Topic 7.4 Notes – Economy in the Interwar Period

Why Governments Took a Bigger Role in the Economy

World War I had already shown that governments could control production, labor, prices, and trade when survival was on the line. After the war, they were dealing with debts, reparations, inflation, and damaged infrastructure, so pulling back to old-school laissez-faire was hard.

Europe’s recovery was shaky because the whole system depended on a chain of payments:

• Germany paid reparations to Britain and France.
• Britain and France paid war debts to the United States.
• U.S. banks loaned money to Europe, especially Germany.

That meant Europe looked stable only as long as American loans kept coming.

Germany’s crisis

Germany showed how fragile this was. In 1923, after France occupied the Ruhr over unpaid reparations, Germany printed money to support resistance. That caused hyperinflation, which wiped out savings and made the mark nearly worthless.

German hyperinflation, 1923

The Dawes Plan in 1924 helped for a while by reorganizing payments and bringing in more U.S. loans, but it solved the emergency, not the dependence.

The Great Depression goes global

The 1929 crash exposed deeper weaknesses:

• speculation in stocks
• overproduction in industry and agriculture
• weak banks
• unequal purchasing power so people could not buy what factories produced
• too much credit and debt

The crisis spread fast when U.S. lenders recalled loans, trade fell, commodity prices crashed, tariffs rose, and the gold standard made governments hesitate to spend freely. The map traces that spread outward from the United States and highlights just how widely economies contracted.

Global spread of the Great Depression

The result was a major shift away from laissez-faire toward intervention.

The Main Types of Interwar Economic Responses

Different governments intervened for different reasons. The common pattern was more state power. The differences were about ownership, freedom, and purpose.

The Soviet Five-Year Plans

The Soviet Union took intervention furthest. In 1928, Stalin ended the New Economic Policy and launched the first Five-Year Plan.

State planners set quotas and directed labor and raw materials into heavy industry such as steel, coal, electricity, machinery, railroads, and armaments. This built new industrial centers fast, but consumer goods and living standards were pushed aside.

Collectivization

In 1929, the state forced peasants onto collective farms and state farms. The goal was to collect more grain, mechanize farming, and use agriculture to fund industry.

Peasants resisted by withholding grain, slaughtering livestock, and fighting officials. The state answered with arrests, deportations, executions, and attacks on so-called kulaks.

That coercion helped produce the famine of 1932-1933, especially in Ukraine and Kazakhstan. The Ukrainian case is the Holodomor.

Soviet propaganda presented the Five-Year Plans very differently, as a shared national effort pulling industry forward.

Soviet Five-Year Plan propaganda poster

The key AP point is this: Soviet industrialization did succeed in some ways, but it came with massive suffering. The USSR was less exposed to the capitalist crash, but that did not mean prosperity or freedom.

Democratic and Fascist Responses in the United States and Europe

The United States expanded government power without ending democracy. FDR’s New Deal used relief, recovery, and reform.

• Banking reforms restored confidence through the bank holiday, FDIC, SEC, and Glass-Steagall.
• Jobs programs like the CCC, WPA, and TVA put people to work and built infrastructure.
• AAA paid farmers to reduce production and raise prices.
• Social Security Act and Wagner Act expanded welfare and labor rights.
• Keynes defended government spending to boost demand.

Mussolini’s Italy and Hitler’s Germany also intervened, but under dictatorship.

• In Italy, corporatism claimed to organize workers and employers by sector under state supervision. Independent unions were crushed. Policies included the Battle for Grain, public works, and bank intervention.
• In Nazi Germany, unemployment and Weimar instability helped Hitler rise. Unions were abolished and replaced by the German Labor Front. The regime used autobahns, deficit spending, rearmament, conscription, and the Four Year Plan to push autarky and war preparation.

Brazil, Mexico, and the Big Picture

Latin American governments also moved toward intervention because export economies got hammered by the Depression.

• In Brazil, Getúlio Vargas responded to the collapse of coffee exports by managing coffee prices, promoting import substitution industrialization, expanding infrastructure, and supervising unions under an increasingly authoritarian Estado Novo.
• In Mexico, Lázaro Cárdenas pushed land reform through ejidos, tied labor and peasant groups to the state, and nationalized oil in 1938 by creating PEMEX.