(Chapter 26) The Great Depression

Popular Front

A short-lived New Deal-inspired alliance in France led by Léon Blum that encouraged the union movement and launched a far-reaching program of social reform. The French had lost the underlying unity that had made government instability bearable before 1914, however. Fascist organizations agitated against parliamentary democracy and turned to Mussolini's Italy and Hitler's Germany for inspiration. In February 1934 French Fascists rioted and threatened to take over the republic. At the same time, the Communist Party and many workers opposed to the existing system looked to Stalin's Russia for guidance. The vital center of moderate republicanism was weakened by attacks from both sides. Frightened by the growing strength of the Fascists at home and abroad, the Communists, Socialists, and Radicals formed an alliance — the Popular Front — for the national elections of May 1936. Their clear victory reflected the trend toward polarization. The number of Communists in the parliament jumped dramatically from 10 to 72, while the Socialists, led by Léon Blum, became the strongest party in France, with 146 seats. The Radicals — who were actually quite moderate — slipped badly, and the conservatives lost ground to the far right. In the next few months, Blum's Popular Front government made the first and only real attempt to deal with the social and economic problems of the 1930s in France. Inspired by Roosevelt's New Deal, it encouraged the union movement and launched a far-reaching program of social reform, complete with paid vacations and a forty-hour workweek. Supported by workers and the lower middle class, these measures were quickly sabotaged by rapid inflation and accusations of revolution from Fascists and frightened conservatives. Wealthy people sneaked their money out of the country, labor unrest grew, and France entered a severe financial crisis. Blum was forced to announce a "breathing spell" in social reform. Political dissension in France was encouraged by the Spanish Civil War (1936-1939), during which authoritarian Fascist rebels overthrew the democratically elected republican government. French Communists demanded that the government support the Spanish republicans, while many French conservatives would gladly have joined Hitler and Mussolini in aiding the Spanish Fascists. Extremism grew, and France itself was within sight of civil war. Blum was forced to resign in June 1937, and the Popular Front quickly collapsed. An anxious and divided France drifted aimlessly once again, preoccupied by Hitler and German rearmament.

