The Great Depression Goes Global

By the late 1920s the world's economies were tightly linked. American banks had lent heavily to Germany, which used that money partly to pay war reparations to Britain and France, who used payments to repay war debts to the United States. Farmers in Brazil and Argentina depended on selling coffee and beef to industrial economies. When the New York stock market crashed in October 1929, American banks called in loans and investors stopped lending abroad. Germany's economy buckled first, then the credit freeze spread outward along every trade and lending route, so a Brazilian coffee farmer lost his buyer and a German factory worker lost his job for the same underlying reason.

Bank failures turned a crash into a decade-long depression because banks are the plumbing of an economy. When depositors panicked and pulled out savings, banks collapsed, destroying the credit that businesses needed to operate and pay workers. Shrinking credit meant shrinking production, which meant layoffs, which meant less spending, a spiral that fed itself. World trade fell by roughly two-thirds between 1929 and 1933 as country after country stopped buying from its neighbors. Governments made this worse by raising tariffs to protect home industries, but every major economy did the same thing at once, so global trade simply collapsed further instead of protecting anyone.

This sets up everything else in the unit. Mass unemployment, sometimes a quarter of the workforce, convinced many people that democratic governments and free markets had failed, opening the door to the authoritarian, state-controlled economies of the 1930s.