The Great Depression in Europe: Here’s What Happened

The Great Depression may have been triggered by a stock market crash in America, but it quickly spread overseas. What conditions in Europe triggered a deep economic depression?

Apr 8, 2024By Owen Rust, MA Economics in progress w/ MPA

great depression europe what happened


Although it began in the United States, the Great Depression spread around the world thanks to the interconnected nature of finance and trade. Europe was still recovering economically from World War I, and Germany had experienced hyperinflation in the 1920s due to printing currency. When American creditors attempted to call loans made to Europe in order to stave off their own collapse, they worsened the economic situation. After American politicians raised tariffs to try and generate revenue from imports, European nations responded in kind. The wave of higher tariffs worsened the Depression worldwide. Ultimately, the Great Depression in Europe had tremendous ramifications as it influenced the rise of fascism and the start of World War II.


Setting the Stage: Post-World War I Chaos

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Civil unrest in Germany in late 1918 and 1919 immediately after the end of World War I. Source: Imperial War Museums (UK)


In high school history classes, the Great Depression is typically portrayed as the simple and direct result of the US stock market crash of 1929. However, the actual cause of the severe economic recession is more complicated. Most individuals did not own many shares of stock and thus were relatively unaffected by the crash itself. However, underlying economic and business conditions turned the stock market crash into bankruptcies, panics, bank runs, and a swift reduction in production and trade.


In Europe, underlying economic conditions were weaker than in the United States due to the ravages of World War I, which had ended a dozen years earlier. Germany suffered the most as the loser of the war, facing both economic strife and political chaos. France also struggled, as a substantial portion of its territory had been destroyed by four and half years of warfare. Britain faced an economic slump due to the vast amounts of money expended on the war effort. The Bolshevik Revolution in Russia threatened to spread to Western Europe as high unemployment and shortages of essential goods raged. All this economic strife was not fully healed when the Depression struck, making it more severe than it otherwise would have been.


Setting the Stage: War Debts

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A newspaper political cartoon criticizing the United States for demanding repayment of World War I debts by fellow allies. Source: University of Massachusetts Amherst


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Allied nations like Britain and France emerged more financially intact from the war than did Germany, but this financial safety net was largely provided by wartime loans from the United States. During the war, billions were loaned by American bankers, mostly to the Allies (prior to America’s entry into the war on the side of the Allies). By the end of the war, seventeen countries had borrowed money from the United States, and the status of repayment quickly became controversial. An economically devastated Germany quickly defaulted on its war reparations payments, which had been inflicted on it by the Treaty of Versailles. Under the Dawes Plan of 1924, Germany’s reparations payments were reduced in exchange for foreign oversight of its economic policies.


In addition to having to repay the United States, European nations struggled to secure foreign loans to help rebuild. The political chaos in the aftermath of World War I, akin to the Bolshevik Revolution in Russia, made many Americans feel that loans to Europe were too risky. Attempts by European governments to get private loans from American banks could be denied by the US government over political disputes. For example, when France refused to use German reparation income to repay the US for the costs of its temporary occupation duties in Germany, the State Department refused to allow a $100,000,000 loan from the J.P. Morgan & Company Bank to France.


1920s Hyperinflation in Germany

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A photograph of children in Germany using nearly worthless paper money for play during the hyperinflation of the 1920s. Source: American Institute for Economic Research (AIER)


The final precursor to the Great Depression in Europe was hyperinflation in Germany. When the war ended, so did wartime price controls that had relatively limited price increases. Then, to make matters worse, the new government decided to print additional currency to pay off Germany’s war reparations. Inflation rose to levels unprecedented in history, with prices for common goods and services doubling within days. Germans would have to rush to buy goods as soon as they were paid, as waiting even a few days would severely diminish their purchasing power. By November 1923, violence and looting were erupting in major cities.


Fortunately, Germany got a hand in inflation by creating a new currency backed by gold: the Reichsmark. Unfortunately, the political and social damage was already done – many Germans now distrusted the government and each other. Foreign actions during the period of hyperinflation, including the seizure of German territory by France when Germany defaulted on its war reparations, created bitterness. It was during this era that a small political party, the National Socialist (Nazi) party, formed in Germany.


