Although the world economic crisis which developed at the end of the 1920s is known as the 1929 depression, the decline in economic activity occurred in different years in the Central America republics; the first country to experience a downturn in the value of exports was Nicaragua in 1926, while in Honduras the fall in exports was delayed until 1930/1; the phrase ‘1929 depression’ is therefore a convenient, if slightly inaccurate, description for the events which unfolded in Central America in the period after 1926.

The impact of the world depression was transmitted to Central America in the first instance through a fall in commodity prices. The peculiar nature of banana prices received by Central America, however, meant that earnings from this commodity (see Chapter 2, pp. 35–6) did not follow the pattern set by other primary exports, and the performance of those republics mainly dependent on banana exports (the banana republics) differed accordingly from those mainly dependent on coffee earnings (the coffee republics).

The decline in commodity prices, particularly for coffee, could not be offset by increases in volume, and export earnings fell. This reduction put a severe strain on the newly established currency stability, but the exchange rate at first held its ground and imports were savagely reduced through a combination of demand-reducing falls in real income and non-price rationing. By 1932, however, Costa Rica and El Salvador were obliged to break the link with gold, and their exchange rates began to depreciate against the US dollar.