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Everywhere one looks you see sadness these days.  The other day on the train a woman sat counting the fingers on her hand.  One, two, three, four, five she said, then began the counting again.  She repeated herself over and over.  Some of us riding the car couldn't help but to start smiling at her.  Her husband then spoke in a soft voice.  Ladies and gentlemen, please don't laugh at my wife.  She has lost all five of her sons in battle defending our fine nation.  Now she is gone in the head and I am taking her to the asylum.

The Nations Involved in WWI

Between the Wars


Declaration of War (American)

Flanders Field

Gavrilo Princip

Kaiser Wilhelm II


Otto Dix




Schlieffen Plan




Wilfred Owen, "Gas"

Woodrow Wilson

World War One Battles

Letters from the Front

Edward Luckart

Albert Smith

A Special Christmas Story

Christmas 1914

Music from World War One

Over There

Long Way To Tipperary

Pack Up Your Troubles


The Eclipse Of The Democracies

Author:      Wallbank Jewsbury

Date:        1992


Economic Disasters


Economic Crises And Political Retreat, 1918-1939




     World War I, the war that was to make the world "safe for democracy,"

left a legacy of physical damage, economic disruption, and doubt that

endangered the hard-won liberal victories of the nineteenth century. The

twenty years between the first and second global wars was a perilous time for

democracy. The horrible costs of the war made the victory a hollow one for the

European victors, and after the initial taste for revenge had been satisfied,

revulsion for war became widespread. The economic dislocation caused by

inflation and depression sapped the strength of the middle classes, the

traditional supporters of democracy. The certainty and belief in progress that

had helped fuel Europe's dominance in the nineteenth century was replaced by

doubt and cynicism. ^1


[Footnote 1: E. H. Carr, The Twenty Years' Crisis (New York: Harper & Row,

1964), p. 224.]


Economic Disasters


     One of the most serious problems facing the survivors of World War I was

the confused and desperate situation of the European economy. Much of the

direct and indirect cost of the war had been covered by borrowing, and now the

bills had come due in a world unable to pay them. The lasting results of the

war touched many areas. The conflict altered world trading patterns, reduced

shipping, and weakened Europe's former economic dominance. The various peace

treaties multiplied the number of European boundaries, which soon became

obstacles to the flow of goods, especially in the successor states of the

Habsburg monarchy and in Poland.


The Costs Of The War


     It is impossible to give a true accounting of the costs of any war,

because there is no way to calculate the contributions that might have been

made by those killed in battle. From 2 to 3 million Russians died, and more

perished in the civil war. Among the other major participants, almost 2

million Germans, over 1.5 million French, close to a million English, a

half-million Italians, 1.2 million from Austria-Hungary, and 325,000 from

Turkey died in battle. These figures do not count the wounded whose lives may

have been shortened as a result of their injuries. Put another way, the young

paid the highest price; it is estimated that Germany and France each lost over

15 percent of its young men.


     Estimates of the financial drain of the war range between $250 billion

and $300 billion, figuring the dollar at its early 1920s level. These figures

do not bring home the depth of the war's impact on trade, shipping, and

monetary stability. Belgium, for example, lost over 300,000 houses and

thousands of factories, and 15,000 square miles of northeastern France were in



     There is no balance sheet or set of figures to measure the psychological

expense of the conflict. How does one calculate the cost of taking 75 million

men who were mobilized away from their jobs and their homes? How can the

mental carnage inflicted on the participants be measured?


     Political institutions felt the effects of the war in different ways. The

German, Habsburg, Russian, and Ottoman empires crumbled and disappeared from

the historical stage. Replacing them were uncertain republics or

dictatorships. Those colonial empires that remained were weakened and

indigenous nationalist movements made substantial progress. Rail and

communications lines had to be reconfigured to reflect the interests of newly

created states.


     The roots of the economic problems that plagued Europe after the war -

agricultural overproduction, bureaucratic regulations, and protectionism -

could be seen before 1914. Compounding these factors were the traditional

challenges encountered in shifting from a wartime to a peacetime economy -

especially that of demobilizing millions of soldiers and bringing them back

into the labor market.


