HS-102 Readings

The European Economy in the Interwar Period

WHAT HAPPENED TO THE WORLD ECONOMY AS A RESULT OF
WORLD WAR I?

HOW DID THE UNITED STATES REACT TO ITS NEW ROLE AS THE CENTER OF THE WORLD ECONOMY?

WHAT WAS THE BASIS OF U.S. PROSPERITY IN THE 1920,S? HOW WAS THE
EUROPEAN ECONOMY DEPENDENT ON THE UNITED STATES?

WHAT WAS THE BASIC CAUSE OF THE GREAT DEPRESSION IN THE UNITED
STATES?

HOW DID THE DEPRESSION IN THE UNITED STATES AFFECT EUROPE?

WHAT WAS THE EFFECT OF THE NEW DEAL UPON THE DEPRESSION IN THE
UNITED STATES?

WHAT WAS THE EFFECT OF FASCIST POLICIES IN ITALY AND GERMANY UPON THEIR NATIONAL ECONOMIES?

WHAT WAS THE EFFECT OF WORLD WAR II UPON THE DEPRESSION IN THE
UNITED STATES AND THE WORLD?

    The European economy was devastated by the war, while the United States economy grew in response to the demands of the war. Economic leadership shifted from the England and London to the United States and New York. The United States became the creditor nation of the world while England, for the first time since the beginning of the industrial revolution, became a debtor nation.

    The American people, accustomed to isolation, were not prepared to accept the responsibility of world leadership. The United States drew away from Europe, insisting that Europe pay its debts. The United States claimed no reparations and saw no connections between reparations and inter-Allied debts.

    The reality, however, was that England and France and other debtor nations could not pay their debts unless they received reparations from Germany. Germany, also devastated by war, could not finance its own recovery and pay reparations too.

    When Germany defaulted in 1923, and experienced massive inflation, financial reforms had to be introduced to stabilize the German economy. The only way to accomplish that was to create the means by which American investment could be made in German recovery.

    Beginning in 1924, under the Dawes Plan, German bonds were sold to American private investors. This enabled the German economy to recover, reparations payments to be made, and inter-Allied debt payments as well.

    This was a system based upon the economy of the United States. As long as the U.S. economy was prosperous, the system worked. When the U.S. economy failed, the system collapsed. The war had created the circumstances which caused Europe to be helpless before the onslaught of the depression which struck the United States in 1929.

    The U. S. economy had been prosperous throughout the 1920,s because, at the end of the war, U.S. industry was very productive and wealthy with the capital to finance growth, U.S. consumers had worked and saved during World War I and they created a demand for the products of industry. This occurred at a time when new technology added new products and a higher standard of living for most Americans.

    However, consumer buying power diminished gradually because the greater proportion of new wealth went to industry and the wealthy. Labor unions were weak and workers wages, though increasing slowly, fell behind relative to the growth of industry.

    By 1927, demand had leveled off. By 1929, demand was decreasing. The stock market was over-extended with inflated share prices and generous margin requirements. This set the stage for the collapse of the market in the Fall of 1929. By the summer of 1932, the market had declined to about 1/10th of its value. Americans were no longer buying German bonds, Austrian and German banks had collapsed, and reparations and debt
payments had stopped. The depression had occurred primarily because of the maldistribution of wealth in the United States and the resulting lack of consumer demand.

    Economic nationalism caused world trade to be cut in half, further exacerbating the depression. Widespread unemployment and economic hardship was prevalent throughout the Atlantic world.

    A new president, Franklin Delano Roosevelt, elected in 1932, had managed to begin a slow recovery by creating an atmosphere of hope, and using the government to stimulate economic activity. This involved defying conventional wisdom by running a deficit. But it was done only on an experimental basis without really understanding why it was desirable to have deficit spending. Therefore, it was not pursued vigorously. When the policy was reversed in 1937, the U.S. economy began to slip back into depression. The New Deal, in the face of fierce opposition from most of the leaders of industry, had turned the depression around and introduced a new era of government involvement in
the economy, but had not gone far enough or fast enough to restore prosperity.

    Only the unlimited expenditures and the huge deficit spending of World War II would finally and decisively end the depression.

    The depression in Europe and in Asia created the desparate conditions, the vast insecurity, which enabled Hitler to come to power in Germany, and the Japanese military to seize control in Japan.

    As Germany, Italy and Japan armed themselves, jobs were created which helped those economies. This economic improvement coupled with the stimulation of national pride, which is a feature of fascism, ensured mass support and a feeling that the fascist state was the wave of the future.

    But because fascism also involved a glorification of war, German and Japanese policies led to World War II, a war which, in the end, destroyed the fascist regimes which had launched it.

    World War I created the conditions which allowed fascism to develop, and which caused the American depression to become a global depression. The depression and the rise of fascism led to World War II.

Thus, it can be said that World War I created the conditions which caused
World War II.