Banking Crisis in America Leads to Calls on Loans

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A cartoon in Puck from 1911 satirizing the wealth of J.P. Morgan, whose bank was later a major American lender to Europe during World War I. Source: Bowdoin College


When the US stock market crashed in the autumn of 1929, Europe was in a far better place economically than it had been at the beginning of the decade. Unfortunately, much of the recovery was built on loans from American banks. When the stock market crash triggered a growing recession in the United States, these banks began to call (demand immediate payment) their loans in Europe. Quickly, the German financial system collapsed, as it had been largely rebuilt during the 1920s with loans from American banks.


When German banks collapsed, they could not repay loans to banks in France or Britain, either. By 1934, all three nations were in default on their loans to American banks. When Germany defaulted on its foreign-made loans, it hurt smaller British banks more than larger American ones and essentially froze credit markets (lending markets). Thus, there was little international cooperation to try and stop growing financial crises. Instead of being able to get money flowing again, as would occur today under Keynesian economic principles, Europe largely “shut down” financially.


Smoot-Hawley Tariff Hurts International Trade

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A graph showing a decrease in US exports after the Smoot-Hawley Tariff Act took effect, revealing that the policy was a failure. Source: Centre for Economic Policy Research (CEPR)


Europe was also impacted by the United States’ attempt to generate revenue early in the Depression through higher tariffs. Tariffs had begun rising in the United States in 1928, at first in an attempt to help farmers who had faced falling crop prices as European farmers recovered after World War I. However, tariffs on imported European agriculture quickly spread to most other goods. In 1930, the Smoot-Hawley Tariff Act raised tariffs substantially. Instead of raising revenue for a struggling America, the tariff act prompted a wave of retaliatory tariffs. Before long, European nations were even decreasing trade with each other.


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A textbook page explaining the similar economic effects in North America and Europe during the Great Depression of the 1930s. Source: Princeton University


International trade fell by almost two-thirds between 1929 and 1934, when Congress repealed the tariff act. The Smoot-Hawley tariffs worsened the Great Depression on both sides of the Atlantic by reducing the revenue generated by net exports. Britain reduced its trade with the United States and sought substitute trade with its own colonies, such as India.


France, Italy, and Spain quickly responded with retaliatory tariffs against the United States. Ironically, these nations were not as harmed by the loss of international trade as they had been focused on restoring domestic production after World War I. Having suffered worse during the war meant they were less impacted by the loss of imports a dozen years later.


Economic Depression Strengthens Push for Fascism

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The Nazi Party (above) quickly became popular in Germany due to its populist rhetoric and promise of economic improvements. Source: Museum of Jewish Heritage


Italy had become Europe’s first fascist state in the 1920s under Benito Mussolini. Economic turmoil in Spain in 1930 led to the resignation of dictator Primo de Rivera, prompting an era of political unrest that slid into the Spanish Civil War (1936-39). At the end of this bloody civil war, fought between pro-fascist Nationalists under Francisco Franco and the socialists, Spain became a de facto fascist state. Many had come to support Franco’s Nationalists after a period of leftist governance between 1931 and 1933 failed to improve the economy and public confidence.


In Germany, economic turmoil from the hyperinflation of the 1920s and the arrival of the Great Depression in Europe, which hit Germany hardest of all states, led to the growing popularity of the Nazi Party. As in Italy and Spain, people gravitated toward a charismatic strongman figure who promised economic aid. After Hitler was appointed chancellor in 1933, he became an increasingly dictatorial figure. Within a few years, he decreed that Germany would no longer abide by the terms of the Treaty of Versailles, which had included disarmament and territorial loss in addition to reparations.


Nazis Rise as States Focus on Own Woes

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An illustration criticizing the America First movement for ignoring the rise of Nazism during the 1930s. Source: University of Minnesota


Although many were concerned about the rise of Adolf Hitler, few nations wanted to confront the bombastic German leader. In 1936, Hitler sent German troops to re-occupy the Rhineland, which bordered France and had been demilitarized after World War I. France and Britain were outraged but had little motivation to risk war during their ongoing economic woes. Instead, an era of appeasement won out, with Germany allowed to continue to violate Treaty of Versailles policies.