The Debt Problem


     A radical change had taken place during the war in Europe's economic

relationship with the United States. In 1914 the United States had been a

debtor nation, mostly to Europe, for the amount of $3.75 billion. The war

totally reversed this situation. The United States lent billions of dollars

and sold tons of supplies to the Allies. British blockades kept the United

States from being able to deal with the Germans, blocking further profits, but

by 1919 Europeans owed the United States more than $10 billion. This

tremendous debt posed what economists call a transfer problem. The

international obligations could be paid only by the actual transfer of gold or

by the sale of goods.


     To complicate the picture, Allied powers in Europe had also lent each

other funds, with the British acting as the chief banker, lending more than

1.7 billion. When their credit dried up, they turned to the United States for

financial help. Even though Britain owed huge sums to U.S. financiers, it

remained a net creditor of $4 billion because of its own European debtors.

France, on the other hand, stood as a net debtor of $3.5 billion. In addition

to war debts, the French government suffered greatly when the Bolsheviks

renounced the tsarist debt of some 12 billion francs - one quarter of France's

foreign holdings.


     Some of the Allies argued that the inter-Allied debts were political,

that all of them had, in effect, been poured into a common pool for victory.

These people wondered how France's contribution in the lives of its young men

could be figured into the equation in terms of francs, dollars, or pounds.

They proposed that, with victory, all debts should be cancelled. The United

States, which had gone to Paris with a conciliatory spirit toward Germany in

the treaty negotiations, changed its tune when dollars and cents were

involved. This attitude was best expressed in a remark attributed to Calvin

Coolidge, who expected full repayment, when he said: "They hired the money,

didn't they?" ^2 Beneath the extremes of these positions was understandable

motives of getting out of paying a huge debt. The German side resorted to

financial mismanagement. In the first three years after the war, the German

government, in a policy of deliberate inflation, spent much more than its

income. This policy was masked by "floating debts ... in other words, by the

printing press." ^3


[Footnote 2: T. Harry Williams, Richard N. Current, and Frank Friedel, A

History of the United States Since 1865 (New York: Alfred A. Knopf, 1960), p.



[Footnote 3: A. J. Ryder, Twentieth Century Germany: From Bismarck to Brandt

(New York: Columbia Univ. Press, 1973), p. 216.]


     The situation became so serious in the summer of 1922 that Great Britain

proposed that it collect no more from its debtors - Allied and German alike -

than the United States collected from Britain itself. Such statesmanship was

prompted by the fact that London had gained what it wanted from the peace

settlement: Germany's navy was destroyed; Germany's merchant ships were

transferred as reparations; Germany's empire was gone. No more could be

squeezed out. Britain saw that Germany would not be able to meet its

reparations payments, and without them, the payments of the inter-Allied

debts, especially debts owed to the United States, would be extremely

difficult, if not impossible, to make.


     Although the United States insisted that there was no connection between

the inter-Allied debts and German reparations, negotiations were carried on,

and debt payment plans were set up with thirteen nations. No reductions were

made in principal, but in every case the interest rate was radically

decreased. The total amount owed came to more than $22 billion.


     Germany's debt problem was complicated by the additional problem of

reparations. Although reparations constituted a drain of major proportions on

the German economy, they were far more significant as a political factor.


     The German government's calculated inflationary policies contributed far

more to the economic disaster that occurred in 1923 than did reparations.

Between May and September 1921 the value of the German mark fell some 80

percent. A year and a half later, after Germany defaulted on some payments,

French troops, supported by Belgian and Italian contingents, marched into the

rich industrial district of the Ruhr, undeterred by American and British

objections. This shortsighted French move contributed nothing to the solution

of Europe's problems and indeed played into the hands of radical German



     Encouraged by the Berlin government, German workers defied the French

army and went on strike, many ending up in jail. The French toyed for a while

with the idea of establishing a separate state in the Rhineland to act as a

buffer between Germany and France. Chaotic conditions in the Ruhr encouraged

the catastrophic inflation of the German currency to make up for the loss of

exports and to support the striking workers. The French, in return, gained

very little benefit from the occupation.


Inflation And Stabilization


     All European nations encountered a rocky path as they attempted to gain

equilibrium after the war. Britain had minimal price increases and returned to

prewar levels within two years after the signing of the Versailles treaty. On

the continent, price and monetary stability came less easily. Only

Czechoslovakia seemed to have its economic affairs well in hand.