The Great Depression

A worldwide economic depression from 1929 through 1939, unique in its severity and duration and with slow and uneven recovery. This fragile optimism was short-lived. Beginning in 1929, a massive economic downturn struck the entire world with ever-greater intensity. Recovery was slow and uneven, and contemporaries labeled the economic crisis the Great Depression, to emphasize its severity and duration. Only with the Second World War did the depression disappear in much of the world. The social and political consequences of the Great Depression were enormous. Mass unemployment and failing farms made insecurity and unemployment a reality for millions of people. In Europe and the United States, governments instituted a variety of social welfare programs intended to manage the crisis. Yet the prolonged economic collapse shattered the fragile political stability of the mid-1920s and encouraged the growth of extremists on both ends of the political spectrum. Democratic government faltered, and authoritarian Fascist parties gained power across Europe. Though economic activity was already declining moderately in many countries by early 1929, the crash of the stock market in the United States in October of that year initiated a worldwide crisis. The American economy had prospered in the late 1920s, but there were large inequalities in income and a serious imbalance between actual business investment and stock market speculation. Thus net investment — in factories, farms, equipment, and the like — actually fell from $3.5 billion in 1925 to $3.2 billion in 1929. In the same years, as money flooded into stocks, the value of shares traded on the exchanges soared from $27 billion to $87 billion. Such inflated prices should have raised serious concerns about economic solvency, but even experts failed to predict the looming collapse. This stock market boom was built on borrowed money. Many wealthy investors, speculators, and people of modest means bought stocks by paying only a small fraction of the total purchase price and borrowing the remainder from their stockbrokers. Such buying "on margin" was extremely dangerous. When prices started falling in 1929, the hard-pressed margin buyers either had to put up more money, which was often impossible, or sell their shares to pay off their brokers. Thousands of people started selling all at once. The result was a financial panic. Countless investors and speculators were wiped out in a matter of days or weeks. The consequences were swift and severe. Stripped of wealth and confidence, battered investors and their fellow citizens started buying fewer goods. Prices fell, production began to slow down, and unemployment began to rise. Soon the entire American economy was caught in a spiraling decline. The financial panic triggered an international financial crisis. Throughout the 1920s American bankers and investors had lent large amounts of capital to many countries. Once the panic broke, U.S. bankers began recalling the loans they had made to foreign businesses. Gold reserves began to flow rapidly out of European countries, particularly Germany and Austria, toward the United States. It became very hard for European businesses to borrow money, and panicky Europeans began to withdraw their savings from banks. These banking problems eventually led to the crash of the largest bank in Austria in 1931 and then to general financial chaos. The recall of loans by American bankers also accelerated a collapse in world prices when businesses dumped industrial goods and agricultural commodities in a frantic attempt to get cash to pay their loans. The financial crisis led to a general crisis of production: between 1929 and 1933 world output of goods fell by an estimated 38 percent. As this happened, each country turned inward and tried to manage the crisis alone. In 1931, for example, Britain went off the gold standard, refusing to convert banknotes into gold, and reduced the value of its money. Britain's goal was to make its goods cheaper and therefore more salable in the world market. But more than twenty other nations, including the United States in 1934, also went off the gold standard, so few countries gained a real advantage from this step — though Britain was an exception. Similarly, country after country followed the example of the United States when in 1930 it raised protective tariffs to their highest levels ever and tried to seal off shrinking national markets for domestic producers. Such actions further limited international trade. Within this context of fragmented and destructive economic nationalism, a recovery did not begin until 1933 and it was a halting one at that. Although opinions differ, two factors probably best explain the relentless slide to the bottom from 1929 to early 1933. First, the international economy lacked leadership able to maintain stability when the crisis came. Neither Britain nor the United States — the world's economic leaders at the time — successfully stabilized the international economic system in 1929. The American decisions to cut back on international lending and erect high tariffs, as we have seen, had damaging ripple effects. The second factor was poor national economic policy in almost every country. Governments generally cut their budgets when they should have raised spending and accepted large deficits in order to stimulate their economies. After World War II, this "counter-cyclical policy," advocated by John Maynard Keynes, became a well-established weapon against downturn and depression. But in the 1930s Keynes's prescription was generally regarded with horror by orthodox economists who believed balanced budgets to be the key to economic growth. The lack of large-scale government spending contributed to the rise of mass unemployment. As the financial crisis led to production cuts, workers lost their jobs and had little money to buy goods. In Britain, where unemployment had averaged 12 percent in the 1920s, it averaged more than 18 percent between 1930 and 1935. Far worse was the case of Germany, where in 1932 one in every three workers was jobless. In the United States, unemployment had averaged only 5 percent in the 1920s. In 1933 it soared to about 30 percent: almost 13 million people were out of work. Mass unemployment created great social problems. Poverty increased dramatically, although in most countries unemployed workers generally received some kind of meager unemployment benefits or public aid that prevented starvation. Millions of people lost their spirit, condemned to an apparently hopeless search for work. Homes and ways of life were disrupted in millions of personal tragedies. Young people postponed marriages, and birthrates fell sharply. There was an increase in suicide and mental illness. Poverty or the threat of poverty became a grinding reality.

