Germany And The Great Economic Depression (I)

The article deals with the Great Economic Depression of 1929-1933 and its negative consequences on the economy of the German Weimar Republic. The aim of the article is to present the main causes and consequences of the global economic and financial crises known as the Great Economic Depression and to investigate how this depression influences the economy and finance of the newly democratic post-war German state called the Weimar Republic. The particular importance of this research subject is the fact that among all European states at the time it was exactly the Weimar Republic to be mostly affected by the global crises with terrible consequences on social and political life which finally brought Adolf Hitler and his NSDAP to the power in Germany.

During the greatest, and at the same time, the most difficult economic crisis, in the world history from 1929 to 1933, the (German) Weimar Republic[i] was one of the most affected countries in the world. The consequences of the Great Economic Depression were the most visible and destructive exactly in the Weimar Republic, which economy became revealed during the second half of the 1920s. In 1928 the German industrial production increased up to 12% of the world one or 26% of the American level. In 1929 Germany reached 20% of the national income and 70% of the foreign trade of the United States.  It is, however, worth noting that the German economic crisis was not only the direct consequence of the American contraction but that Germany also sustained the international economic slump by having her own “crisis within the crisis”. Nevertheless, the economic crisis of 1929-1933 was the most severe in Germany among all European countries.

Our intention in this paper is to present some of the most important aspects of the economic crisis in the Weimar Republic during the time of the Great Economic Depression. The crucial problems to be dealt with are:

I) The roots and origins of the Great Economic Depression on two levels: global and German.

II) The problems regarding the financial crisis and its outcomes on the German economy.

III) German industrial production during the crisis.

IV) The problems concerning the German trade and trade policy.

V) The problems with regard to unemployment in Germany and the social and economic measures carried out by the German government in order to alleviate this the most difficult social problem in the Weimar Republic during the Great Economic Depression.

The origins of the Great Economic Depression

Throughout the end of the 1920s and the beginning of the 1930s, the world was in the worst economic depression in history. This economic crisis began with the dramatic collapse of the American stock market in October 1929 that was followed by spreading up throughout Europe until 1933. This worldwide financial collapse was the manifestation of deeper weaknesses of the world economy. Various factors contributed to the recession:

Great economic depression1) Cyclical contractions in demand in much of Europe.

2) A general tendency for primary product prices to fall.

3) Financial crises in Europe and the USA.

The global sources of this economic crash and instability were:

1) The First World War caused a dramatic increase in productive capacity, especially outside Europe, but there was no corresponding increase in demand.

2) There was a world-wide imbalance between agriculture and industry.

3) The rewards of growth accrued disproportionately to the industrialized countries and, within these countries, to their industrial and financial sectors.

4) International finance was never fully recovered from the dislocation of the First World War.[ii]

5) Increased production allowed food and raw material prices to decline through the 1920s, worsening the terms of trade for countries depended on the export of such commodities, and decreasing their ability to buy the industrial products of Europe and the USA.

More specified and concrete origins of the slump and economic recession in 1929 must be located in the USA. It is clear that the American economy was the storm center of the world depression. Here national economic management was powerless to prevent the collapse of money and commodity markets together with the manufacturing production.[iii] The major destabilizing influence came with the collapse in American lending. This began in the summer of 1928 and it was prompted by the domestic boom and the action of the Federal Reserve to check it by raising interest rates. Both of them had the effect of attracting funds into the home market.[iv] This dramatic curtailment of lending exercised a powerful deflationary impact on the world economy. It was sufficiently widespread to undermine the fragile stability of the international economy. It also, in turn, reduced Europe’s import demand for products outside the region.

The second economic shock came in the summer of 1929 when the USA boom petered out. A tightening in monetary policy at this time may also have contributed, though monetary factors probably played a relatively minor part in the initial breaking of the American economic boom. The American economic slump was touched off by the financial crisis.

The Great Bull Market of 1928 gave way to a precipitous fall in stock prices in October of 1929.[v] In conditions of monetary instability and imbalance of payments, the gold standard as a kind of fundamental law of international monetary relations was obsolete.[vi] In other words, the easiest solution for the overhaul of the “Wall Street Crash” was to break the links by abandoning the gold standard. This was done by several Latin American countries and also by Australia and New Zealand late in 1929 and early in 1930. On the other hand, this action inevitably imposed a greater burden for the countries still depended on the gold standard and hence intensified the deflationary spiral either automatically or through deliberate government action. Once started, therefore, the deflationary process became cumulative and eventually it led to the general collapse of the gold standard and the adoption of restrictive policies to protect domestic economies. With regard to the problem of the origins of the depression in the United States, it is important to quote the words by H. J. Braun: “it seems that not so much monetary but real factors caused it and that the failure of the international economic system contributed to it”.[vii]

One contributory factor as the causer of the depression was the fall in prices of foodstuffs and other primary products which resulted in declining incomes and purchasing power for agricultural producers and exporters. Such price falls contributed to the rising of the real incomes elsewhere.

