Between 1919 and 1938, Europe, as well as other countries across the world, experienced a period of relative peace and stability, politically speaking.

This came after the horrors of the First World War, which had a variety of short- and long-term causes, although the assassination of Archduke Franz Ferdinand in Sarajevo in 1914 is generally considered to have been one of the more immediate triggers.

Although the First World War lasted a little longer than four years, when the war did finally end, after years of armed conflict and occupation, the time came for countries to rebuild.

From an economic point of view, this interwar period between the First World War and the Second World War was not particularly smooth sailing. Although European economies did have periods of brief stability during this twenty year period, stability has to be considered against a backdrop of intense loss, both emotionally, physically, and financially, coupled with a rise in nationalism in Germany during the 1930s.

Many European countries, including France, Belgium and Germany

had been torn apart by fighting, meaning that many towns, cities, and communities needed to be rebuilt. This, on top of the fact that many millions had lost their lives or had become casualties of war, left workforces sparse, and nations suffered as a result.

Finally, there’s the fact that the sheer cost of the war was extraordinary, and decimated the reserves of more than one country.

The Interwar Years Were Characterised By Struggle

Europe changed during the interwar period in many ways.
Europe's geographical boundaries changed between the world wars. (Source: CC BY-SA 3.0, Ssolbergj, Wikimedia Commons)

The difficulties that European nations faced during the interwar period were all interlinked, as their struggles could be traced back to the financial losses incurred during the First World War.

However, each nation had its own set of problems during this time, as we will see below. What’s more, Europe wasn’t the only continent to suffer economically during the interwar years.

In fact, some of the economic turmoil that Europe experienced can be traced back to policies that were in place in the United States of America, as well as the subsequent global repercussions of the Great Depression during the end of the 1920s and the beginning of the 1930s.

Below, we examine some of the struggles that global economies faced during this interwar period, and how those struggles were interlinked. The countries in focus are Britain, Germany and The United States.

The Interwar Economy of the United States

The economy of the United States in the early 1920s was significantly different than that of European countries. This was due in part to the fact that their economy was in a better shape on account of the fact that the U.S.A. had acted as a creditor to the Allied nations during the First World War, and as such demanded repayment from those nations now that the war had ended.

Another reason things were fairly roaring along was that, following the bleakness of war came an era of unprecedented innovation and manufacture: automobiles, household appliances such as refrigerators and radios, telephones and, perhaps best of all, the widespread proliferation of cinema.

It is in this era that America's celebrity culture is rooted; athletes, actors and other prominent persons were hired to promote all of the new products rolling off assembly lines all around the country.

Easy credit terms, along with a plethora of goods for purchase stimulated the American economy. In this time of prosperity, the American government, with a newfound sense of magnanimity, eased the burden of Germany's repayment obligations, first through the Dawes' Plan; later under the Young Plan.

The Dawes' Plan

Due to their inability to make their second reparations payment to France, Germany lost access to its most fertile industrial area, the Ruhr region. Their inability to make use of the installations in that region formerly theirs was unfairly crippling their ability to rebuild their own economy. That, in turn, led to them taking punishing measures to repay their war damages to other nations.

Whereas initially, German banks were conducting elaborate financial manoeuvers to meet their obligations, it soon became apparent that the system was a house of cards, destined to fall. All of the allied nations - Britain, France and the US knew something must be done to stave off another flavour of German disaster.

The Dawes Committee, so named because it was chaired by American banker Charles Dawes, drafted a plan that would give Germany more leeway to rebuild both its country and economy while still meeting its obligation to repay for the war.

  • Allied troops would clear out of the Ruhr area, permitting German manufacture to begin once again
  • The Central Bank (Reichsbank) would be reorganised under the supervision of Allies
  • Germany would be made a loan of around $200 million, most of it from Wall Street bonds, to get things started
  • A portion of revenues derived from transportation, taxation and customs fees would be earmarked for reparations payments
  • Germany would be held liable for 1 billion Marks repayment the first year, that amount increasing in subsequent years to a total of 2.5 billion Marks within five years.

Now with liquid assets to pay France and Great Britain, and with industry once again humming along, Germany soon joined America and France in celebrating the Roaring Twenties.

In accordance with the Treaty of Versailles, the U.S.A. was to be repaid for their war loans in dollars and gold.

Germany found clever but ultimately damaging ways to meet that burden. France, relying on Germany to pay their debts, ended up unable to repay their obligation due to Germany's default.

This created additional strain on the Western European economies, who then found themselves borrowing from other nations to make the payments, leading America to further eased reparation obligations for Germany through the Young Plan.

The Young Plan expected Germany to default on around two-thirds of its obligation to American banks and so, wrote the plan in such a way that only one-third of the total debt must be met unconditionally. The plan further relaxed repayment terms, making it easier than ever for Germany to comply.

It's better to get a little than get nothing at all.

So  was the prevailing attitude in American government and on Wall Street and, with an influx of money and through their increasingly protectionist policies, the U.S.A. enjoyed a period of relative stability and economic growth during the mid-1920s, which in turn led to an increase in world trade as well as speculative trading.

