from the aftermath of World War I, combined with weaknesses in international trade, monetary practices, and economic structures. The Depression undermined Western European democracies, leading to the rise of radical political movements and extremist leaders.
Causes of the Great Depression
World War I Debt and Reparations
- Post-WWI Debt: World War I left European nations with crippling debts. The war had been incredibly expensive, and countries relied on loans, particularly from the United States, to finance their military efforts. These loans were expected to be repaid after the war.
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German Reparations: The Treaty of Versailles imposed severe reparations on Germany, totaling 132 billion marks (approximately $33 billion). This placed a heavy burden on Germany’s economy and led to hyperinflation, particularly in the early 1920s, as the government printed more money to meet its obligations.
- The Dawes Plan: In 1924, the United States, under Charles Dawes, developed a plan to help Germany pay off its reparations. The plan involved loans from the US to Germany, which Germany would use to pay reparations to France and Britain, who would then pay their debts to the US. This circular arrangement helped stabilize Germany temporarily.
Stock Market Crash and Economic Weaknesses
- Stock Market Speculation: During the 1920s, a consumer-driven economy emerged in the United States. Many people invested in the stock market, often buying "on the margin"—paying only 10-20% of the price of the stocks and borrowing the rest. This practice increased market instability as investors were highly leveraged.
- The 1929 Stock Market Crash: In 1929, the stock market crashed, triggering a panic as stock prices plummeted. The result was a massive loss of wealth, leading to bank closures and the start of the Great Depression. The financial collapse in the US had immediate global effects, particularly in Europe, where economic activity came to a halt.
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Impact on European Economies: As the US economy contracted, the Dawes Plan collapsed, and the flow of American capital to Europe ceased. This caused an economic ripple effect across Europe, with nations experiencing massive unemployment, poverty, and social unrest.
Effects of the Great Depression in Europe
Political and Social Unrest
- Weakened Democracies: The economic instability fostered political discontent across Europe. Democratically elected governments struggled to deal with the economic challenges and could not provide effective solutions. This failure led to a rise in extremist movements, particularly on the far right and far left.
- Rise of Authoritarianism: In many countries, the Great Depression contributed to the rise of authoritarian regimes. In Italy, Benito Mussolini's fascist regime gained popularity, promising to restore national strength and order. Similarly, in Germany, Adolf Hitler’s Nazi Party gained support by exploiting public frustration and offering solutions to economic hardship.
- Nationalism and Anti-Interconnectedness: Countries became increasingly nationalistic, emphasizing economic self-sufficiency and rejecting the interconnectedness that had existed between Europe and the United States. This shift in political ideology exacerbated tensions between nations and weakened international cooperation.
Rise of Extremist Political Movements
- Fascism and Nazism: In countries like Italy and Germany, the economic instability created fertile ground for the rise of radical political ideologies. Fascist leaders promised to restore national pride and stability by rejecting democratic principles and instituting totalitarian regimes. Similarly, in Spain, Francisco Franco's nationalist movement gained traction during the economic crisis.
- Communism: In the Soviet Union, Joseph Stalin’s policies of rapid industrialization and collectivization were aimed at overcoming the economic devastation caused by the Depression, but these policies also led to significant human suffering.
New Economic Theories and Responses to the Crisis
As traditional economic policies failed to alleviate the effects of the Great Depression, new theories and approaches to economic management emerged.
Keynesian Economics
- John Maynard Keynes argued that the government should intervene in the economy to maintain stability. He advocated for government spending to stimulate demand and reduce unemployment, challenging classical economic theories that emphasized limited government interference.
Keynes’s ideas gained widespread influence in the 1930s and were adopted by many countries, including the United States under President Franklin D. Roosevelt’s New Deal. These policies aimed to provide relief, recovery, and reform through public works, welfare programs, and financial regulation.
Cooperative Social Action in Scandinavia
- Scandinavian Model: In Denmark, Sweden, and Norway, cooperative social action became a prominent response to the Depression. This model emphasized cooperation between the government, employers, and workers to achieve social and economic equality.