In the ensuing scramble for liquidity, funds flowed back from Europe to America, and the shaky European prosperity collapsed. In May 1931, the Austrian Credit-Anstalt bank defaulted. But, when the United Kingdom left the Gold Standard, allowing sterling to depreciate in September 1931, virtually the entire world was affected. The world market for commodities followed the American crash. For instance, by 1931, the price of wheat on the Liverpool Stock Exchange was only a half in comparison to 1929. The prices of the British imports of raw material were down by two-fifths, and food import prices as a whole were to fall down as well as in the following year. The earnings of overseas suppliers were correspondingly reduced, and the markets for Europe’s exports were consequently diminished. The collapse of overseas demand was transmitted into the European economy through those European countries with a large overseas export trade. The production followed the exports down. In 1932, European manufacturing production was 28% lesser than in 1929. The industrial production fell down to 53% of its 1929-level in Germany and the United States, and the world trademark sank to 35% of its 1929-value.[viii] The level of decrease in industrial production reached its peak in 1929. It became accompanied by the rising level of unemployment and falling prices for all goods, but particularly of primary produce.[ix] Nonetheless, the new policies of trade protection and currency manipulation turned out to be the hammer for the economy. According to Lewis, “the decline of trade in manufactures was due neither to tariffs nor to the industrialization of new countries”. In reality, the trade-in manufactures were low only because the industrial countries were buying too little of primary products by paying so low price for what they bought.[x]

We think it would be of a great value to present here opinion by Roger Munting and B. A. Holderness that the Wall Street crash did not cause the depression in Europe, but the loss of financial confidence resulting from it and the poor monetary policies which followed, together with the collapse of American demand, made the recession more severe in Europe than in the USA having negative consequences in the rest of the world too. Thus, although the European recession did not originate in the USA, American depression undoubtedly adversely affected the rest of the world.[xi]                 

The crisis of financial policy and the declination of industrial production

In the autumn of 1929, it was by no means clear that a general economic depression in almost all industrial countries was underway and that the slump would have a duration of several years. According to H. J. Braun, there were two main reasons for the deterioration of economic conditions in the Weimar Republic:

1) The disintegration of international economic relations, especially the decline of international trade and banking, accompanied by protectionism and competitive devaluation.

2) The high degree of monopolization of the German industry.[xii]

The fact was that instead of lowering prices, big corporations tended to reduce production and dismiss employees.[xiii]

There was a sharp cyclical recession in Germany in the first quarter of 1931, but the second quarter already showed signs of economic recovery. The ensuing collapse of the German capital market in the summer of 1931 turned a “normal” temporary crisis into a crisis of the whole economic and consequently of the political system of the republic. Now, in order to prevent a total collapse of the economy, the German banks provided further loans. Obviously, the German banking crisis was triggered off by events in Austria. On May 11th, 1931 the “Österreichische Creditanstalt”, which was the largest Austrian commercial bank, published its own reports which showed huge losses. Subsequently, this financial crash was followed by other Austrian banks. However, it is important to observe that French creditors did nothing to support the Austrian banks.[xiv] The collapse of the Austrian banks aroused concern about the German banks because they too were lacking in financial liquidity. The German banks also had a large amount of foreign debt, approximately 40% of the American. In the second part of May 1931 Reich-Mark (RM) 288 million of short-term loans were withdrawn from the German banks.[xv] During the coming six weeks the “Reichbank” lost almost 2 billion RM in gold and foreign exchange. The German private financial institutions had huge losses as well, especially it was the case with the leading Berlin “Grossbanken”, which accounted for over half of the nation’s foreign banking debits.[xvi] The German deposits rushed to withdraw their money, and once again it was the “Grossbanken” of Berlin that became in the hardest position – it reimbursed 2 billion RM in June and July.[xvii] The economic and financial situation was drastically worsened when two large German companies, the department store chain “Karstadt” and the large insurance company “Nordstern”, became financially crashed. The foreign credits, again, were withdrawn. The “Reichbank” had to increase its discount rate from 5 to 7%, but in fact, this financial measure did not help very much because at the same time the “Nordwolle” concern had lost RM 200 million in some speculative dealings. Nevertheless, two big German banks, the “Danat Bank” and the “Dresdner Bank” were directly and heavily involved in financing “Nordwolle”’s undertakings. Further withdrawals of deposits caused the “Reichbank”’s gold and foreign currency reserves to dwindle again. A consecutive rise in the discount rate reached in July the level of 15% and later on even 20%. On May 13th, 1931 the “Danat Bank” was closed. According to James, at the root of the problem was a crisis of confidence, especially foreign confidence, which could not be overcome by the German banks or the “Reichbank”.[xviii]

