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AP European History
Unit 8 Overview: 20th-Century Global Conflicts
8.1 Context of 20th Century Global Conflicts
8.2 World War I
8.3 The Russian Revolution and Its Effects
8.4 Versailles Conference and Peace Settlement
8.5 Global Economic Crisis: The Great Depression
8.6 Fascism and Totalitarianism
8.7 Europe During the Interwar Period
8.8 World War II
8.9 The Holocaust
8.10 20th-Century Cultural, Intellectual, and Artistic Developments
8.11 Continuity and Changes in the Age of Global Conflict

🇪🇺ap european history review

8.5 Global Economic Crisis: The Great Depression

Verified for the 2025 AP European History exam•Last Updated on June 18, 2024

Great Britain, France, Russia, Belgium, and Germany saw the largest economic impacts of WWI. Nations were forced into a war of attrition. The new fighting style and weaponry of WWI caused extensive damage, more than any previous European war. 

The expensive nature of the war forced nations into debt. The United States offered loans to its European allies during the war, expecting them to be paid afterwards. The Treaty of Versailles placed war reparations on Germany totaling 132 billion German marks (around $33 billion). This, coupled with their personal war debts, forced Germany into a period of hyperinflation when they were forced to print more money to cover their debts.

The US, under the direction of Charles Dawes, developed a plan in which the US would loan Germany money to pay off its debts. In return, the other European nations could pay off their debts to the US. 

Dawes Plan. Photo courtesy of SlidePlayer.

US Stock Market Crash

In the United States, WWI had been an economic boom. Industry was more productive and the workforce had expanded in the wartime economy. This led to the outbreak of a consumer economy in the 1920s. Part of this consumer economy led to people investing in the stock market with expectations of making money. However, they didn’t invest the full amount required. 

Most were buying on the margin: meaning they were only paying 10-20% of their investment and taking a loan out for the rest. When stock prices reached a peak, many began selling their stocks. As the DOW dropped after one day, a frenzy began and people started selling stocks quickly. The problem? People had only invested 10-20% of the cost. If they don’t make money, they can’t pay their loans back.

When banks began closing and the US Stock Market crashed in 1929, the US was unable to continue participating in the Dawes Plan and the Great Depression began, then exacerbated the hyperinflation already occurring in Europe.

Rise of Extremism

The extreme poverty that existed in Europe led to the rise of authoritarian leaders. People feared for their lives, their futures, and the futures of their nations. Men who had military backgrounds made strong speeches with rhetoric that matched the anger and frustrations of their populations, and promised to fix all that is wrong with their countries. They start gaining popularity in Italy, Spain, Germany, and even Russia. It is important to recognize that European Nations began to become very dependent on the U.S economy after WWI, so the nationalist rhetoric opposed this interconnectedness and preached self-sufficiency in the economy. 

New Economic Theories

In order to revert this deep economic crisis, different economic ideologies began to gain popularity across the world. These new theories were often built as an alternative option to classical economics, and set the groundwork for heterodox economists. 

    • Keynesianism - Deveoped by the British economist John Maynard Keynes, it consists of the idea that government intervention is important to maintain economic stability. Keynes emphasized the need to have a comprehensive fiscal set of policies that use government spending to expand the economy. His ideas highly influenced JFK in the United States to recover the US economy.
    • Cooperative Social action in Scandinavia - This set of policies emerged during the depression period in the Scandinavian countries, such as Denmark, Finland and Iceland. It consisted of cooperation between the government, employers and workers in achieving economic and social equality. This model has been praised for overcoming poverty and inequality and allowing for economic mobility (the capacity of citizens to ascend the social strata).
    • Popular Front policies in France - The popular front of France is a coalition of French left-wing political parties led by the PCF, the French Communist Party. Their economic policies aimed to reduce poverty and promote more equality through the nationalization of certain industries, the implementation of 40-hour workweeks and other social welfare programs.

All of these theories are a direct response to the tragic outcomes of war, and many of these policies endured until the late 20th Century. 

Key Terms to Review (20)

