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.

Popular pages: The Interwar Years (1919-1938)