By late 1929 the American economy had reached the saturation point in its ability to consume new goods.  The number of new cars registered began to fall sharply and new houses being constructed fell off as well.  These were warning signs of an economic slowdown.  As the American economy slowed, the Stock Market began to fall.  The fall of the Stock Market was more a symptom than a cause of the problem.  From 1929 to 1931 the American economy went into a deep spiral.  Demand for goods fell off, producers cut back on the number of workers and on the amount of raw materials.  The unemployed suddenly spent less and farmers and miners saw their incomes shrink even further, so they spent less.  Falling spending by ordinary consumers then drove down demand even further, setting off a new turn of the spiral.  People who couldn’t pay back the loans they had contracted in happier times lost their homes or farms or businesses.  Banks collected farms and houses and businesses they couldn’t then resell. The banks themselves went bankrupt too.  Most countries had little or no unemployment insurance.  If you lost your job, you had to get another one or starve.  There weren’t any jobs to be found.  People got desperate.  They demanded government action, or they moved elsewhere in search of work, or they tried to organize protest movements and political movements.  All existing institutions were called into question. 

            This crisis quickly spread to the rest of the world.  Americans stopped importing, but insisted on collecting the loans they were owed by other countries.  These countries first tightened up their own economies to try to pay back the loans, then defaulted on the loans rather than drive themselves into complete collapse.  Countries went off the existing system of international payments.[1]  This caused international trade to decline sharply, throwing more people out of work.  Nobody but the Soviet Union—a non-capitalist country that traded very little with the rest of the world—managed to ride out this crisis without suffering economic hard times.[2]  In many places, people concluded that the government would have to accept responsibility for insuring prosperity in the future, as well as peace and security.[3] 

            Many people questioned the systems of capitalism and representative government.  All they seemed to offer was the “freedom to starve.”  Democracy failed in Germany and Adolf Hitler came to power.  It teetered on the edge of collapse in France.  In the United States, Franklin D. Roosevelt became president and launched a program called the “New Deal.”

This constituted a decisive moment in the development of modern governments.  The historian John Garraghty has written an interesting book comparing the response to the Depression of the American “New Deal” and Nazi Germany.  One would expect that they were very different from one another.  Wrong: there were a lot of similarities.  The main difference was that Nazi Germany was more effective at putting people back to work.  The both increased government control of the economy.  They both spent a lot of money to put the unemployed back to work.  One thing that people discovered, during the Depression and later in the Second World War, was that deficit spending offered the best way out of the slump.  We’re still living with the consequences of that discovery. 

[1] The Gold Standard. 

[2] Well, more accurately, it didn’t suffer hardships as a result of the Depression.  Stalin’s drive for rapid industrialization inflicted severe hardship on almost all Russians. 

[3] If you look at the—so far—failed efforts to repeal and replace the Affordable Care Act/Obamacare, you can see that Americans have now concluded that it is the duty of the government to insure health care at a low cost to consumers.