The roar is over

The dizzy roar of the 1920s was silenced before the decade was out. The Wall Street Crash of October 28th, 1929 wiped out the savings of a generation and was followed by a world economic depression on an unprecedented scale. World GDP fell an estimated 20 per cent, with a 28 per cent fall in the US. Unemployment rose to 22 per cent in the US and 17 per cent in Germany. Ironically, it was not until the second World War, with its demands for weapons and other manufactured goods, that many countries were able to climb out of the Depression.

This was doubly ironic, given that the first World War had set the stage for the Depression to occur. Post-war inflation was rampant, particularly in Germany. The Germans were also forced to borrow from the US to repay crippling war reparations to the French and the British, who in turn used the German payments to repay their own war debts to the US. This unwieldy cycle did nothing to foster world trade. After the Crash, America had to call back its foreign loans and cut down on imports. By 1932 all war payments were suspended by agreement.

During the years prior to the Crash, many Americans invested in the stock market. American industry was enjoying a short and somewhat illusory boom, and everyone wanted a share in the profits. The average price of stocks on Wall Street rose by 25 per cent in 1928 and by another 35 per cent the following year. People borrowed the money to buy shares, convinced their value would continue to rise. Wall Street was like a huge casino.

In the summer of 1929 some shareholders began to sell their shares, perhaps fearing the price rises couldn't go on (they were, after all, mere manipulations of the stock market, and did not correspond to increases in the supply of real goods or in world trade). In September prices began to fall. On October 24th ("Black Thursday") nearly 13 million were sold. Prices plummeted.

In the subsequent Crash, many became homeless, having lost their savings and their jobs. Shanty towns, dwelling places of the homeless unemployed, sprang up. There were queues for free bread and soup. There was no general system of unemployment assistance.

Banks that had lent too much went bankrupt. As shares were sold and loans withdrawn, companies went to the wall. Factories, without the means to buy materials or keep machinery going, laid off workers. Unemployment rose, as people didn't have the money to buy manufactured goods any more, so the companies that made such goods were forced to close.

Poorer, less developed countries suffered, because they needed to sell their sugar, coffee and cotton to Europe and America to pay for imported machinery and other industrial goods. Unable to sell as much as before, countries such as Cuba and Brazil were forced to slash prices and burn crops. Although Stalin made sure the world believed the Soviet economy was booming, it too was in poor health, with a 20 per cent decline in Soviet national income during the period of Stalin's first Five Year Plan (1928-1932).

The Depression paved the way for the success of fascism and dictatorships such as Hitler's in Germany. There, over five million Germans were unemployed, more than any other European country. People were disillusioned with democracy which they blamed for the economic crisis. They looked for simple and extreme solutions, such as blaming minorities for their hardship. After Hitler came to power in 1933, he abolished trade unions, sacked working women, created industrial labour camps and arms factories for the unemployed, and introduced compulsory military service in 1935. Industry was kept in private hands but the state controlled output. Unemployment was cut in half.

By 1932 US industry was producing half as much as it had been in the months before the Crash. In spite of Hoover setting up the Reconstruction Finance Corporation to lend money to banks and businesses, by July 1932, 13 million Americans were unemployed. He and US business leaders still adhered to the old notion that the government should not interfere too much with running the economy.

In November 1932, Hoover lost the presidency to the charismatic Democrat Franklin D. Roosevelt, who promised the American people a "new deal". During his first 100 days, he ended the banking crisis and set up agencies to relieve poverty and unemployment. Two years later, there were still 10 million unemployed, and in 1935 the passing of the Social Security Act set up a system of old age pensions and unemployment benefits (similar legislation was passed in Britain that year). In 1938 his government set a national minimum wage and a maximum working week of 44 hours.

The Depression, followed by the second World War, created a new sense of responsibility in American government for the well-being of its citizens. This was epitomised in the 1944 GI Bill of Rights, which guaranteed jobs, homes and education for returning soldiers. Western European democracies had already learned during the first World War that a government could plan its country's economic development. The experience of the Depression reinforced this switch from a laissez-faire free market economy to "democratic planning".