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.

Popular pages: The Interwar Years (1919-1938)