With economic distress and high unemployment, plus low public support for any return of warfare, European leaders did not push back forcefully against Hitler’s expansionist goals. Britain and France allowed Germany to rearm, secretly at first and then openly. In 1938, at the Munich Conference, an agreement among Britain, France, Italy, and Germany was struck to allow Germany to annex the German-speaking Sudetenland region of Czechoslovakia. Hitler received this permission in exchange for a promise of no more territorial ambitions…which he promptly violated.


Effects of the Great Depression in Europe on the US

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An art installation commemorating the 1936 Jarrow March protest against unemployment in Britain during the Great Depression. Source: Arts Council England


As in the United States, all nations in Europe saw an increase in unemployment and a decrease in industrial output. Central Europe, especially Germany and Austria, suffered the most. At the outset of the Depression, few nations believed in deficit spending and were forced to cut government spending and raise taxes as the economy faltered. This quickly worsened the recession, with unemployment in England doubling during 1930. France suffered less than most other countries, arguably due to its relatively slow and steady recovery from World War I. Its industries had not overextended themselves during the Roaring Twenties, taking on debt that would bankrupt them after the stock market crash.


The lingering Depression in Britain prompted economist John Maynard Keynes to write The General Theory of Employment, Interest and Money. Keynesian theory argued that government spending should increase during recessions to build infrastructure and reduce unemployment. This increase in total spending, known as aggregate demand, would pay for itself through higher tax revenue later on when output was restored. Many world leaders, including US President Franklin D. Roosevelt and German dictator Adolf Hitler, had already been working with the same principles. By late in the Depression, virtually every European leader was a Keynesian.


Foreign Policy Effects of the Depression in Europe

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Italian dictator Benito Mussolini (left) and German dictator Adolf Hitler (right) pulled their respective countries out of the League of Nations during the 1930s. Source: Yale University Press


Due to the economic malaise, few European leaders were worried about foreign policy that was not related to economic benefit. Most significantly, the Depression almost certainly doomed the League of Nations, which had been created by the Treaty of Versailles as an international body to solve geopolitical disputes. Germany left the League in October 1933, followed by Italy in December 1937. The League’s charter, combined with little appetite for confrontation from Britain and France, made the organization toothless in terms of physical power.


The inward focus of most European nations during the 1930s allowed fascists like Mussolini, Hitler, and Franco to amass power unchecked. By the time Britain and France were willing to confront Hitler in September 1939, after he had invaded Poland, it was too late to avoid a tremendous war. In the history books, isolationism and appeasement have gone down as failures of the 1930s, blamed for allowing fascist Italy, Nazi Germany, and imperialist Japan to arise as warmongering powers.


Great Depression’s Effect on World War II in Europe

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German’s illegal rearmament program during the 1930s bolstered the economy, but set the stage for war. Source: Council on Foreign Relations (CFR)


The Great Depression in Europe gave the Nazis an advantage: their foes were underprepared for conflict in 1939. Indeed, when Germany did strike westward, it defeated France in only six weeks. The sight of German soldiers marching in Paris was a shock to the world, as France had been one of the world’s foremost powers. Fortunately, US economic recovery allowed it to swiftly give military aid to Britain under the Lend-Lease Act. Thousands of tons of weapons and aid flowed from America to Britain before Hitler could truly contemplate an invasion of the island.


On the Eastern Front, the Depression in Europe may have given Soviet dictator Joseph Stalin a false sense of security about Germany’s strength. Potentially, this is what led Stalin to believe that a nonaggression pact between Nazi Germany and the Soviet Union would be honored by Hitler. On June 22, 1941, Germany violated the 1939 Molotov-Ribbentrop Pact by invading the Soviet Union with its handful of Axis-Power allies in Europe. Now fighting Germany and allied with Britain, the Soviet Union also became a recipient of Lend-Lease weaponry from the United States. This aid helped save Moscow in December 1941, with the US joining the war only days later.

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By Owen RustMA Economics in progress w/ MPAOwen is a high school teacher and college adjunct in West Texas. He has an MPA degree from the University of Wyoming and is close to completing a Master’s in Finance and Economics from West Texas A&M. He has taught World History, U.S. History, and freshman and sophomore English at the high school level, and Economics, Government, and Sociology at the college level as a dual-credit instructor and adjunct. His interests include Government and Politics, Economics, and Sociology.