Scandanavian Response

Of all the Western democracies, the Scandinavian countries under Social Democratic leadership responded most successfully to the challenge of the Great Depression. Having grown steadily in the late nineteenth century, the Social Democrats became the largest political party in Sweden and then in Norway after the First World War. In the 1920s they passed important social reform legislation that benefited both peasants and workers and developed a unique kind of socialism. Flexible and nonrevolutionary, this Scandinavian socialism grew out of a strong tradition of cooperative community action. Even before 1900 Scandinavian agricultural cooperatives had shown how individual peasant families could join together for everyone's benefit. Labor leaders and capitalists were also inclined to cooperate with one another. When the economic crisis struck in 1929, socialist governments in Scandinavia built on this pattern of cooperative social action. Sweden in particular pioneered in the use of large-scale deficits to finance public works and thereby maintain production and employment. In ways that paralleled some aspects of Roosevelt's New Deal, Scandinavian governments also increased such social welfare benefits as old-age pensions, unemployment insurance, subsidized housing, and maternity allowances. All this spending required a large bureaucracy and high taxes, first on the rich and then on practically everyone. Yet both private and cooperative enterprise thrived, as did democracy. Some observers saw Scandinavia's welfare socialism as an appealing middle way between sick capitalism and cruel communism or fascism.

The New Deal

President Herbert Hoover (r. 1929-1933) and his administration initially reacted to the stock market crash and economic decline with dogged optimism but limited action. When the full force of the financial crisis struck Europe in the summer of 1931 and boomeranged back to the United States, people's worst fears became reality. Banks failed; unemployment soared. Between 1929 and 1932 industrial production fell by about 50 percent. In these dire circumstances, Franklin Delano Roosevelt (r. 1933-1945) won a landslide presidential victory in 1932 with grand but vague promises of a "New Deal for the forgotten man." Roosevelt's goal was to reform capitalism in order to preserve it. Though Roosevelt rejected socialism and government ownership of industry, he advocated forceful government intervention in the economy and instituted a broad range of government-supported social programs designed to stimulate the economy and provide jobs. In the United States, innovative federal programs promoted agricultural recovery, a top priority. Almost half of the American population still lived in rural areas, and the depression hit farmers hard. Roosevelt took the United States off the gold standard and devalued the dollar in an effort to raise American prices and rescue farmers. The Agricultural Adjustment Act of 1933 also aimed at raising prices — and thus farm income — by limiting agricultural production. These measures worked for a while, and in 1936 farmers repaid Roosevelt with overwhelming support in his re-election campaign. The most ambitious attempt to control and plan the economy was the National Recovery Administration (NRA). Intended to reduce competition among industries by setting minimum prices and wages, the NRA broke with the cherished American tradition of free competition. Though participation was voluntary, the NRA aroused conflicts among business people, consumers, and bureaucrats and never worked well. The program was abandoned when declared unconstitutional by the Supreme Court in 1935. Roosevelt and his advisers then attacked the key problem of mass unemployment. The federal government accepted the responsibility of employing as many people as financially possible. New agencies like the Works Progress Administration (WPA), set up in 1935, were created to undertake a vast range of projects. One-fifth of the entire U.S. labor force worked for the WPA at some point in the 1930s, constructing public buildings, bridges, and highways. The WPA was enormously popular, and the opportunity of taking a government job helped check the threat of social revolution in the United States. In 1935 the U.S. government also established a national social security system with old-age pensions and unemployment benefits. The National Labor Relations Act of 1935 gave union organizers the green light by declaring collective bargaining to be the policy of the United States. Union membership more than doubled from 4 million in 1935 to 9 million in 1940. In general, between 1935 and 1938 government rulings and social reforms chipped away at the privileges of the wealthy and tried to help ordinary people. Programs like the WPA were part of the New Deal's fundamental commitment to use the federal government to provide relief welfare for all Americans. This commitment marked a profound shift from the traditional stress on family support and community responsibility. Embraced by a large majority in the 1930s, this shift in attitudes proved to be one of the New Deal's most enduring legacies. Despite undeniable accomplishments in social reform, the New Deal was only partly successful in responding to the Great Depression. At the height of the recovery in May 1937, 7 million workers were still unemployed — better than the high of about 13 million in 1933 but way beyond the numbers from the 1920s. The economic situation then worsened seriously in the recession of 1937 and 1938, and unemployment had risen to a staggering 10 million when war broke out in Europe in September 1939. The New Deal never pulled the United States out of the depression; it took the Second World War to do that.