Authoritarian Leaders: Authoritarian leaders are political figures who exercise significant control over a state, often prioritizing state power and authority over individual freedoms and democratic processes. These leaders typically maintain power through centralized decision-making, repression of dissent, and often use propaganda to promote their agenda. During global economic crises, authoritarian leaders can gain support by promising stability and order, which can appeal to populations facing economic hardship.
Buying on the Margin: Buying on the margin refers to the practice of purchasing stocks by paying only a fraction of the total price, while borrowing the remainder from a broker. This method allows investors to leverage their investment, potentially leading to higher profits but also greater risks, especially during periods of economic instability such as a global economic crisis.
Charles Dawes: Charles Dawes was an American banker and politician who is best known for his role in the Dawes Plan, which aimed to resolve the reparations crisis in post-World War I Germany. The plan facilitated loans to Germany, restructured its reparations payments, and aimed to stabilize the German economy during a time of severe inflation and economic turmoil, highlighting the international effort to address the consequences of the global economic crisis.
Classical Economics: Classical Economics is an economic theory that emerged in the late 18th and early 19th centuries, emphasizing free markets, self-regulation, and the importance of supply and demand. This approach laid the foundation for modern economic thought and significantly influenced various aspects of social and political ideologies during periods of change.
Consumer Economy: A consumer economy is an economic system that relies heavily on the consumption of goods and services by individuals. It emphasizes the importance of consumer spending as a driving force for economic growth and development, often leading to increased production, innovation, and advertising. This concept gained prominence in various historical contexts, where societal values shifted towards materialism and consumerism.
Cooperative Social Action in Scandinavia: Cooperative Social Action in Scandinavia refers to a collaborative approach to social welfare and economic resilience that emerged in Nordic countries, characterized by a strong emphasis on community involvement and collective responsibility. This model became particularly significant during times of economic hardship, such as the Global Economic Crisis, as it fostered social safety nets and encouraged civic engagement to mitigate the adverse effects of financial downturns.
Dawes Plan: The Dawes Plan was an economic plan established in 1924 to help Germany stabilize its economy after World War I by restructuring its reparations payments. The plan aimed to ease the burden of reparations on Germany by providing loans from the United States, allowing Germany to restart its economy, and promoting economic recovery in Europe. This plan marked a significant attempt at international cooperation during a period of global economic turmoil.
French Communist Party: The French Communist Party (PCF) is a political party in France that was founded in 1920 and has been a significant player in the French left-wing movement. It emerged from the socialist movement and played a critical role in French politics, especially during the global economic crisis when it sought to address the social and economic issues faced by workers and the unemployed.
German Marks: German Marks were the official currency of Germany from 1871 until the introduction of the Euro in 2002. The currency played a significant role in the economic landscape of Germany, particularly during the Weimar Republic when hyperinflation drastically devalued the Mark, leading to severe economic consequences and social unrest.
Great Depression: The Great Depression was a severe worldwide economic downturn that began in 1929 and lasted until the late 1930s, characterized by massive unemployment, plummeting stock markets, and widespread poverty. Its impact reshaped economies and political landscapes, setting the stage for conflicts and shifts in global power dynamics.
Heterodox Economists: Heterodox economists are those who challenge mainstream economic theories and propose alternative perspectives on economic issues. They often criticize the assumptions and methodologies of neoclassical economics, advocating for a more pluralistic approach that incorporates diverse economic theories and practices. Their ideas gained traction during the global economic crisis, as traditional economic models struggled to explain the complexities of the financial collapse.
Hyperinflation: Hyperinflation is an extreme and rapid increase in prices, often exceeding 50% per month, leading to a collapse in the value of currency. It typically occurs when there is a significant increase in the money supply not supported by economic growth, often due to government policies or war reparations. This drastic devaluation causes severe economic instability, resulting in a loss of public confidence in the currency and creating challenges for everyday transactions.
John Maynard Keynes: John Maynard Keynes was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics and economic policies of governments. He is best known for his advocacy of government intervention to stabilize economies during downturns, which became especially significant during the Great Depression and influenced policies in the aftermath of World War I, as well as during the Versailles Conference where reparations were debated.
Keynesianism: Keynesianism is an economic theory based on the ideas of John Maynard Keynes, which suggests that active government intervention is necessary to manage economic cycles and mitigate the effects of recessions. This theory advocates for increased public spending and lower taxes during economic downturns to stimulate demand and promote recovery, emphasizing the role of government in stabilizing the economy.
New Economic Theories: New Economic Theories refer to a set of innovative ideas that emerged in response to the global economic crises, focusing on redefining how economies function and emphasizing the role of government intervention, social welfare, and sustainable practices. These theories seek to address the flaws of traditional economic models, particularly during times of financial instability, advocating for policies that prioritize social equity and environmental sustainability over mere profit maximization.
Popular Front Policies in France: The Popular Front Policies in France were a series of social and economic reforms implemented during the mid-1930s by a coalition of leftist parties, including socialists and communists, aimed at addressing the economic crisis and improving the conditions of the working class. These policies emerged as a response to the global economic crisis, aiming to combat unemployment, promote labor rights, and stimulate economic recovery through government intervention.
Rise of Extremism: The Rise of Extremism refers to the increasing support for radical political ideologies and movements that reject mainstream democratic values, often fueled by social, economic, and political unrest. This phenomenon is typically characterized by a surge in nationalistic sentiments, anti-establishment attitudes, and the emergence of fringe political groups that exploit crises to gain popularity and influence.
Treaty of Versailles: The Treaty of Versailles was a peace agreement signed in 1919 that officially ended World War I, imposing heavy reparations and territorial losses on Germany. It aimed to establish lasting peace but ultimately sowed the seeds for future conflicts, heavily influencing European politics and international relations in the following decades.
US stock market crash: The US stock market crash refers to a significant decline in stock prices on the New York Stock Exchange, most famously occurring in late October 1929, which marked the beginning of the Great Depression. This event created widespread economic turmoil and uncertainty, leading to a global economic crisis and affecting millions of lives worldwide.
War of Attrition: A war of attrition is a military strategy aimed at wearing down an opponent to the point of collapse through continuous losses in personnel and material. This approach often leads to prolonged conflict, where each side seeks to inflict maximum damage on the other while sustaining their own capabilities. In the context of a global economic crisis, this strategy reflects the broader struggle nations face when dealing with resource scarcity and the fight for survival amidst overwhelming challenges.
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8.6 Fascism and Totalitarianism