From 1929 the ratio between the banks’ own funds and the capital from outside deteriorated to 1:10 for all private banks and to 1:15 for the “Big Banks” of Berlin. By the end of 1930 about half of the RM 26 to RM 27 billion in German commercial debts was short-term in nature, and foreign funds had come to account for some 40% to 50% of deposits in the “Big Banks” of Berlin. Of the total German commercial debt, about half was owed by industry, one-third by the banks, and about one-fifth each by the Reich, the states and the municipalities. The German foreign assets amounted to RM 9 to 10 billion, of which 5 to 6 billion were on a short-term basis.[xix]

Berlin Riot
Broken windows at a bank on Weddingplatz, Berlin, the day after violent clashes between police and demonstrators, June 11, 1931.

A trend of increasing of the prices was one of the heaviest outcomes of the economic depression in the Weimar Republic. The main reasons for increasing the prices were: 1) the great inflation, and 2) the reduced German agricultural and industrial production. The prices of consumer goods dropped as: from an index of 100 in 1928 to 98 in 1929, 91 in 1930, 80 in 1931 and 67 in 1932; one-third lower than it was the pre-crisis level. During the same period of time, the wages were severely depressed, partly because contractual rates were lowered by the state emergency decrees and partly because the employers became engaged in wage undercutting. The fall of wages, which achieved the “adjustment” in the wage costs for which employers had repeatedly been calling, was so enormous that despite the simultaneous falls in prices, real wages also dropped substantially – to 87% of the 1928-level.[xx]

A contracting market of depressed economies produced falling demand and the prices, bankruptcy and inevitable unemployment for the German industry. For the export-oriented German industrial companies, it was a major problem to find foreign markets after 1930. Even before 1930 Ruhr steel companies were over-producing their cartel quota. After 1930 the market difficulties became more generalized. The German large scale industry depended on the cartels, far more extensively than the other producers, became more inclined to respond to this problem by restricting production by at the same time keeping the prices rather than to reduce them down (the same practice was done in the USA as well during the Great Economic Depression).

The German industrial production fell by almost half between 1929 and 1932; national income declined from 75.4 billion RM in 1928 to 45.2 billion RM in 1933. According to the report which was made by the “Organisation for European Economic Co-operation”, industrial production in the Weimar Republic during the period from 1929 to 1932 declined for 40.8% and GDP for 15.7% in the same period of time.[xxi] In Germany particularly declined production of the coal, the shipbuilding industries, the steel, and the iron. In the Weimar Republic, “rationalization” often meant that the industry ownership was concentrated in a few companies likewise the production became concentrated in the most productive pits and fields. Increased mechanization of a coal cutting, enabled production per one worker to be doubled between 1924 and 1931. By 1929, 91% of the coal in Germany was cut mechanically.[xxii] The Index of industrial production in Germany for 1932 in comparison with 1928 (index 100) was: capital goods 45.7% and consumer 78.1%.[xxiii] According to H. J. Braun and D. S. Landes, during the world economic crisis, the industrial production in Germany declined by 42% and in 1932 amounted to only 73% of the 1913-figure.[xxiv] According to D. J. K. Peukert, in 1930 German industrial production fell to 91% of its 1913-level, “and it collapsed even more dramatically over the next two years”.[xxv] According to D. S. Landes, Index of industrial production in the Weimar Republic during the Great Economic Depression was (1928=100): 1929=101, 1932=59, 1933=66 and 1934=83. According to the same author, GDP in 1928 was 91 billion RM, in 1929 was 89, in 1932 was 72, in 1933 was 75 and in 1934 was 84 billion RM.[xxvi] It is important to note that this industrial stagnation was paralleled by agricultural depression, a worldwide phenomenon that had devastating effects on the East Elbian farming, which suffered from structural weaknesses, as well as in many regions of small and medium-sized peasant holdings.

