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Difficulty: HardCauses of the Great Depression

"European nations can pay their obligations to the United States only in three ways: in gold, in goods and services, or by securities. The export of gold on the scale required would destroy European currencies. The export of goods is blocked by the rising tariff walls of the United States. Consequently, Europe has paid its debts largely by borrowing new capital from American investors. This circular flow of credit cannot continue indefinitely. If American investment in foreign securities declines, the international trade and debt structure will face immediate collapse."

— Adapted from an American memorandum on international economic relations, 1928

The pattern of international trade and finance described in the excerpt most directly contributed to the onset of the Great Depression by doing which of the following?

  1. A
    Demonstrating that the United States had maintained a policy of absolute economic isolation from European nations during the 1920s.
  2. Creating an unstable global credit system that collapsed when American private investment in foreign nations ceased.Answer
  3. C
    Prompting the immediate implementation of federal relief programs that successfully stabilized international currency values.
  4. D
    Forcing the federal government to abandon protective tariffs in order to encourage unregulated laissez-faire global trade.

Answer

The correct answer states that the pattern of international trade and finance created an unstable global credit system that collapsed when American private investment in foreign nations ceased.
The correct answer is correct because the international financial system of the 1920s relied heavily on a circular flow of capital: American banks lent money to Germany, Germany paid reparations to Britain and France, and Britain and France paid their war debts to the United States. Because of high U.S. protective tariffs, European nations could not sell goods to earn the dollars needed to repay these debts. When American investors stopped lending to Europe in the late 1920s to chase higher returns in the domestic stock market, this fragile credit cycle collapsed, destabilizing global banking and contributing significantly to the onset of the Great Depression.

Step-by-Step Solution

1
Analyze the stimulus to identify the central economic mechanism described.
The passage describes a circular flow of capital where European nations pay war debts to the United States using funds borrowed from American private investors, while U.S. tariffs block European exports.
Understanding the core argument of the source is necessary to link it to the systemic causes of the Great Depression.
2
Recall the historical context of late 1920s international finance and how it changed.
American investment in Europe declined sharply in 1928 and 1929 as capital shifted toward the booming U.S. stock market.
This explains the trigger that disrupted the fragile circular flow described in the memorandum.
3
Evaluate the choices to determine how this international cycle contributed to the depression.
The sudden halt in American lending caused European bank failures and economic contraction, which reduced foreign markets for American goods and deepened the domestic depression.
Connecting the disruption of international lending to the global economic collapse reveals the correct answer.

Key Concept

International Debt Structure of the 1920s
Estimated Time:2m 0s
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Topics

Causes of the Great Depression

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