Conjunctural factors were particularly unfavorable, since the stock-market crash—whose exceptional масштаb we have already described—was the primary cause of the deepening of the depression. The collapse of the house of cards in October 1929 set off chain reactions that all led to a reduction in national expenditure:
- Bank failures led to further failures and simultaneously undermined both the capacity to extend credit and depositors’ confidence;
- The hoarding of banknotes was encouraged and the mechanisms of investment came to a halt;
- Falling prices, and in particular the collapse of agricultural prices, reduced the purchasing power of producers and sellers, while buyers preferred to wait and see;
- An cumulative process of declining activity was reinforced by the psychological reactions of consumers and potential investors. Anxiety and pessimism replaced euphoria, and the optimistic statements of politicians and of economists from Harvard and elsewhere were incapable of changing minds. In such a climate, it is not surprising that overall investment spending fell to as little as 75% of its 1929 level;
- The reduction in consumption expenditure, a consequence of rising unemployment, encouraged producers and sellers not to replenish their inventories and not to renew their fixed equipment.
In 1932, net investment was negative, since capital depreciation exceeded gross investment by 5.8 billion dollars. Entrepreneurs did not replace worn-out machinery. Yet these conjunctural factors were not new: they had appeared, with varying degrees of intensity, in earlier recessions. Their scale was exceptional because they were accompanied by entirely new structural factors.
Structural Factors
From the beginning of the chapter, we have emphasized the evolution of the structures of the world economy, in which the weight of the American economy continued to grow. It was this weight that explains the rapid “export” of the depression. The dominance and sheer size of the American economy were further magnified by the cessation of capital exports that had fed the foreign-exchange currents. It was not only Germany that was severely affected, but also all the countries of Central and South America previously mentioned: these countries ceased buying American goods. The negative multiplier mechanism also operated in international relations. This cumulative braking movement between external trade and national production was intensified by the consequences of structural transformations for international competition. We have noted that the industrial development of Western countries had altered the relative importance of exported products. Certain sectors (chemical products, capital goods) saw their exports grow, while others (textiles, coal) saw their traditional foreign outlets disappear. Alongside cyclical unemployment, there emerged structural unemployment resulting from these transformations.
Protectionist measures (higher tariff duties, quantitative restrictions) accelerated the decline of foreign trade. If every country seeks to export while refusing to import, the only outcome can be paralysis of exchanges. “Beggar-thy-neighbour” policies were widely adopted by a large number of countries. The collapse of the international monetary system, which we shall examine in the next section, was likewise unfavorable to foreign trade. The abandonment of the gold-exchange standard represented a structural change affecting monetary institutions and international means of payment. From the moment international liquidity and the capacity to increase it were threatened, the financing of trade was compromised, and consequently so was national economic activity oriented toward exports. Competition between London and New York from 1918 to 1930 had pernicious consequences for international stability. The failure of the gold-exchange standard was both the result of this conflict—which reflected structural evolution—and of the 1929 crisis. Having first been a consequence of the 1929 crisis (it was not until September 1931 that Great Britain abandoned the gold standard), the collapse of the international monetary system became a new cause of the deepening of the depression.
The interwar period was a transitional period between the end of nineteenth-century capitalism and the modern capitalism born of the Second World War. The disappearance of old structures and adaptation to new ones require time. These rigidities were linked to structural transformations of markets. As economic concentration intensified and trade unionism developed, the labor market moved toward bilateral monopoly. The proliferation of cartels and professional agreements created quasi-monopolistic situations. Re-equilibrating mechanisms operated less and less downward, but always upward. Adjustments would therefore be longer and more difficult.