     France did not stabilize its currency until 1926, when the franc was

worth fifty to the dollar (as contrasted to five to the dollar in 1914). In

Austria prices rose to 14,000 times their prewar level until stability of

sorts came in 1922. Hungary's prices went to 23,000 times prewar level, but

this increase is dwarfed by Poland's (2.5 million times prewar level) and

Russia's (4 billion times prewar level).


     But Germany served as the laboratory of the horrible impact of inflation

on society. Germany's prices went up a trillion times (a thousand billion)

what they were in 1914. The German mark had been worth four to the dollar in

prewar times. At its weakest point in November 1923, after the French

occupation of the Ruhr, the German mark reached the exchange rate of 4.2

trillion to the dollar. During the worst part of the inflation, the Reichsbank

had 150 firms using 2000 presses running day and night to print Reichnotes. To

get out of their dilemma, the Germans made an effective transition to a more

stable currency by simply forgetting the old one. ^4


[Footnote 4: David S. Landes, The Unbound Prometheus (Cambridge: Cambridge

Univ. Press, 1969), pp. 361-362. Gustav Stolper, Karl Hauser, and Knut

Borchardt, The German Economy: 1870 to the Present, trans. Toni Stolper (New

York: Harcourt Brace Jovanovich, 1967), p. 83.]


     The millions of middle-class Germans, small property owners who would be

the hoped-for base of the new Weimar Republic, found themselves caught in the

wage-price squeeze. Prices for the necessities of life rose far faster than

did income or savings. As mothers wheeled baby carriages full of money to

bakeries to buy bread, fathers watched a lifetime of savings dwindle to

insignificance. Pensioners on fixed incomes suffered doubly under this crisis.

The bourgeoisie, the historical basis for liberal politics throughout Europe,

suffered blows more devastating than those of war, for inflation stole not

only the value of their labor, but the worth of their savings and insurance.


     Where the middle classes and liberal traditions were strong, democracy

could weather the storm. But in central Europe, especially in Germany where

the inflation was the worst, the cause of future totalitarianism received an

immense boost. Alan Bullock, a biographer of Adolf Hitler, has written that

"the result of inflation was to undermine the foundations of German society in

a way which neither the war nor the revolution of 1918, nor the Treaty of

Versailles had ever done." ^5


[Footnote 5: Alan Bullock, Hitler, A Study in Tyranny (New York: Torchbooks,

1964), p. 91.]


Temporary Improvements


     After 1923 the liberal application of U.S. funds brought some calm to the

economic storm. Business was more difficult to conduct because protectionism

became more and more the dominant trait of international trade. Autarky, the

goal of gaining total economic self-sufficiency and freedom from reliance on

any other nation increasingly became the unstated policy of many governments.


     Nonetheless, production soon reached 1913 levels, currencies began to

stabilize by mid-decade, and the French finally recalled their troops from the

Ruhr. Most significantly, in September 1924 a commission under the leadership

of U.S. banker Charles Dawes formulated a more liberal reparations policy in

order to get the entire repayment cycle back into motion. Dawes' plan,

replaced in 1929 by the Young plan (named for its principal formulator, U.S.

businessman Owen Young), reduced installments and extended them over a longer

period. A loan of $200 million, mostly from the United States, was floated to

aid German recovery. The Berlin government resumed payments to the Allies, and

the Allies paid their debt installments to the United States - which in effect

received its own money back again.


     Prosperity of a sort returned to Europe. As long as the circular flow of

cash from the United States to Germany to the Allies to the United States

continued, the international monetary system functioned. The moment the cycle

broke down, the world economy headed for the rocks of depression. One economic

historian has written:


          In 1924-31 Germany drew some one thousand million pounds

          from abroad and the irony was that Germany, in fact, received

          far more in loans, including loans to enable her to pay interest

          on earlier loans than she paid out in reparations, thus gaining

          in the circular flow and re-equipping her industries and her

          public utilities with American funds in the processes in the

          1920s before repudiating her debts in the 1930s. ^6


[Footnote 6: Sidney Pollard, European Economic Integration, 1815-1970 (New

York: Harcourt Brace Jovanovich, 1974), p. 138.]


