Chapter 5

Global Economic Crisis and the Restructuring of the Social and Political Order
By the mid-1920s, most of the world seemed to have recovered from World War I. In the United States, prosperity and normalcy appeared to have returned for good. On the New York Stock Exchange, stocks were climbing to previously unimagined heights. The European states ravaged by the war also made considerable economic progress. In 1925, for instance, Britain returned to the gold standard, which at that time was taken as a sign of financial reliability. The Bolshevik Revolution had not spread, and it seemed possible to view communism as a Russian, rather than a world, problem.
In truth, however, deep faults ran through the international economy. World War I had catalyzed great increases in industrial and agricultural capacity throughout the world. After the war, demand for both industrial and agricultural goods collapsed, creating a persistent problem of overproduction. In addition, the major European powers had gone into great debt during the war. To make payments on their debts to U.S. banks, the British and French governments continued to extract reparations payments from Germany. Germany, in turn, could only make these payments by borrowing from U.S. banks. In the United States, mass production had surged ahead, but unequal distribution of wealth meant that consumer demand could not keep pace with the growth in production. Personal credit was also badly overextended.
The collapse of the U.S. stock market in October 1929 created a chain reaction of economic contraction that plunged the world into depression. As U.S. banks called in their debts from Europe, the European financial system collapsed.
Business troubles quickly crossed all the boundaries and oceans of the world. London banks, which in earlier times had been able to bring financial relief to lenders, were now unable to meet the challenge of worldwide disaster. The United States, the only other nation in the world with the resources to play this role, had no intention of doing so. As the industrialized nations sank into depression, so too did the colonial and semi-colonial economies that they dominated.
In Britain and France, the traditional wisdom of economic liberalism was to spark a stalled economy by allowing prices, wages, and government spending to drop. These cures aggravated the illness. As prices and consumer demand fell even further, businesses now found it all the more difficult to recover. In some countries, leaders experimented with non-revolutionary socialism, as a middle road between capitalism and communism. Although communists remained committed to violent revolution, socialists in Britain, France, Weimar Germany, and other European countries attempted to implement socialist policy measures (such as unemployment insurance and the establishment of public housing) within the framework of parliamentary democracy.
In the United States, President Franklin Roosevelt proposed another alternative to Marxism and traditional liberalism with his New Deal. Roosevelt created a wide array of federal agencies to alleviate the Depression, such as the Securities and Exchange Commission (to regulate stock transactions and prevent another Wall Street crash) and the Civilian Conservation Commission, which hired the unemployed on various public works projects. In so doing, he created a new attitude in the United States. From now on, government would play an increased role in the lives of ordinary people.
In the process, the word “liberal” itself came to take on a new meaning in the American context. American liberals, unlike most of their European counterparts, believed that the government should take an active role in improving the life of all citizens. Roosevelt’s policies of federal activism and deficit spending became permanent features of American politics.
Although Britain, France, and the United States took different paths in creating the guarantor state, all of them accepted the principle, at least for a time, that government should intervene in economic matters on a large scale. This principle had been widely adopted during World War I, but many had hoped that it was only a temporary necessity. By the end of the 1930s, however, the guarantor state was a stable feature of European and American life.
Global interrelatedness. The structural weaknesses of the world economy and of various national economies were hidden during the deceptive prosperity of the 1920s. The Depression and the subsequent erection of national trade barriers negatively impacted many colonial and semi-colonial societies in the periphery.
Identity and difference. A common response to the Depression was economic nationalism (in the United States, the Hawley-Smoot Tariff Act of 1930). The periphery discovered just how dependent it was on the core economy.
Rise of the mass society. The creation of the guarantor state throughout Europe and in the United States (the New Deal) was intended to deal with the effects of the Depression on mass society.
Technology versus nature. The formation of the Dust Bowl and the resulting economic and environmental disaster.

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