To be continued

Reposts are welcomed with the reference to ORIENTAL REVIEW.



[i] On the history of the Weimar Republic see: Stephen Lee, The Weimar Republic; Colin Storer, A Short History of the Weimar Republic.

[ii] The pre-war system of fixed exchange rates and free convertibility was replaced by a compromise – the Gold Exchange Standard – which never achieved the stability necessary to rebuild world trade. In regard to this problem is important to present opinion by Derek H. Aldcroft: “it would be difficult to argue that the First World War and its aftermath was the prime causal factor of the crisis than began at the and of the 1920s” (Derek H. Aldcroft, The European Economy 19141990, p. 66).

[iii] Carlo M. Cipolla (ed.), The Fontana Economic History. Contemporary Economies-1, p. 332.

[iv] The US capital issues on foreign accounts fell by over 50% between the first and second halves of 1928.

[v] The American downturn in economic activity was accompanied by a further reduction in foreign lending and a sharp contraction in import demand, the consequences of which were a severely reduced flow of dollars to Europe and the rest of the world.

[vi] David S. Landes, The Unbound Prometheus. Technological Change and Industrial Development in Western Europe from 1750 to the Present, p. 364.

[vii] Hans-Joachim Braun, The German Economy in the Twentieth Century. The German Reich and the Federal Republic, p. 64.

[viii] The Times, Atlas of World History, chapter “The Great Depression 1929-1939”, Table: 3 “The world economy, 1929 to 1939”, p. 266; Simon Kuznets, Modern Economic Growth: Rate, Structure and Spread, pp. 306-309.

[ix] Roger Munting, B. A. Holderness, Crisis, Recovery and War. An Economic History of Continental Europe 19181945, p. 15.

[x] W. Arthur Lewis, Economic Survey, 19191939, p. 155.

[xi] Roger Munting, B. A. Holderness, Crisis, Recovery and War. An Economic History of Continental Europe 19181945, p. 17.

[xii]Hans-Joachim Braun, The German Economy in the Twentieth Century. The German Reich and the Federal Republic, p. 66.

[xiii] In the depression year of 1932 industrial production in Germany was approximately 30% below in comparison with its pre-war level. From 1929 to 1932 consumer goods productions declined by 18%, producer goods production by as much as 52% (G. Hardach, “Zur politischen Oekonomie”, Reinchard Kühnl, Gerd Hardach (eds.) Die Zerstörung der Weimarer Republik, pp. 26-30).

[xiv] Harold James, “The causes of the German banking crisis of 1931”, pp. 68-87.

[xv] Freidrich-Wilhelm Henning, “Die Liquiditaet der Banken in der Weimarer Republik”, pp. 43-92.

[xvi] David S. Landes, The Unbound Prometheus, p. 375.

[xvii] C. W. Guillebaud, The Economic Recovery of Germany: 19331938, p. 20.

[xviii] James H., The German Slump. Politics and Economics 1924 1936, p. 291.

[xix] Karl Hardach, The Political Economy of Germany in the Twentieth Century, p. 41.  

[xx] Detlev J. Peukert, The Weimar Republic. The Crisis of Classical Modernity, p. 257.

[xxi] Organisation for European Economic Co-operation, Industrial statistics, 19001959, p. 9.

[xxii] In Belgium the figure was 89%, in France 72%, in Poland 31%, and in Great Britain only 28% (R. Munting, B. A. Holderness, Crisis, Recovery and War. An Economic History of Continental Europe 19181945, p. 82.

[xxiii] The index of industrial production in (Nazi) Germany in 1938 was: capital goods 135.9% and consumer 107.8%  (for both examples the source is R. Munting, B. A. Holderness, Crisis, Recovery and War. An Economic History of Continental Europe 19181945, p. 147.

[xxiv] Hans-Joachim Braun, The German Economy in the Twentieth Century, p. 49; David S. Landes, The Unbound Prometheus, Table 25, p. 391.

[xxv] Detlev J. K. Peukert, The Weimar Republic. The Crisis of Classical Modernity, p. 121.

[xxvi] David S. Landes, The Unbound Prometheus, p. 411, Table 31, (source: Burton H. Klein, Germany’s Economic Preparations for War, p. 10).

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