7.4D: Economy in the Interwar Period

cash (2)

AP Theme

Economic Systems

Learning Objective 7D

Explain how different governments responded to economic crisis after 1900.

Historical Development 1

Following World War I and the onset of the Great Depression, governments began to take a more active role in economic life.

Historical Development 2

In the Soviet Union, the government controlled the national economy through the Five Year Plans, often implementing repressive policies, with negative repercussions for the population.


The end of World War I led to profound economic changes worldwide. In the years after the war, industrial economies entered periods of recession (negative economic growth). Major economies shifted from mass production to win total war back to more consumer-based economies. By 1922, the economies of the allied powers had begun to expand again and entered a decade of wide-scale economic growth. Germany and the new countries formed out of the Austro-Hungarian Empire entered a decade of financial hardship.

The Great Depression

Following WWI, the economies of the victorious nations experienced economic expansion throughout the 1920s. The American economy led this expansion with a rapidly expanding GDP, low unemployment, and rising wages. Historians refer to this as “the roaring twenties” for the decade’s high economic growth and growing prosperity.

Black Tuesday: The economic growth ended when in October 1929, the American economic engine came to a sudden halt when the American stock market crashed. Known as  “Black Tuesday,” between October 28 and 29, 1929, American stocks lost nearly 25% of their value. This stock market crash set off a chain of events that filtered through the world economy and lasted for more than a decade. The Great Depression only ended as the world began ramping up production and increasing government spending to fight WWII.

Causes of the Great Depression

The effects of WWI placed all the world’s economic eggs in the United States basket. While the American economy was roaring in the mid to late 1920s, global economic growth continued. However, when the American economy collapsed, that collapse spread throughout much of the global financial system. Explore both the American and international causes of depression below.

What led to the great depression in the United States?

Historians believe the following led to the great depression in the Unites Stares. 

Agriculture: Overproduction was also a problem in agriculture. During the 1920s, farmers around the world increased productive capacity. As Europe recovered from the war, their agriculture production increased, and they no longer needed to import as much from the United States. Many farmers had taken out bank loans during the 1920s to keep their farms in business and expand production. As more farm produce became available globally, agriculture prices declined, and American farmers could not repay their loans and lost their farms to bankruptcy.

Overproduction: During the 1920s, American factories produced over half the world’s goods. Throughout the 1920s, improvements in technology and manufacturing processes resulted in factories producing goods faster than consumers could purchase the goods. As warehouse stocks increased, manufacturers decreased production of new products leading to lower profits for companies that provided raw materials. Less production increased job losses and led to rising levels of unemployment.

Unequal wealth: American society in the 1920s was incredibly unequal. In 1929, 60 percent of American families subsisted on less than $2000 a year. As a result, there were not enough consumers who could afford to purchase the number of goods factories were producing.

Stock collapse: The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash in 1929. It started in September and ended late in October when share prices collapsed on the New York Stock Exchange. Scholars generally attribute the stock crash to stock prices that had become too inflated (high) and not worth their value due to economic problems. As financial issues started to surface in  1929, investors began to withdraw money from the market, which caused stock prices to collapse. Investors lost billions of dollars when the market collapsed.

What led to the Great Depression in Europe

The Treaty of Versaille and war debt: The Versailles Peace Treaty severely damaged the economies of Germany and new countries created out of the old Austro-Hungarian Empire. The treaty stipulated these countries take full responsibility for the war. Germany became the most indebted country in the world. Debts prevented new German and East European governments from stabilizing their economies and buying goods on global markets. Without a stable economy, German business also could not rebuild and prosper.

Trade barriers: The Depression was made worse by tariffs and other trade barriers. The goal of trade barriers such as tariffs on foreign goods was to raise the cost of foreign goods and lower the cost of domestically produced goods. In the United States, the Smoot-Hawley Tariff Act of 1930 raised import tariffs to protect American business. The act placed import taxes on agriculture and many other manufactured goods sectors. As America’s largest trading partner, Smoot-Hawley affected European nations most. Other countries responded with their own trade protections that placed trade tariffs on American goods. While this act of Congress did not cause the depression, it furthered decreased global trade and increased the damaging impacts of the depression.

Effects of the Great Depression

The effects of the great depression were global.

Western industrial nations: In the western industrialized nations, unemployment increased, banks collapsed and closed, and many stocks became worthless. The collapse spread to Europe as American businesses and banks began withdrawing money from European economies and bringing it back to the United States. American banks also demanded immediate repayment of loans the banks had previously loaned to European nations and businesses. The withdrawal of American capital hit Germany especially hard. The post-WWI Weimar government had no choice but to cut government spending, further exacerbating the suffering of the German people. To try and support its farmers and businesses, the United States, followed by other nations, began passing legislation to erect trade barriers by charging increased tariffs, resulting in a further drop in overall global trade.

Asian nations: Asian countries suffered as western nations imported less of their products as demands for products like silk and porcelains decreased. As an industrial nation, the crisis in Japan was most visible. Between 1930-1931, Japan’s economy shrank by 10.3%. Outside of Japan, most Asian economies relied on agriculture. There was widespread economic distress as agriculture prices dropped and small farmers could not pay their debts.

Export economies: Export economies in Africa and Latin America suffered as industrial nations stopped importing as many raw materials from their export economies. As prices for their raw materials and commodities decreased, they could not import manufactured goods from the industrial nations. At the same time, unemployment in export economies increased.

Responses to the Great Depression

Governments around the world developed a variety of responses to the Great Depression. These responses increased the role of government in managing, structuring, and promoting economic growth. Some governments also began passing legislation promoting social welfare and raising living standards.

Major change: The economic responses to the Great Depression were a significant expansion of the governments’ role within the economy. Expanded economic influence over the economy resulted in more power governments that grew in size. 

The fascist corporate economy

Several countries in Europe turned to Fascist leaders and their promises of national rebirth in the 1930s. Fascist governments in Italy and Germany, and to a smaller extent Spain, went about building Fascist corporatist economies where the state-managed production and manufacturing with the main economic goal being to strengthen the state, especially militarily. Private industry cartels owned the factories, and businesses carried out the economic plans of fascist leaders.

Not communism: Fascist corporate economies are different than communist economics in that the state does not necessarily own the means of production: land, labor, and capital. These production inputs often remained in private hands. Those that run these businesses became incredibly wealthy by working with the state to execute fascist economic planning.

The American New Deal programs

When the Great Depression broke out in 1929, President Herbert Hoover did very little to improve those suffering from the depression. He argued that it was not the government’s job to manipulate the economy to relieve economic suffering. In the election of 1932, Franklin Roosevelt beat Hoover on a platform promising to use the government to revive the economy and alleviate the suffering of the poor and unemployed through a series of policies he called the New Deal.

  • The New Deal program was a vast expansion of government power into national economics and social welfare.
  • The idea behind the New Deal was that the government could revive the economy through massive levels of government spending.
  • The United States Congress passed several important New Deal policies that stabilized the financial system and provided relief to farmers and jobs to the unemployed by building large national infrastructure projects.

Actions and outcomes taken by states

States took a variety of actions in response to the depression.