Despite some initial success, Romero's and Arujo's plans for democratic consolidation were brought to an abrupt end by international events. The Wall Street Crash in November 1929 and the Great Depression that followed were catastrophic for El Salvador. Virtually all - 95 percent - of her exports were coffee. As the market for this collapsed after 1929, so did the country's economy. All were affected, in particular the landless poor, for whom living conditions deteriorated appallingly. Unrest both amongst the destitute masses and the elite grew, and in December 1931 Arujo's brief period in office was ended by a military coup , engineered by the vice-president General Maximiliano Hernández Martínez.

Social unrest over the deteriorating conditions suffered by campesinos and the urban poor grew, exacerbated by growing repression meted out by the new government. On the night of January 22, 1932, thousands of campesinos - the majority indigenous - led by the Communist Party, rebelled . Armed mainly with machetes they attacked military installations and haciendas in the west of the country, assassinating hundreds of civilians including government functionaries and merchants. Mainly because plans to rebel had been widely known in the days before the event, the rebellion itself was rapidly quashed by superior government forces. The ringleaders were arrested and later executed.

The scale of government repression in the wake of the failed rebellion was unprecedented in the history of the country. The army, the police, the Guardia Nacional and the private forces of the hacienda owners engaged in a week-long orgy of killing. During " La Matanza " ("the massacre"), as it became known, anyone suspected of connections to the rebellion, anyone wearing indigenous dress or anyone simply perceived to be guilty was shot out of hand. In some cases, whole villages disappeared. Exact figures have never been known, but the death toll is estimated at up to 30,000 people, although the government itself insisted that only 2000 were killed. For El Salvador's indigenous population, the effects of the massacre went far beyond the immediate death toll. As it became increasingly dangerous to be identified as indio (indian), traditional dress, language and customs largely disappeared.