It’s been exactly 95 years since the world was gripped by the greatest economic depression of all time. It began in October 1929 in the USA, gradually spreading to other parts of the world, and its manifestations and historical impacts were terrifyingly unprecedented. Could something similar happen again?
It’s November 11, 1918. World War I, the largest military conflict in history up to that time, has just officially ended. The German, Russian, Austro-Hungarian, and Ottoman empires have collapsed, and several states appeared on the map of Europe, some vehemently, some less visibly, building on their roots from the medieval kingdoms and principalities of Central and Eastern Europe. Among them, of course, was Czechoslovakia, for which the fall of the Austro- Hungarian monarchy presented a unique opportunity to once again establish the dominance of the Czech national element in the lands of the Bohemian Crown. A massive reconstruction of war-torn countries began. New factories, residential buildings, schools, roads were built... The war spurred technological advancement, which was quickly applied in the economic sector, particularly in industry and transportation.
Turning point
The entire decade following World War I was a period of unprecedented growth and development in virtually every area of life. People, even those from lower social strata, were living well, and it seemed that the world was in order and that it would remain so. But then came October 24, 1929, and with it the crash of the New York stock market. It was caused by excessive consumption financed by cheap unsecured loans and the overvaluation of the stock price of numerous companies. One company after another reported a decline. Due to the interconnectedness of developed countries' economies, the problems quickly spread to Europe and other parts of the world. Perhaps the hardest hit was Germany, burdened by huge war reparations, but soon problems appeared in Czechoslovakia, Poland, Brazil, and elsewhere. Practically every country with a significant industrial sector was gradually engulfed by an unprecedented crisis. A crisis that seriously destabilized the political systems, social structures, and economic relations of all capitalist countries whose governments were based on the principles of liberal democracy. Banks collapsed en masse, factories closed, businesses disappeared, and the state and municipalities ran out of money to operate institutions, provide services, fund firefighters and police... Unemployment soared, leading to the loss of savings, property, and ultimately homes for huge masses of people, especially from the lower classes. People had nothing to eat, nowhere to sleep, and despair and hopelessness reigned everywhere. So, does it come as a surprise that under such conditions, trust in the democratic system of governance by political parties began to erode? That democratic institutions were increasingly seen as weak and ineffectual? It is only natural that the masses began to look toward strong personalities who could react quickly and decisively.
In the shadow of extremes
The political landscape in many countries became dramatically radicalized during the crisis. Moderate parties lost support, which began to shift toward the far ends of the political spectrum, both right and left. In Germany, for instance, Nazis and communists became the main contenders for political power, while traditional parties like social and Christian democrats were merely scraping by. The reason for this is clear. Both fascism and communism offered simple solutions that promised a return to order and economic stability. Never mind that this came through authoritarian methods at the expense of democratic freedoms. We all know how that ended. Both destructive ideologies ultimately drove the world into the Second World War, which remains humanity’s greatest historical trauma.
A look into the crystal ball
The Great Depression of the 1930s is such a significant topic that historians, theoretical economists, sociologists, and other experts regularly revisit it. And an inherent part of these returning visits is the question: Could something like that happen again? Recessions and crises are a natural part of the economic cycle - after a period of growth and expansion, a downturn inevitably follows. However, not all downturns are the same. For the situation to approach the severity of the 1930s, several strong negative factors would need to converge that we would not be able to mitigate through ordinary regulation. And that seems quite unlikely. Nevertheless, experts have identified several major warning signs that may herald a major crisis. There are seven in total:
1. Rising global debt: Worldwide debt, whether public (states) or private (companies, households), is at a historical maximum today. This debt can become a major problem if the economies of the most important countries begin to slow down and creditors become convinced that debtors will not be able to repay their obligations. This could lead to a sudden rise in interest rates, causing many problems.
2. Bubbles: These form due to excessive investment or speculation in a particular sector, such as real estate, cryptocurrencies, etc. When such a bubble bursts, it can destabilize the economy significantly.
3. Geopolitical instability:Wars, trade conflicts, or disruptions in supply chains can negatively affect the global economy. Take the war in Ukraine, for example. It has caused energy and food prices to rise globally, increased inflation, and forced many countries to rethink their geopolitical and trade strategies.
4. Climate change and ecological issues: The impacts of climate change, natural disasters, and problems with the availability of natural resources can cause significant economic shocks that could destabilize the global market in a major way.
5. Monetary policy and inflation: After the global financial crisis in 2008, central banks introduced extraordinarily loose monetary policies, including low interest rates. However, this approach can lead to overheated markets and increased inflation, which then forces central banks to raise interest rates and slow economic growth.
6. Technological changes: Rapid technological progress can destabilize the labor market. It can lead to increased unemployment, which would slow consumption and heighten social tensions.
7. Pandemics: The coronavirus pandemic showed us how fragile global supply chains and public health systems are. A health crisis of a similar scale could destabilize the global economy again, especially if it affects key industrial regions of the world.
WHAT TO DO?
Even though economic analysts carefully monitor all of the warning signs listed below, it is impossible to predict exactly when the next crisis will come and how deep it will be. The depressions of 1929 and 2008 were caused by a combination of several factors, some of which were not primarily economic in nature. A key lesson from the past is that economic cycles, which are fundamentally always the same, differ from one another based on the specific circumstances and characteristics of the time, and that a critical factor always at play is the ability of the governments of major countries and their central banks to respond adequately.
