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1931 Crisis in Lithuania

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2021-10-28
This year marks the 80th anniversary of the major global economic crisis hitting Lithuania. This crisis, which began in 1929, was caused by a nine-year period (1920–1929) of rapid and unbalanced economic growth, lack of control of the financial system, and irresponsible investment. Many industrial companies around the world collapsed, and millions of people were left without work. Lithuania, an agricultural country with a less developed industry, felt the consequences of this crisis only a few years later, in 1931. However, the crisis still managed to reach our country and affected not only the economy but also the social life of people. 

Before the crisis in Lithuania...

Of course, the news of the onset of a global crisis reached Lithuania almost as soon as it began. However, there were doubts as to whether it would even reach Lithuania, and the press at times mocked the countries experiencing this crisis. “Crisis” in Lithuania quickly became an ironic concept to describe a difficult life. This term was often used in advertisements or even in dating ads. It was the subject of various jokes, feuilletons, and poems. 

The early 1930s did not bode anything bad for Lithuania. The economy was more or less strong, many Lithuanians already were quite wealthy (or at least they did not feel deprivation), and some often spent money outside their means. Lending among private individuals was also very widespread, often without thinking about how credits will be repaid. However, the financial literacy of people was very low. 
The crisis was approaching relentlessly, but this fact was denied in both the press and by the government. To some extent, there were reasons for such an approach. Lithuania was one of the few countries to which the crisis came so late. It had been identified internationally as an exception and an example for other countries. Even neighbouring Latvia felt the difficulties of the crisis almost immediately, and its poor anti-crisis solutions further aggravated the situation. A wave of bankruptcies and unemployment spread across the country. Lithuania had not experienced such difficulties for some time. The prices of particular goods had even decreased, and the litas remained one of the most stable currencies in Europe. The possible consequences of the crisis were expected to be mitigated by the modernisation of agriculture. However, this process was too slow.

Why was the crisis so slow to reach Lithuania? This was due to several reasons. First, Lithuania was economically lagging behind other countries and global change had not reached it as quickly. Second, there was practically no industry here — Lithuania was a land of agriculture. Third, Lithuania avoided government crises during this period. Fourth, the thriftiness that was characteristic of Lithuanians also contributed. Although, as mentioned above, living outside one’s means had gradually become customary, most people adhered to old habits and did not spend without good reason. 

The view that the crisis would simply pass over Lithuania was maintained until mid-1931. Interestingly, in 1931, revenue to the state budget was even higher than in 1930. Exports were also higher than ever before. There were a lot of loans. It was hard to believe that something could change. However, signs of the crisis were already being felt, and in the summer of 1931, it swept in so suddenly that the situation changed completely.

The beginning of the crisis

Even before the crisis accelerated in Lithuania, certain signs and losses experienced by the country’s economy could already be observed. As agricultural prices started to fall around the world, farmers began to feel the losses. 

The beginning of the crisis coincided with another phenomenon, which is now considered a negative one — emigration. In the 1920s, emigration from Lithuania was very high, but it was not a major issue. The country was not rich and emigration in some sense was even considered useful for Lithuania. However, with economic cataclysms beginning around the world, emigration started to decline rapidly, and in 1931 it almost stopped completely. The government also had to deal with employment issues. 

Since the second half of 1931, the decline in agricultural prices started to affect the economy. The competitive power of Lithuanian agricultural production was weakened. The decline in export opportunities and the increase in the cost of imported products led to the collapse of foreign exchange reserves, a drop in the purchasing power of the population, and an increase in the burden of tax debts and interest. 
Farmers suffered the most. Many of them went bankrupt. Some companies also experienced difficulties in reducing salaries and posts. Many farmers, left without land and jobs, were attracted to cities to find employment opportunities. However, in larger companies, unemployment was very low compared to other countries. And the industry (because it was practically non-existent) even grew during the years of the crisis!

In 1932, the Lithuanian press had already publicly declared that the crisis reached Lithuania. At that time, the situation of almost all Lithuanian farmers had deteriorated significantly. 

The crisis accelerates

Although Lithuania managed to avoid a large number of unemployed people, there also was an increase in the number of unemployed. It is estimated that the number of unemployed people increased by at least five times as early as 1933. There was a lack of work even in the summer (in the past, that had not been the case). People’s dissatisfaction also increased. 

The crisis affected both the Lithuanian economy and the banking sector. The currency devaluation caused by the bankruptcy of major banks led to an international credit crisis and a lack of confidence in money. The undervaluation of the English pound caused significant losses to the Bank of Lithuania. 

