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Postwar Economic Devastation
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 grave pessimism and poverty for many. Living standards declined dramatically at the close of the war, the infant mortality rate skyrocketed, and life grew more and more difficult. The widespread material destruction totaled billions of dollars of damage, and the war's prosecution had cost 6.5 times as much as the total national debt of the entire world during the previous century.
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 its foreign investments, and 90 percent of its mercantile fleet, all on top of 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 production slowed, unable to meet the increasing demand 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, but their economic troubles were far from over.
German Financial Troubles
The depression made it increasingly impossible for the debtor countries to pay their war debts. Germany pleaded with Britain and France for a moratorium on reparations payments, but France would not agree, even sending troops into the Ruhr in 1923 when Germany defaulted on its payments. In 1924, American politician Charles Dawes presented his solution: the Dawes Plan. 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. Germany accepted the plan on August 27, 1924, and as a result, Germany was able to pay on time for a short while.
However, most of the debt paid 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 when the Young Plan replaced the Dawes Plan, lowering annual payments yet again, Germany continued to struggle. This was only worsened by Great Depression in the early 1930s, and felt particularly keenly in Germany due to its overwhelming dependence on short-term capital to pay its debts.
Allied Debts
Meanwhile, the European Allies, the “victors,” had their own financial problems, ending the war deeply indebted to the United States. Fearing the depreciation and collapse of foreign currencies, the United States demanded payment in dollars and gold, a situation which put a great deal of pressure on European treasuries. As a result, European nations were forced to borrow money to pay back the money they had already borrowed. This reliance on short-term loans at high rates, as well as the foolish extension of credit to the struggling powers by speculating creditor nations, only served to drive up national debts even further and generally overextend the nations of Europe financially.
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, led by US creditors, increased as the result of better economic times. However, this prosperity was deceiving. European currencies were still unstable, and simply responded to speculation, not realistic economic indicators. Additionally, this prosperity was distributed unevenly throughout Europe. Thus, when the Great Depression hit, it all came crashing down as currencies collapsed and any hopes of stability were dashed. Ironically, it was only the outbreak of another war that would solve the financial problems created by the first one.