     The system broke down in 1928 and 1929 when U.S. and British creditors

needed their capital for investments in their own countries. Extensions on

loans, readily granted a year earlier were refused. Even before the U.S. stock

market crash on October 29, 1929, disaster was on the horizon.


     Few people in America could admit such a possibility during the decade,

however. The United States had become the commercial center of the world, and

its policies were central to the world's financial health. The United States

still had an internal market in the 1920s with a seemingly inexhaustible

appetite for new products such as radios, refrigerators, electrical

appliances, and automobiles. This expansion, based on consumer goods and

supported by a seemingly limitless supply of natural resources, gave the

impression of solid and endless growth.


     Tragically, the contradictions of the postwar economic structure were

making themselves felt. The cornerstones of pre-1914 prosperity - multilateral

trade, the gold standard, interchangeable currencies - were crumbling. The

policies of autarky, with their high tariff barriers to protect home products

against foreign competition, worked against international economic health.

Ironically, the United States led the way toward higher tariffs, and other

nations quickly retaliated. American foreign trade seriously declined, and the

volume of world trade decreased.


     There were other danger signals. Europe suffered a population decline.

There were 22 million fewer people in the 1920s in the western part of the

continent than had been expected. ^7 The decrease in internal markets affected

trade, as did the higher external barriers. Around the globe, the agricultural

sector suffered from declining prices during the 1920s. At the same time that

farmers received less for their products, they had to pay more to live - a

condition that afflicted peasants in Europe and Asia and farmers and ranchers

in the United States.


[Footnote 7: Landes, The Unbound Prometheus, p. 365.]


     In the hopes of reaching an expanding market, many food raisers around

the world borrowed money to expand production at the beginning of the decade.

Many farmers went bankrupt as they could not keep up with payments on their

debts. The food surplus benefitted consumers, but across the world

agricultural interests suffered. Tariff barriers prevented foodstuffs from

circulating to the countries where hunger existed. By the end of the decade,

people in the Orient were starving, while wheat farmers in Whitman County,

Washington, dumped their grain into the Snake River and coffee growers in

Brazil saw their product burned to fuel steam locomotives. The countryside

preceded the cities into the economic tragedy. ^8


[Footnote 8: Pollard, European Economic Integration, 1815-1970, pp. 140-142.]


The Great Crash


     Because of America's central position in the world economy, any

development, positive or negative, on Wall Street reverberated across the

globe. The United States, with roughly 3 percent of the world's population,

produced 46 percent of the globe's industrial output. The country was

ill-equipped to use its new-found power. Its financial life in the 1920s was

dominated by the activities of daring and sometimes unscrupulous speculators

who made the arena of high finance a precarious and exciting world of its own.

This world, however, was not dominated by businessmen pursuing long-term

stability. Their blind rush for profit led to America's crash, which in turn

sparked a world disaster. ^9


[Footnote 9: William R. Keylor, The Twentieth Century World (Oxford: Oxford

Univ. Press, 1984), p. 133.]


     Even before the stock market crash, Wall Street had been showing signs of

distress such as capital shortfalls, overly large inventories, and

agricultural bankruptcies. But nothing prepared financiers for the disaster

that struck on October 29, 1929 - Black Thursday. By noon, Wall Street was

caught in a momentum of chaotic fear. The initial hemorrhage of stock values

stopped by the end of the trading session, but the damage was done.


     John Kenneth Galbraith has written: "On the whole, the great stock market

crash can be much more readily explained than the depression that followed

it." ^10 Overspeculation, loose controls, dishonest investors, and a loss of

confidence in the "ever-upward" market trend can be identified as causes for

the crash. Further causes can be traced to the inequitable distribution of

wealth, with the farmers and workers left outwhile the top 3 percent grew

incredibly rich and irresponsible. Industrial overexpansion was fueled by

speculators buying stock on the margin, with insufficient cash backing for the

investments. In addition, the government's hands-off policies permitted

massive abuses to take place unchecked.


[Footnote 10: John Kenneth Galbraith, The Great Crash 1929 (Boston: Houghton

Mifflin Co., 1961), p. 173.]


     The international impact of the crash can be explained by the involvement

of investors and bankers from a number of countries in the U.S. market, the

interdependent world economic structure, the peculiar Allied debt and

reparations structure, the growing agricultural crisis, and the inadequate

banking systems of the world.