- Social Welfare Programs: Scandinavian countries implemented social welfare policies that included unemployment insurance, social security, and healthcare, helping to reduce poverty and promote economic mobility.
Popular Front in France
- French Left-Wing Coalition: The Popular Front, a coalition of left-wing political parties in France, advocated for economic and social reforms to address the Depression’s effects. Led by Léon Blum, the Popular Front implemented several key policies, such as the 40-hour workweek and paid vacations for workers.
- Nationalization of Industries: The French government took control of several key industries, including the arms industry, to ensure national stability. Despite these reforms, the French economy continued to struggle with high unemployment and political instability.
Long-term Impact of the Great Depression
- Weakened European Economies: The economic disruptions caused by the Great Depression led to long-term instability in Europe. Countries were unable to recover fully until World War II, when wartime production stimulated industrial output and employment.
- Transformation of Political Landscapes: The rise of fascism, communism, and authoritarianism marked a permanent shift in the political landscape of Europe. The weaknesses of democratic governments paved the way for more centralized, dictatorial regimes, which would dominate much of Europe in the years leading to World War II.
- Global Impact: The Great Depression reshaped the global economic order, shifting power away from Europe and towards the United States. The failure of European economies and the inability to cooperate effectively during the Depression set the stage for future global conflicts and realignments.
In conclusion, the Great Depression was a pivotal moment in European history, not only undermining existing political structures but also catalyzing the rise of radical political movements and the rethinking of economic policies. The long-term effects of the crisis would reverberate throughout the 20th century, ultimately leading to another world war.
Key Terms to Review (20)
Authoritarian Leaders: Authoritarian leaders are political figures who exercise significant control over a state, often prioritizing state power and authority over individual freedoms and democratic processes. These leaders typically maintain power through centralized decision-making, repression of dissent, and often use propaganda to promote their agenda. During global economic crises, authoritarian leaders can gain support by promising stability and order, which can appeal to populations facing economic hardship.
Buying on the Margin: Buying on the margin refers to the practice of purchasing stocks by paying only a fraction of the total price, while borrowing the remainder from a broker. This method allows investors to leverage their investment, potentially leading to higher profits but also greater risks, especially during periods of economic instability such as a global economic crisis.
Charles Dawes: Charles Dawes was an American banker and politician who is best known for his role in the Dawes Plan, which aimed to resolve the reparations crisis in post-World War I Germany. The plan facilitated loans to Germany, restructured its reparations payments, and aimed to stabilize the German economy during a time of severe inflation and economic turmoil, highlighting the international effort to address the consequences of the global economic crisis.
Classical Economics: Classical Economics is an economic theory that emerged in the late 18th and early 19th centuries, emphasizing free markets, self-regulation, and the importance of supply and demand. This approach laid the foundation for modern economic thought and significantly influenced various aspects of social and political ideologies during periods of change.
Consumer Economy: A consumer economy is an economic system that relies heavily on the consumption of goods and services by individuals. It emphasizes the importance of consumer spending as a driving force for economic growth and development, often leading to increased production, innovation, and advertising. This concept gained prominence in various historical contexts, where societal values shifted towards materialism and consumerism.
Cooperative Social Action in Scandinavia: Cooperative Social Action in Scandinavia refers to a collaborative approach to social welfare and economic resilience that emerged in Nordic countries, characterized by a strong emphasis on community involvement and collective responsibility. This model became particularly significant during times of economic hardship, such as the Global Economic Crisis, as it fostered social safety nets and encouraged civic engagement to mitigate the adverse effects of financial downturns.
Dawes Plan: The Dawes Plan was an economic plan established in 1924 to help Germany stabilize its economy after World War I by restructuring its reparations payments. The plan aimed to ease the burden of reparations on Germany by providing loans from the United States, allowing Germany to restart its economy, and promoting economic recovery in Europe. This plan marked a significant attempt at international cooperation during a period of global economic turmoil.
