After the First World War, the American economy experienced a manufacturing boom. The European economy, however, had collapsed under a destroyed infrastructure and hyperinflation. In Germany, this was further compounded by reparations payments demanded by the Treaty of Versailles.
It soon became apparent that there was no international market to meet America's manufacturing output, and consumer confidence declined. On October 24, 1929, a panic began on Wall Street, the financial center of New York City. As investors frantically tried to sell stocks they feared would soon become worthless, and no one wanted to buy stocks for the same reason, they had to sell for less and less, fulfilling their own fears. The market lost 25% of its value over a three-day period.
There was then a "run on the banks" as everyone tried to withdraw their savings at the same time. Banks don't work like that, and were soon out of money. Trade between Europe and America declined by 45%. Businesses began to go bankrupt. Those that did not started to cut costs and lay off their employees, which caused widespread unemployment. The resulting loss of people's disposable income further reduced the market for manufactured goods, causing more businesses to go bankrupt. Unemployment continued to spread, and as loanholders began to call in loans and mortages, many were unable to make payments, driving them into poverty and homelessness. The economy's downward spiral over the next ten years became known as the Great Depression.
In the United States, President Herbert Hoover was largely blamed for the crisis, and was replaced in the election of 1932 by Franklin Delano Roosevelt. "FDR," as he was commonly known, worked with Congress to develop a "New Deal," a program of deficit-spending that sought to put people back to work. Massive infrastructure projects like the Tennessee Valley Authority and Public Works Administration were put into place, paying workers to build roads, bridges, and dams. Although the United States treasury was just printing money to make these payments, which causes inflation, the reduction in unemployment helped the market to recover and increased consumer confidence, which began to spur an American economic recovery.
Europe was less successful in this area. Economic chaos, social unrest, and widespread dissatisfaction with the status quo caused many people to turn to political extremism. The Soviet Union was already a left-wing dictatorship under Joseph Stalin, and fear of the spread of Communism turned much of Europe in the other direction. A civil war in Spain pitted republicans, anarchists, and communists against monarchists, conservatives, and nationalists, ending in the dictatorship of General Francisco Franco. A military coup in Poland put Grand Marshal Józef Piłsudski in control of the country. Violent revolution swept Italy and ushered Benito Mussolini and his Fascist Party (fasci is the Italian word for "group") into power, turning King Victor Emmanuel III into a figurehead. In Germany, which had been hit hardest by the depression, the National Socialist Party (more commonly known as the Nazis) gained a foothold as a fringe group in the Reichstag (Parliament) and from that position outmaneuvered President Paul von Hindenburg to gain control over the government. The Nazi leader, Adolf Hitler, was soon granted emergency powers and appointed to a new position as "Supreme Leader (Führer)."
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