In July 1935, some Lithuanian commercial banks lost up to 30% of their deposits within a week. Depositors rushed to withdraw deposits from banks and invest money in real estate. The export of capital from Lithuania increased significantly. During the crisis, the state budget revenue decreased by a quarter, from LTL 340 million to LTL 257 million, while the Bank of Lithuania’s gold and foreign exchange reserves decreased — by three times — from LTL 126 million to LTL 40 million.

Despite significant losses, the credit system did not experience any major shocks. Only small credit companies went bankrupt or were liquidated: In 1932 — the Nurokai brothers’ bank house, several mutual credit societies, and 28 small credit societies. Meanwhile, three banks went bankrupt in Latvia and two in Estonia. 

However, it was necessary to find solutions to halt the crisis and its consequences. 

Solutions to manage the crisis

Only when the crisis began did rumours about the introduction of anti-crisis measures also start. Some of them were naive and ridiculous (e.g. the bachelor tax or the firing of female managers whose husbands earned a lot) but some were actually effective. As is often the case in crisis situations, it all started with austerity and “strap tightening.” Saving was done by showing that the government was concerned with the problems of society, which is why it was also, to some extent, a demonstrative measure. 

In the autumn of 1931, the first anti-crisis plan was distributed. It presented the need to monitor state expenditures, reduce the allowances of officials, stop unnecessary construction, etc. It is true, however, that, to show that farmers were supported, one of the instructions was not to increase the land tax. 

As an example of austerity, the first president of the Republic of Lithuania, Antanas Smetona, and members of the Government, abandoned their wage benefits. In 1933, an Ordinance on the abolition of all additional salaries in the civil service and the limiting of business trips was issued. Even telephone conversations were limited. There were also prohibitions for civil servants to visit gambling houses, coming to service when drunk, or leaving their place of work without permission from their superiors.

There were even more proposals to reduce staff costs. For example, reducing the number of independently-hired persons, dismissing those who had additional sources of income, those who had been working for more than 25 years, married women-officials, etc. 

One of the strangest directives, implemented in 1934, was an order for officials to buy the geese that were no longer being bought by foreign countries, thus adding to the state budget. Category I officials had to buy one goose, category II — two geese, etc. And those who received a permanent additional salary had to buy even more geese (one goose for every 50 litas over their base salary). 
In addition to these somewhat naive solutions to deal with the crisis, the government took other steps to rebuild the public economy. Exports were encouraged, prices of certain products were regulated, and the market for agricultural production was formed. There was also social policy in place. There has been a strong focus on employment, regulated labour demand and supply, etc. In essence, the “statification” of work started, and the idea of work camps, to which the unemployed would be sent, spread. 

To ease the burden of loans on borrowers, the Bank of Lithuania reduced the interest rate several times to increase the reserves of gold and foreign exchange and preserve the stability of the litas. In the autumn of 1935, foreign exchange operations were controlled by restrictions on foreign exchange sales. Currency control was entrusted to the Bank of Lithuania. 

Although the changes took place, the crisis was slow to withdraw. This began around 1934, but some areas (especially cultures) felt it for a long time. However, Lithuania’s economy recovered.

Consequences of the crisis

This crisis can be described as the biggest economic crisis that had ever taken place in Lithuania. It was important to note that it was also very universal, covering all social circles and branches of the economy. Although, of course, the crisis was not and could not have been a very positive thing, it was possible to see positive developments in addition to its negative consequences. 

Even before the 20th century, there was a strong opinion that Lithuania was only an agricultural country, and Lithuanians were at most able to engage in trade. It was during the crisis that this attitude evolved rapidly, and an understanding of entrepreneurship began to emerge. Its lack led to the crisis being experienced by both the state and a very large number of its individual population. Thus, during the crisis there was more and more talk about Lithuanian entrepreneurship — the aim was to create a modern class of entrepreneurs. As a result, organisations in different fields of business were established, and even conferences of traders and industrialists took place. 

There were also small changes among farmers. During the crisis, farmers began to keep their farm accounts more closely, paying more attention to debts, and looking for new ways to earn money. It was understood that trade can also be broader, and more original, but that it also required careful planning. 

So, the crisis also gave Lithuania good lessons, which the Lithuanians took, learned diligently, and began to put into practice. Unfortunately, the twists and turns of history did not allow us to fully understand what these lessons would have given later. After the crisis, independent Lithuania only existed for five more years. 

Sources: 
 

1. Krizė keičia Lietuvą: 1931–1935 metų pokyčiai visuomenėje ir valstybėje, Zenonas Butkus, Norbertas Černiauskas, 2015;

2. https://knyga.kvb.lt/lt/parodos/temines-leidiniu-parodos/item/187-1929-1933-m-pasaulines-ekonomines-krizes-itaka-lietuvai-ir-latvijai

3. Pinigai Lietuvoje 1915–1944 m. Vladas Terleckas, 1992;

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