The Interwar Years (1919-1938)

During World War I, some 10 million Europeans were killed, about 7 million were permanently disabled, and 15 million seriously wounded, mostly young men of working age and middle class backgrounds. This loss, combined with the destruction of land and property, led to a European situation of grave pessimism and poverty for many. Living conditions declined dramatically at the close of the war, the infant mortality rate skyrocketed, and life was quite difficult for Europeans of the period. The widespread material destruction totaled billions of dollars of damage in Europe. The war's prosecution had cost the nations of Europe six and one-half times as much as the total national debt of the entire world during the years from 1800 to 1914.

The Allies bore the brunt of the debt, and material damages, France especially. But the Central Powers were punished severely by the war's concluding treaties. Germany lost 15 percent of its pre-war capacity, all of its foreign investments, and 90 percent of its mercantile fleet. The Treaty of Versailles imposed reparations payments which were generally considered intolerable and impossible. In Austria, agricultural production fell 53 percent from pre-war levels, and starvation was a persistent problem. Inflation hit all of Europe in the first years after the war, as pent up demand was released and production fell off due to a shortage of raw materials. By 1920, prices in Hungary were 23,000 times what they had been before the war, and in Russia the multiplier was 4 million. A sharp depression in 1920 and 1921 corrected prices to some extent.

This depression, however, meant that the debtor countries increasingly found it impossible to pay their war debts. Germany pleaded with Britain and France for a moratorium on reparations payments, but France would not agree, and in fact, sent troops into the Ruhr in 1923, when Germany defaulted on its payments. In 1924, a solution was presented in the form of the Dawes Plan, presented by the American, Charles Dawes. Under this plan the total sum owed by Germany would remain the same, but the yearly payments were reduced, and Germany was granted a loan. The German Chamber of Deputies accepted the plan on August 27, 1924. As a result, the German mark began to stabilize, and Germany was able to pay on time for a short while.

Meanwhile, the European Allies had their own financial problems. They ended the war deeply indebted to the United States. The United States demanded payment in gold and dollars, which the Allies borrowed from creditor nations, creating even greater debt elsewhere.

From 1925 to 1929, Europe entered a period of relative prosperity and stability. However, unemployment remained high, and population growth outstripped economic growth. During this time, world trade increased and speculative investment increased as the result of better economic times. US creditors, flush with capital coming in from Europe, led this speculative movement.

Germany continued to struggle with reparations payments, and in 1930, the Young Plan replaced the Dawes Plan, lowering annual payments yet again, but to no avail. In attempts to maintain benefits for the unemployed and drive prices down, taxes were hiked, and unemployment shot up again. As the Great Depression that had struck the United States in 1929 began to set in throughout Europe in the early 30s, banks began to collapse. Despite international loans, Germany, and Europe as a whole, plunged into depression, during which currencies collapsed and all hope of stability was dashed. Despite efforts to stabilize world prices and European employment, Europe remained mired in depression until the outbreak of World War II.

PARAGRPH Most of the financial costs incurred by that nations fighting in WWI were covered by deficit spending. As a result, the money supply increased without any regard to the actual gold and silver reserves of the European nations. Most nations were forced to abandon the gold standard, causing their currencies to depreciate rapidly and creating rampant inflation. However, many analysts argue that strict government policies, implemented at the correct times, could have kept this inflation in check. Regardless, these measures were not taken, currencies remained wildly unstable, and world trade could not be resumed. The widespread borrowing of money to make debt payments only served to worsen the situation. Reliance on short-term loans at high rates, and the foolish extension of credit to the struggling powers by speculating creditor nations only served to drive up national debts even farther, and generally overextend the nations of Europe financially.

Germany was no exception to this rule. Most of the money paid by Germany to Britain and France under the Dawes Plan came in the form of borrowed money. Between 1924 and 1929, Germany borrowed 28 billion marks, and paid some 10 million in reparations. Even without a depression in the early 1930s, this situation was likely to collapse on the Germans' heads. When the depression did hit, it was magnified in Germany by this overwhelming dependence on short-term capital.

While Europe struggled to rebuild during the 1920s, the United States prospered as the major creditor of the Allied nations. The United States feared the depreciation and collapse of foreign currencies, so demanded payment in dollars and gold, a situation which put a great deal of pressure on European treasuries. However, US financial institutions benefited greatly from this influx of capital, and sought ways in which to invest it, driving up the US stock market by speculation, and often sending capital back to Europe in the form of loans. American financial experts favored massive international loans as a means of increasing American exports, increasing employment, and strengthening the already mighty dollar. American enthusiasm for speculation raised the economic tide both at home and in Europe from 1925 to 1929, but in the end, the situation proved unsustainable.

This period of outward prosperity belied the problems beneath. There was no international agreement on currency stabilization, so it was carried out haphazardly, in a varied, unsynchronized fashion by the nations of Europe. Currencies responded to speculation during the period of prosperity, rather than to realistic economic indicators. Additionally, the prosperity achieved during the late 1920s was distributed unevenly throughout Europe. All of this meant that the situation was primed for a sharp correction. That correction came in the early 1930s, plunging Europe into economic hard times once again.