The 1920s saw further modernization of the world economy and concerted efforts by Europeans and Americans to build a future free of war. This changed by the 1930s. One of the greatest causes of the long spiral downwards to World War II was the Great Depression, which struck in 1929. As the leading creditor nation, the United States was crucial to the health of world markets. After the New York stock market collapsed in October 1929, the American credit-based economy contracted. Existing loans were called in, and new loans were cancelled.
The impact was especially severe in Europe, which had depended on American loans to recover from World War I. A wave of bank failures in the United States had a ripple effect in London, Berlin, Tokyo, and other financial capitals. In the following years, global unemployment rose to double-digit levels. Countries tried to protect their economies by cutting public expenditures and limiting imports, which tended to worsen the problems. For example, the United States passed the highest tariff (a tax on imports) in its history, further limiting its trading partners’ abilities to repay their American debts.
The great hardships of the Depression led to social instability and a rise in political extremism in many nations. Communists on the left criticized the obvious failings of capitalism and advocated Soviet-style collectivism, while fascists on the right sought governmental control and direction of private enterprise to achieve national self-sufficiency. Britain, France, and the United States remained democracies even as they experimented with more state regulation of their economies. Japan, Italy, and Germany, on the other hand, looked to dictatorial rule to unify their divided societies, overcome economic hardships, and solidify national power and prestige through aggressions against their neighbors.