The economic wars started about 10 years before the hot wars. The Great Depression brought economic suffering
to virtually all nations, which led to fighting over wealth within and between countries that led to the hot wars that
began a decade later.
In 1929 gold (and to a lesser extent silver) was money, and paper money represented a promise to deliver it (there
was a Type 2 monetary system in the world, as explained in Chapter 2). In the Roaring ’20s a lot of debt (promises
to deliver paper money that was convertible to gold) was created to buy speculative assets (particularly stocks).
When the Federal Reserve tightened monetary policy in 1929 to curtail the speculation, the bubble burst
and the global Great Depression began.
The debt problems in the US were ruinous for American banks, which curtailed their lending around the world,
hurting international borrowers. At the same time the depression created weak demand, which led to the collapse in
US imports and other countries’ sales to the US. As their incomes weakened their demand fell and more credit
problems occurred in a self-reinforcing downward economic spiral. At the same time the US turned protectionist to
safeguard jobs, so it raised tariffs (via the passage of the Smoot-Hawley Tariff Act) in 1930, which further
depressed economic conditions in other countries.
Turning protectionist and raising tariffs to protect domestic businesses and jobs during periods of economic bad
times is common. It leads to reduced efficiency because production does not occur where it can be done most
efficiently, and it typically contributes to greater global economic weakness as raising tariffs usually leads to
tariff wars that typically cause the country that raised tariffs to lose exports too. It does however benefit those
entities protected by the tariffs and can create political support for the leader who is imposing the tariffs.
When the Great Depression began, Germany, Japan, the Soviet Union, and China were already suffering.
Germany struggled under the burdens of its World War I debt and the occupation of the Rhineland by foreign
forces. Japan suffered a classic big debt crisis in 1927 that was followed by a severe depression in 1930-31 and
then a classic massive currency devaluation, fiscal stimulation, and debt monetization that pretty much wiped out
financial wealth in Japan. The Soviet Union suffered from its 1917-22 revolution and the civil war, a lost war to
Germany, a costly war with Poland, a famine in 1921, and political purges and economic hardships through the
1930s. China suffered from civil war, poverty, and a famine in 1928-30. So when things worsened in 1930, bad
conditions became desperate conditions in these countries, which set in motion the economic and eventually
military conflicts that followed.
To make matters worse droughts in the US and in the Soviet Union soon followed. The drought/famine in the
Soviet Union, in combination with extreme government policies, was so severe that it caused millions of deaths.
Harmful acts of nature (e.g., droughts, floods, and plagues) have often caused periods of great economic
hardship that when combined with other adverse conditions have led to periods of great conflict. Over the next
several years in Russia internal political fighting and fears of Nazi Germany led to purges of hundreds of
thousands of people who were accused of spying and shot without trials.
While Germany had previously been saddled with tremendous reparation debts following World War I, in 1929 it
was beginning to emerge from under the yoke of these via the Young Plan, which provided for considerable debt
relief and the departure of foreign troops from Germany by 1930. However, the global depression hit Germany
hard, leading to 25% unemployment, massive bankruptcies, and extensive poverty. As is typical, a battle
between populists of the left (communists) and populists of the right (fascists) emerged. Adolf Hitler, the
leading populist-fascist, tapped into the mood of national humiliation to build a nationalist furor, casting as the
enemy the World-War-I-ending Treaty of Versailles and the countries that imposed it. He created a nationalist
program of 25 points that gave something to everyone and rallied support around it. In response to internal
fighting and a desire to restore order, Hitler was appointed chancellor in January 1933, drawing large support
for his Nazi Party from industrialists who feared the communists. Two months later, the Nazi Party won the most
support and the most seats.
In the United States in 1932 there was the presidential election that led to the election of Franklin D. Roosevelt,
who many considered a populist of the left. Promptly after his inauguration, in March/April 1933, he defaulted on
the promise to convert paper dollars into gold, provided money to all banks so depositors at those banks could get
their money, ordered all gold in denominations of more than $100 to be turned in for paper money at a rate of
$20.67 per ounce, and devalued the dollar in relation to other currencies. There were also big fiscal spending