European Economic Crisis

From Roses, Tulips, & Liberty

The European Economic Crisis of 1922–1928 was a sharp deflationary recession across Europe, Asia and parts of the Americas. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.


Most historians blame the crisis on a perfect storm of factors starting with the Rhine Republican Revolution (and it’s accompanying capital flight) that led to a large decrease in demand in the nations of Northern Europe and lack of investor confidence in European stock markets. By 1921 the inflation rate across European markets was failing and consumer spending was declining. On July 2nd 1922, in the aftermath of massive famines across eastern and central Europe, the Amsterdam, London and Moscow stock exchanges all fell almost 25% leading to the ruination of many businesses and a major bank run. Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money became necessary for many as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand. The decrease in the money supply and the onset of deflation was exacerbated by a lack of a unified response to the crisis by policymakers across the continent and the bubbling up of national and civil strife that occurred in the wake of the crisis.

Other causes

In addition to the generally agreed upon account of the crisis, many other heterodox and non mainstream economists have had other interpretations of the events that led to the crisis. Communards tend to blame the sharp stock market fall in 1922 on a crisis of overproduction amongst capital with a particular focus on the heavy reliance of risky speculative investments. Nationalist Republicans on the other hand tend to blame the integrated and non-self-sufficient nature of European economies at the time which created a domino effect of crises across the continent. In contrast to these two answers progressives have long argued that the crisis was extended by the inflexibility of the gold standard in Europe. They say that, even countries that did not face bank failures and a monetary contraction first hand were forced to join deflationary policy since higher interest rates in countries that performed a deflationary policy led to a gold outflow in countries with lower interest rates. Under the gold standard's price–specie flow mechanism, countries that lost gold but nevertheless wanted to maintain the gold standard had to permit their money supply to decrease and the domestic price level to decline (leading to deflation). Additionally, they say, countries that remained on the gold standard, keeping currencies fixed, were more likely to implement protectionist policies to strengthen the balance of payments and limit gold losses which in turn decreased the money supply. While countries that had abandoned the gold standard at the time (mostly American nations that adopted a bi-metalist policy) allowed their currencies to depreciate which caused their balance of payments to strengthen. It also freed up monetary policy so that central banks could lower interest rates and act as lenders of last resort.

Effects of the Economic Crisis

The effects of the EEC were widespread and numerous, with many countries across Europe seeing a GDP fall of over 20% and unemployment rates across the continent rising up to 30% in some places.

Nations EEC Impact GDP Fall
Rhine Republic Extremely High 31
Poland Extremely High 32.5
Moldavia Extremely High 29
Saxony Extremely High 28.5
Sicily Extremely High 29.5
Austria High 20
Spain High 17
Sweden High 17.5
Wallachia High 21
Tuscany High 21
Denmark High 20.5
Russia Highest Impact 35.5
Ireland Low 3.5
Portugal Low 4.5
Piedmont Moderate 8.5
Sardinia Moderate 7
United Kingdom Moderate 9
Norway Moderate 5.5
Switzerland Moderate 6.5
Illyria Moderate 9.5
Venice Moderate 8
Lombardy Moderate 9
Pomerania Sigificant 13
France Sigificant 12.5
Ottomans Sigificant 14.5
Savony Sigificant 15.5
Genoa Sigificant 12.5
Netherlands Very High 24
Latial Rep. Very High 24.5
Naples Very High 23
Hannover Very High 25.5

Figure 1. Percent drop in GDP across several European Nations in years between 1922 and 1928.

Social & Political Effects

The crisis served to worsen political relationships in the Italian peninsula, with politicians in the less economically self sufficient southern Italian states (mostly allies of France at the time) blaming British and Venetian bankers shortsightedness and greed for the worse of the EEC's effects. Additionally the EEC is commonly believed to be one of the most important causes of the the 1925 Russian Revolution and the growth of National Republican ideology across Eastern Europe.