As the Depression spread and deepened, governments desperately sought ways to revive, or at least protect, their ailing economies. One tactic was to raise tariffs and establish import quotas, trading blocs, and bilateral trade pacts. However, by 1933, this had helped cut world trade to one-third of its 1929 level. Another policy was to reduce government spending by cutting public works programs and civil servants' salaries. But this only created more unemployment and fewer consumers to revive the economy.
A third tactic, started by Britain, was to go off the gold standard and then devalue the British currency, which now had no gold backing it up. The idea was to make other nations' currencies and goods more expensive in comparison to Britain's and thus make the cheaper British goods more appealing to British and foreign customers. However, other countries followed Britain's lead, so nothing was gained, and everyone's currencies were devalued and less stable. Therefore, the Depression deepened even more and international tensions grew.
As the situation worsened, there emerged a growing realization that the laissez faire economics of the nineteenth century was no longer working and that governments must take a more active role in reviving their national economies and looking after the welfare of their citizens. Among the more innovative theories along that line was that of John Maynard Keynes, a British economist whose Keynesian Economics has been one of the most influential economic theories of this century.
The problem as Keynes saw it was that during a depression businesses need sales in order to provide jobs to families, while families need jobs to get the money to provide businesses with sales. However, neither individual businesses nor families have the resources to help themselves or each other out of the downward spiral of depression. Keynes saw the modern industrial state as the only institution with the power and resources to help both businesses and families and to revive a national economy.
However, the state's role is not to respond to changing economic conditions in the same way as a business or family would. Rather, it should act in an almost contrary way in order to maintain stability. Therefore, the state should tax high and spend low in prosperous times in order to build up treasury surpluses. Then, during times of economic hardship, governments would tax low and spend their surpluses to provide jobs for families in such things as public works programs. The money earned from those jobs would lead to increased sales for businesses and an overall revival of the economy. Governments would then go back to taxing high to restore their surpluses in anticipation of the next economic downturn.
While governments generally did assume larger roles in trying to solve the Depression, they did it in different ways. The United States, under Franklin Delano Roosevelt, set up the New Deal, which supported vital industries, banks, agriculture, and public works to provide jobs and stimulate the economy. It also set up a social safety net, Social Security, which provided relief for the aged and unemployed. Later, this would be expanded into a virtual retirement fund, although that was not its original purpose. Britain reversed its earlier austerity policy of cutting government salaries and public works, and funded new industries such as shipping, electricity, and, later, armaments as the clouds of World War II loomed on the horizon. In both cases, the United States and Britain were in better positions to act when war came.
More fascist governments, such as Germany, Italy, and Japan, followed more aggressive and militant policies. Nazi Germany and, to a lesser extent, Italy embarked on rapid rearmament programs that provided jobs, but poured money into weapons industries that are unproductive unless they are used in the one thing for which they are suited: war. Japan was especially hard hit by the Depression since it had virtually no natural resources and had lost the trade needed to buy them. This situation prompted a military takeover of the government and an invasion of China to secure a food and resource base. In both Europe and Asia, these events were already undermining the collective peace and laying the foundations for World War II.