French Communist Party: The French Communist Party (PCF) is a political party in France that was founded in 1920 and has been a significant player in the French left-wing movement. It emerged from the socialist movement and played a critical role in French politics, especially during the global economic crisis when it sought to address the social and economic issues faced by workers and the unemployed.
German Marks: German Marks were the official currency of Germany from 1871 until the introduction of the Euro in 2002. The currency played a significant role in the economic landscape of Germany, particularly during the Weimar Republic when hyperinflation drastically devalued the Mark, leading to severe economic consequences and social unrest.
Great Depression: The Great Depression was a severe worldwide economic downturn that began in 1929 and lasted until the late 1930s, characterized by massive unemployment, plummeting stock markets, and widespread poverty. Its impact reshaped economies and political landscapes, setting the stage for conflicts and shifts in global power dynamics.
Heterodox Economists: Heterodox economists are those who challenge mainstream economic theories and propose alternative perspectives on economic issues. They often criticize the assumptions and methodologies of neoclassical economics, advocating for a more pluralistic approach that incorporates diverse economic theories and practices. Their ideas gained traction during the global economic crisis, as traditional economic models struggled to explain the complexities of the financial collapse.
Hyperinflation: Hyperinflation is an extreme and rapid increase in prices, often exceeding 50% per month, leading to a collapse in the value of currency. It typically occurs when there is a significant increase in the money supply not supported by economic growth, often due to government policies or war reparations. This drastic devaluation causes severe economic instability, resulting in a loss of public confidence in the currency and creating challenges for everyday transactions.
John Maynard Keynes: John Maynard Keynes was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics and economic policies of governments. He is best known for his advocacy of government intervention to stabilize economies during downturns, which became especially significant during the Great Depression and influenced policies in the aftermath of World War I, as well as during the Versailles Conference where reparations were debated.
Keynesianism: Keynesianism is an economic theory based on the ideas of John Maynard Keynes, which suggests that active government intervention is necessary to manage economic cycles and mitigate the effects of recessions. This theory advocates for increased public spending and lower taxes during economic downturns to stimulate demand and promote recovery, emphasizing the role of government in stabilizing the economy.
New Economic Theories: New Economic Theories refer to a set of innovative ideas that emerged in response to the global economic crises, focusing on redefining how economies function and emphasizing the role of government intervention, social welfare, and sustainable practices. These theories seek to address the flaws of traditional economic models, particularly during times of financial instability, advocating for policies that prioritize social equity and environmental sustainability over mere profit maximization.
Popular Front Policies in France: The Popular Front Policies in France were a series of social and economic reforms implemented during the mid-1930s by a coalition of leftist parties, including socialists and communists, aimed at addressing the economic crisis and improving the conditions of the working class. These policies emerged as a response to the global economic crisis, aiming to combat unemployment, promote labor rights, and stimulate economic recovery through government intervention.
Rise of Extremism: The Rise of Extremism refers to the increasing support for radical political ideologies and movements that reject mainstream democratic values, often fueled by social, economic, and political unrest. This phenomenon is typically characterized by a surge in nationalistic sentiments, anti-establishment attitudes, and the emergence of fringe political groups that exploit crises to gain popularity and influence.
Treaty of Versailles: The Treaty of Versailles was a peace agreement signed in 1919 that officially ended World War I, imposing heavy reparations and territorial losses on Germany. It aimed to establish lasting peace but ultimately sowed the seeds for future conflicts, heavily influencing European politics and international relations in the following decades.
US stock market crash: The US stock market crash refers to a significant decline in stock prices on the New York Stock Exchange, most famously occurring in late October 1929, which marked the beginning of the Great Depression. This event created widespread economic turmoil and uncertainty, leading to a global economic crisis and affecting millions of lives worldwide.
War of Attrition: A war of attrition is a military strategy aimed at wearing down an opponent to the point of collapse through continuous losses in personnel and material. This approach often leads to prolonged conflict, where each side seeks to inflict maximum damage on the other while sustaining their own capabilities. In the context of a global economic crisis, this strategy reflects the broader struggle nations face when dealing with resource scarcity and the fight for survival amidst overwhelming challenges.