Nevertheless, this period of stability was not to last, and in 1929 the Wall Street Crash occurred, which sent the U.S.A., as well as Europe, into a deep economic depression. It was against this backdrop of economic turmoil that extremist parties, including the Nazi and Communist parties in Germany, gained greater popularity.

No German felt the humiliation of the Versailles Treaty more than Adolf Hitler, who fomented unrest and sought to overthrow the existing government even as the economy hummed along. He would later be appointed as German Chancellor, rewrite the laws so that they would permit him absolute power and ultimately, start World War Two in 1939 by invading Poland.

Can you tell where the borders were redrawn in western Europe?
Following the Treaty of Versailles, western Europe's borders were redrawn Source: Pixabay Credit Hans

Germany's Economy in the Interwar Period

Germany’s interwar period is perhaps best described as turbulent.

After the end of the First World War the Treaty of Versailles, among many others, was put in place. This agreement as especially punishing to the Germans as it contained a series of measures, including:

  • Acknowledgment by Germany and her allies that they were responsible for causing all of the loss and damage during the war
  • The requirement for Germany to make reparations payments and territorial concessions
  • The demilitarisation of the Rhineland to afford extra protections for France, an economically and strategically weaker nation

The treaty was contentious at the time, not least amongst the German people, but also due to the volume of reparations payments that Germany was required to make. Famous economists, such as Keynes, wrote at the time to argue against such untenable payments.

The belief among some was that, by placing such a financial burden on Germany, there was little chance of the German economy getting back on its own two feet following the war. Although reparations payments went ahead, these fears do in part seem to have been borne out by history.

The Hyperinflation of the Weimar Republic

Going into the war, the plan was that, through successful military campaigns, Germany would annex resource-rich lands to the east and west.

Furthermore, those countries suffering defeat would be made to pay massive reparations, all of which would serve to boost the country's financial coffers. With that strategy in place as the rumbles of war echoed throughout Europe, the German Parliament felt confident in suspending the gold standard and printing more currency, effectively financing their war with debt.

Germany failed in her economic strategy by losing the war. Instead of reaping the spoils, Germany suffered the ignominy of being blamed for all of the war's damages on top of being saddled with a huge debt to pay.

Because of their pre-war strategy to abandon the gold standard, their currency, the Mark, had already lost substantial value. All of the world powers knew about that.

To prevent the Germans paying their debt with useless currency, the Reparations Committee formulated the London Payment Plan, forcing Germany to pay in gold or foreign currency instead of paper money - a smart move on their part. 

The first payment was made in gold, as ordered, severely depleting Germany's coffers. To offset the loss, they printed millions of Mark notes and exchanged them for foreign currency. That money was then used to make the next reparations payments.

Unfortunately, this devaluation of their currency led to inflation: by August 1921, it took 321 Marks to buy $1.

Germany was unable to pay the next instalment of their note to France the next year. In response to that, France marched on Germany's industrial Ruhr area, taking up occupation of that country's industrial cradle. The workers, instructed to not resist the invaders, effectively went on strike - but had to be paid, somehow. It wasn't their fault they couldn't work; their government had ordered passive resistance.

Germany printed yet more banknotes to meet that demand.

Bread became very expensive at times during the German inter war period.
The cost of a loaf of bread is often used as an example of the extreme hyperinflation that Germany experienced during the interwar period. (Source: CC BY 2.0, Jeff Keacher, Flickr)

For some context of how extreme Germany’s hyperinflation was...

Imagine going into a supermarket to buy a loaf of bread. The price of that loaf when you first entered the supermarket hovered around £90 but then, as you shopped, it doubled or tripled in price. By the time you finished your shop, that loaf of bread will cost you 82 times as much as it had when you first entered the shop!

In an effort to avert an economic meltdown, American investment banker J.P. Morgan organised a series of reparations conferences in June 1922. These meetings yielded no satisfactory results and the Mark devalued even further - now it took 7,400 Marks to buy one dollar.

Germany asked for a moratorium on reparations payments at various times. Amendments to the payment terms were granted through the Dawes Plan and, later, the Young Plan but these changes did not provide for a long-term solution.

Through these two initiatives and, most importantly, the restoration of the Ruhr industrial zone - one of the terms of the Dawes Plan, the German economy recovered enough to enjoy what they called Die Goldene Zwanzige - The Golden Twenties, their version of the Roaring Twenties.

Although Germany’s economic situation was nearly untenable at the beginning, when the Great Depression hit Europe in the early 1930s, they were economically sound enough to weather it with minimal damage.

Economics of The United Kingdom Between the Wars

The U.K. had its own set of struggles during the interwar period, due to the fact that, like their European Allies, a huge amount of the country’s wealth had been spent in order to finance the First World War.

Taxation was the primary indicator of this economic shift: prior to the war, a wealthy man might pay up to 8% of his income in taxes; after the war that percentage jumped to more than four times that amount - around 33%.