     Some economic historians believe that the cycle of highs and lows hit a

particularly vicious low point in 1929. Crashes had occurred before, but never

with such widespread repercussions over such a long period of time. In the

United States, stock prices declined one-third overall within a few weeks,

wiping out fortunes, shattering confidence in business, and destroying

consumer demand. The disaster spread worldwide as American interests demanded

payment on foreign loans and imports decreased. The Kredit-Anstalt of Vienna

did not have enough money to fill demands for funds from French banks and

failed in 1931. This set in motion a domino-like banking crisis throughout

Europe. Forecasts by Washington politicians and New York financiers that the

worst was over and that the world economy was fundamentally sound after a

"technical readjustment" convinced nobody. There would be no easy recovery.


The World Depression


     By 1932 the value of industrial shares had fallen close to 60 percent on

the New York and Berlin markets. Unemployment doubled in Germany, and 25

percent of the labor force was out of work in the United States. In nation

after nations, industry declined, prices fell, banks collapsed, and economies

stagnated. In the western democracies the depression contributed even more to

the feelings of uneasiness that had existed since 1918. In other countries,

the tendency to seek authoritarian solutions became even more pronounced.

Throughout the world people suffered from lowered standards of living,

unemployment, hunger, and fear of the future.


     The middle classes on the continent, which had suffered from inflation

during the 1920s, became caught in a whiplash effect during the depression.

Adherence to old liberal principles collapsed in the face of economic

insecurity, and state control of the economies increased. Governments raised

tariffs to restrict imports and used command economies, an expedient usually

reserved for wartime. As conditions deteriorated, fear caused most governments

to look no farther than their own boundaries. Under the competing systems of

autarky, each nation tried to increase exports and decrease imports.


     After almost a century of free trade, modified by a comparative few

protective duties levied during and after World War I, Great Britain finally

enacted a high tariff in 1932 with provisions to protect members of its

empire. In the United States the Hawley-Smoot Act of 1930 increased the value

added duty to 50 percent on a wide variety of agricultural and manufactured



     Another technique to increase exports at the expense of others was to

depreciate a nation's currency - reduce the value of its money. When Japan

depreciated the yen, for example, U.S. dollar or British pound could buy more

Japanese goods. In effect, lowering the yen reduced the price of Japanese

exports. In most cases, however, devaluation brought only a temporary trade

advantage. Other nations could play the same game, as the United States did in

1934 when it reduced the amount of gold backing for the dollar by 40 percent,

thus going off the gold standard.


     The debt problem that grew out of the war worsened during the depression.

In 1931, U.S. president Herbert Hoover gained a one-year moratorium on all

intergovernmental debts. The next year at the Lausanne Conference, German

reparations payments were practically canceled in the hope that the United

States would make corresponding concessions in reducing war debts. The

Americans, for a variety of domestic financial and political reasons, refused

to concede that there was a logical connection between reparations and war

debts. As the depression deepened, the debtors could not continue their

payments. France refused outright in 1932; Germany after 1933 completely

stopped paying reparations; Britain and four other nations made token payments

for a time and then stopped entirely in 1934. Only Finland continued to meet

its schedule of payments.


     Individual families had as many, or more, problems in paying their bills

as did the governments of the world. Factories closed down and laid off their

workers. Harvests rotted in the fields as the price of wheat fell to its

lowest figure in 300 years. The lives of the cacao grower in the African Gold

Coast, the coffee grower in Brazil, and the plantation worker in the Dutch

East Indies were as affected as those of the factory worker in Pittsburgh,

Lille, or Frankfurt.


     The 1929 crash occurred in an economic framework still suffering from the

dislocations of World War I. It began a downturn in the world economy that

would not end until the world armed for another global conflict. Whether the

depression ended because of World War II or whether the world would have

eventually come out of the low part of the cycle is a question that will

always be debated. The weaknesses in American stock market operations were by

and large addressed in a series of reforms.


     From the major banks to the soup lines in villages, the depression had

profound implications for politics. The combination of inflation and

depression threatened representative government. Unemployed and starving

masses were tempted to turn to dictators who promised jobs and bread. The

hardships of economic stability, even in those countries where the democratic

tradition was strongest, led to a massive increase in state participation in

the daily life of the individual.