8.5 Global Economic Crisis

The war left Britain and France owing large debts to the United States, and Germany owing reparations to the Allies. Governments had printed money to pay for the war, so currencies lost value; international trade was disrupted by new borders and nationalist tariffs; and farms and factories, expanded for wartime demand, produced more than buyers could afford, so prices fell. In the late 1920s speculation, buying stocks with borrowed money in hopes of quick profits, inflated a bubble in the United States.

In 1923, when Germany fell behind on reparations, French and Belgian troops occupied the Ruhr, Germany's industrial heartland. The German government paid workers to strike in passive resistance by printing money, and hyperinflation exploded: by November 1923 one U.S. dollar was worth about 4.2 trillion marks. Middle-class savings were wiped out, a memory that made many Germans fear chaos.

The Dawes Plan (1924) reduced Germany's annual payments and arranged American loans. For a few years, money moved in a circle: American lenders lent to Germany, Germany paid reparations to Britain and France, and they repaid their war debts to the United States. The system depended entirely on American money continuing to flow.

After the Wall Street crash of October 1929, American banks called in loans and stopped lending. The United States raised tariffs sharply (1930), and other countries retaliated, so world trade shrank dramatically. The failure of Austria's largest bank, the Creditanstalt, in 1931 set off a banking crisis across central Europe. Britain abandoned the gold standard in 1931, and reparations were effectively ended in 1932.

Unemployment soared. Germany had around six million registered unemployed by early 1932, close to a third of its workforce. Britain's old industrial regions, such as coal mining and shipbuilding areas, suffered badly. Farmers in eastern Europe were ruined by collapsing crop prices.

The Depression discredited governments that seemed unable to act, and it pushed voters toward extremes. In Germany, the Nazi share of the vote jumped from 2.6 percent in 1928 to 37.3 percent in July 1932, making the Nazis the largest party in the Reichstag, while the Communists also gained. Desperation, fear of communism and anger at Weimar's austerity helped bring Hitler to power in January 1933 (8.6).

Not every country turned to dictatorship. Britain, France, the Scandinavian states and the Low Countries kept their democracies, and Sweden's model of cooperation became a basis for later welfare states (9.6). The Soviet Union, with its planned economy, was isolated from world markets and seemed to many Western observers to be avoiding the Depression, which helped communism's appeal, although the Soviet countryside was suffering famine at the time.