Britannica
Sources used in this answer
- Great Depression - The gold standard
- Smoot-Hawley Tariff Act
- money - The decline of gold
- history of Europe - The impact of the slump
- 20th-century international relations - Political consequences of the Depression
- history of Latin America - World war and world trade
- Great Depression - International lending and trade
- history of Latin America - The emerging force of nationalism
How did reduced U.S. lending abroad affect other countries in the late 1920s?
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Great Depression
Unemployed men standing in line outside a soup kitchen, Chicago.
In the late 1920s, the reduction of U.S. lending abroad significantly destabilized the global economy, as many nations had become heavily dependent on American capital and liquidity following the Dawes Plan of 1924.1
As U.S. investors increasingly diverted their savings toward the booming domestic stock market, new capital issues for foreign accounts dropped by 78 percent between 1928 and 1929. This contraction of international credit had several severe consequences:1
- Economic Downturns: The withdrawal of capital led to credit contractions and declines in output in borrower countries. Notably, the economies of Germany, Argentina, and Brazil began to turn down even before the Great Depression officially began in the United States.2
- Financial Instability: The sudden cessation of capital flows left countries vulnerable to banking panics. In Europe, the collapse of the Creditanstalt in Austria in 1931 triggered a wave of financial crises that spread across the continent.31
- Policy Constraints: Many nations were forced to adopt contractionary monetary and fiscal policies to maintain the gold standard and defend their currencies against gold outflows, which further depressed prices and increased unemployment globally.341