Ulmanis dictatorship

On May 15, 1934, Kārlis Ulmanis, one of the key leaders of Latvian independence, and Jānis Balodis, the Minister of War, staged a bloodless coup d'état that ended parliamentary democracy. The constitution was suspended, the parliament was dissolved, and all political parties were banned. Press censorship was introduced, and opponents from both the extreme left and right—including Pērkonkrusts nationalists, Social Democrats, and pro-Nazi Baltic Germans—were arrested, with some, like Gustavs Celmiņš, imprisoned.

Economic Reforms and State Control

Ulmanis' government actively expanded state control over the economy. The regime established Chambers of Trade, Industry, Agriculture, and Labor between 1934 and 1936, bringing cooperative societies and farmers under state supervision. To stabilize agriculture, bankrupt farmers were given debt relief, and the Central Union of Dairy Farmers was tasked with controlling the dairy industry.

In 1935, the Credit Bank of Latvia was created to replace foreign capital, leading to nationalization of foreign and minority-owned businesses. Large state-owned enterprises were formed, reducing competition among private firms. By 1939, the state controlled 38 companies across key sectors.

• Significant industrial developments included:
• Vairogs produced railway carriages and licensed Ford-Vairogs automobiles.
• VEF developed innovative products like the Minox camera and experimental aircraft.
• The Ķegums Hydroelectric Power Station (completed by Swedish companies) became the largest power station in the Baltics.

After the gold standard was abandoned, Latvia pegged the lats to the British pound in 1936, devaluing the currency and boosting exports. By 1939, Latvia enjoyed an economic boom propelled by agricultural exports, achieving higher GDP per capita than Finland and Austria. However, it took nearly 10 years to fully recover from the Great Depression.

Foreign Policy and Neutrality

Latvia pursued strict neutrality in the late 1930s, avoiding entanglement in European conflicts. In 1936, Latvia secured a non-permanent seat on the League of Nations Council and re-established its embassy in Washington, which later became crucial for maintaining Latvian diplomacy during the Soviet occupation.

As tensions in Europe grew:

• December 1938: Latvia formally declared absolute neutrality.
• March 1939: The Soviet Union claimed it was committed to protecting Latvian independence.
• June 1939: Latvia signed a non-aggression treaty with Germany.

When World War II began, Latvia remained neutral, though it was increasingly isolated. The Baltic Sea was blocked by Germany, cutting off trade with the United Kingdom. The Soviet-Latvian Mutual Assistance Treaty (October 5, 1939) allowed the Soviet Union to station troops in Latvia, but also opened new trade opportunities. In late 1939, Latvia signed trade agreements with both Germany and the Soviet Union, exchanging food exports for oil, fuel, and chemicals.

Impact of World War II on Latvia’s Economy

Latvia’s agricultural economy suffered as seasonal Polish laborers were no longer available due to the war. In response, the government introduced mandatory labor service for state employees, students, and schoolchildren in spring 1940 to fill labor shortages.

The Ulmanis dictatorship was characterized by centralized economic planning and political suppression, though it achieved economic recovery and stability after the Great Depression. However, Latvia’s neutrality and efforts to balance relations with both Germany and the Soviet Union could not prevent the looming threat of occupation. The regime’s policies set the stage for Latvia’s involvement in World War II and the eventual Soviet annexation in 1940.