The Great Depression

Great economists, like great politicians, can sometimes make mistakes. The opening quote is not included to mock an undoubtedly outstanding figure in economics theory, Joseph Schumpeter. It more intends to show that understanding an important historical event while it is happening, even in the most general terms, is difficult. The year the Great Depression broke out, 1929, is among the most important in modern history.

“Between January 1930 and January 1933 there was a sixty-per-cent drop in the value of world trade.”² The economic development of international relationships, which were being rebuilt after World War One, were once again interrupted—the world was being divided into zones of various currencies (like the pound or dollar), with walls of tariffs. Unemployment struck various countries unequally. Less developed countries like Spain and Portugal had grappled for years with structural unemployment in the countryside, but because of their relatively limited connections to the international circulation of goods, the jobless rate rose comparatively little in 1929.³ Madrid registered 667,000 unemployed in 1934,⁴ while in Portugal there were 39,000 in 1931 (translating to eight and six per cent unemployment, respectively).

In industrialized Germany there were over 6,100,000 people with no source of income in February 1932.⁵ So, compared to Spain, there was nearly ten times the unemployment in a population about 2.5 times larger.

In Europe at the time, there was no shortage of social services—yet they were relatively limited by today’s standards, and the scale of what was needed meant that potential funds were quickly exhausted.

In the latter half of the 1930s, the Great Depression slowly began subsiding—yet this was relative, with moments of regression. It was only World War Two and its mobilization of people and resources that finally eliminated the specter of economic collapse, albeit at a horrific price.⁶

To this day, economics historians discuss what importance to assign the various events leading up to 1929. They point to structural factors, such as the appearance of new technologies, including those that came with electricity, whose investments could not be returned, as the market was not sufficiently developed in the 1920s.⁷ Seeing the growing bubble, the American Federal Reserve decided to calm the heated emotions by raising interest rates. This dashed investors’ hopes to turn a quick profit, bursting the bubble. And the rest of the world, which was tied to the USA through the credit system, followed in their footsteps.⁸ What was decisive, however? The decisions of the governments and central banks, the emotions of investors and consumers, or the very shape of the capitalist system?

Answering these questions remains essential today—whole generations of decision-makers were brought up reflecting upon the Great Depression, including those who were in charge in 2008.⁹ In the 1930s, your perspective could depend upon whether you were for democracy, or for some variant of totalitarianism.