In spite of wealthy citizens' higher tax burden replenishing state coffers, the following four factors made for a lackluster economy in Great Britain:

  • The labour shift away from coal and steel production meant that more people were unemployed and relying on the dole to see them through.
    • Approximately 5% of the national revenue went to support families during periods of no work.
  • Our country's resistance to modern methods of business and industry such as assembly line work, consumer credit and eliminating surplus goods served to further weigh our economy down.
  • The shipping industry, once dominant in world trade, failed to turn a profit since the war despite several stimulus packages.
  • Winston Churchill, at that time Chancellor of the Exchequer, put the country back on the gold standard - a move criticised by many economists as keeping the economy down.

By the mid-1920s, the British economy had at least stabilised, even though revenues were rather slim and unemployment was still rampant, especially in the industrial north and in Wales, where mining was a main source of employment.

This caused a political shift rather than an economic one. the Liberal party collapsed, bringing the Labour Party to the forefront as contenders against the Conservative Party. 

As Labour represented (and still represent) trade unionists, much was done to protect the rights and benefits of workers during that time. However, in spite of their best efforts, Scotland and Northwest England still suffered long periods of economic uncertainty and hardship.

Because Britain's actual financial cost of the war was relatively low - it suffered more economic stress because of disability and death, our country only reluctantly supported the Treaty of Versailles.

As mentioned before, our chief economist, John Keynes, felt that the treaty was far too harsh on Germany and would, in fact, prevent that country's economic recovery.

With America financing Germany's repayments for war damages, Britain was guaranteed her share of the monies which she used, in turn, to repay her debt to America.

Looking ahead, our country's leaders hoped to forge trade relations with Germany once that country was restored, but hopes of bringing Germany onto the global economic stage as an equal partner through various trade deals soon were dashed.

The horrors of war were still fresh in everyone's mind. The great powers - America, Britain and France believed that strong alliances would serve as a deterrent to war.

In their efforts to prevent another worldwide conflict, they also sought to limit, among other instruments of war, naval might and weaponry. Furthermore, these allies sought peace with Germany through a series of treaties negotiated at Locarno, in Switzerland.

Through such cooperation, forethought and rigorous planning, the United Kingdom weathered the global economic depression fairly well. We had just time enough to enjoy our bit of the Roaring Twenties before the global economy crashed, but even that event did not impact us so severely.

During this time, our country's trouble was more political. The Chanak Crisis nearly set us to war with Turkey but, in the end, even that conflict was averted, albeit narrowly.

What really rattled British sabres was the rise to power of Adolf Hitler. The uncertainty of another possible war with Germany, coupled by the death of our beloved King and the abdication of his son, who soon made highly publicised appearances in Nazi Germany... that's what put our country in turmoil! 

The Great Depression sent the global economy into decline in the interwar years.
The Great Depression hit during the interwar years. (Source: CC0 1.0, geralt, Pixabay)

The Interwar Period From An Economist’s Point Of View

The interwar period is a fascinating one, both from a historical and economic perspective.

Although the period only spans around twenty years, the world as a whole saw tremendous shifts during that time.

While one of the most famous results of the interwar period – namely, the rise of Hitler and the Nazi Party – is well known, it’s equally true that other countries faced their own political and economic struggles during this period, as countries tried to move on from the horrors of the First World War and rebuild their nations and economies.

This attempt to rebuild peace was ultimately shattered with the start of the Second World War.

Historians have pointed out the short- and long-term causes of World War Two. One of the most prominent factors was the long-simmering German resentment over what they saw as the subjugating terms in the Treaty of Versailles. To reassert its might, under orders from the Führer, German troops marched on relatively defenceless Poland in September 1939, leading Britain and France to jointly declare war on Germany.

The start of World War Two undid all the work that had been made to encourage a lasting global peace, including the work of the League of Nations, which was founded in 1920.

Oddly enough, the interwar period is not always a primary focus of economics courses, whether at school or university. Although an emphasis is placed on areas such as macro- and microeconomics, economic history does have a tendency to fall by the wayside.

However, economic history can be very satisfying, not to mention enlightening, area of economics to study. So, if you’re offered the chance to take a module covering economic history, it is well worth studying it.

If such a course is not offered as a part of your curriculum syllabus, you might see if such is offered as an online course, as a massive open online course (MOOC).

Economic history classes can cover all sorts of historical economic events, including:

  • The Industrial Revolution;
  • The interwar period and the Great Depression;
  • The workings of ancient economies; and
  • The 2008 financial crisis.

If you’d like to study or learn more about economic history, then you can also reach out to an economics teacher on Superprof for help. Superprof has economics tutors with specialisms and interests across a wide range of economics subjects, so you should be able to find a tutor that specialises in economic history at a price point that suits your budget.

By entering your subject preference and postcode, you can be matched with tutors in your area. However, online sessions with a Superprof tutor are also an option for anyone who would prefer to study remotely.

Read more about the Roman Empire economy.

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