In the 1920s, the war was over and European nations were rebuilding their economies. Many took loans from the United States, and only the United States and Japan came out of the war better than before. Americans had a booming stock market but there were still serious weaknesses that was about to lead to an economic downturn.

  • Postwar Europe

    World War I left European countries bankrupt, giving the United States domination in world affairs.

    • Unstable New Democracies
      • The end of the war brought the rise of democracy, as European absolute rulers were overthrown. The new governments such as the Provisional Government in Russia tried to create constitutional and democratic rule. While the Russian government did fall and become communist, most other nations had democracies.
      • However, many citizens were unfamiliar with this kind of government. They had dozens of political groups, making it impossible for one to govern effectively. Often, no single party would win a majority and a coalition government was needed. Because of disagreements, coalitions easily broke apart.
      • These frequent changes in government made it hard for countries to move to long-term goals, making voters sacrifice democracy for a strong dictatorship.
  • The Weimar Republic

    Germany’s post war government was formed in 1919, and was known as the Weimar Republic. This republic was weak, as German citizens blamed them for losing the war and humiliating Germany in the Versailles Treaty.

    • Inflation Causes Crisis in Germany
      • Germany faced economic problems after the war, as they had simply printed more money when they needed it. Unlike the other nations, who charged taxes, Germany cheapened its money. As inflation set in, people needed more money to buy goods, and people began to question the government.
    • Attempts at Economic Stability
      • Germany recovered from 923 inflation thanks to an international banking group. This group was led by an Charles Dawes, an American banker, who provided a $200 million dollar loan to help stabilize the German currency.
      • This plan started in 1924, slowing inflation and attracting loans and investments from the US. By 1929, German factories were back to their pre-war levels.
    • Efforts at a Lasting Peace
      • Once Germany’s future seemed secure, Gustav Stresemann and France’s Aristide Briand tried to improve relations. In 1925, these two ministers met in Locarno, Switzerland along with officials from Italy and Britain. This treaty declared that they would not make war against each other and that Germany would respect Belgium and French borders. Germany joined the League of Nations.
      • In 1928, this policy of peace continued with the Kellog-Briand peace pact. The US Secrety of State and France’s Aristide Briand worked together, getting almost every country in the world to sign, agreeing to renounce war as a national policy.
      • However, this treaty could not be enforced as the only possible group, the League of Nations, had no military. Also, the League did not have the American support. Even so, the peace agreement was a good start.
  • Financial Collapse

    The world’s economy in the 1920s was completely dependent on the US. In 1929, the US economy weakened, triggering a global economic collapse.

    • A Flawed US Economy
      • There were several weaknesses in the US economy – uneven distribution of wealth, overproduction, and Americans who began to buy less.
      • By 1929, the American factories made most of the world’s goods. However, the wealth they earned was not evenly spread, and around 60 percent of families were too poor to buy the goods produced by factories. Unable to sell goods, store owners lowered their orders from factories. Factories reduced production and laid off workers. This spiral continued on.
      • Overproduction also affected American farmers. Scientific methods made higher crop yields possible, and global production led to a huge surplus of agricultural products. This kept agricultural products prices low.
      • These farmers could not make a profit, and were unable to pay off bank loans. The unpaid debts forced some banks to close. These signs should have stopped people from gambling on the stock market, but no one listened.
    • The Stock Market Crashes
      • In 1929, Wall Street was the financial capital. The optimism in the US economy resulted in growing prices for stocks. Many people began buying stocks. These people bought a percentage of the stock’s price as down payment and borrowed the rest from a stockbroker. However, if the prices fell, they would be unable to pay the loan to the stockbroker.
      • In 1929, some investors began to sell their stocks. By October 24, the stock market was sliding downward with everyone selling. The market collapsed after around 16 million stocks were sold.
  • The Great Depression

    People could not pay back the money they borrowed from stockbrokers. Stocks became worthless, and unemployment rose. This Great Depression cut factory production by half in 1932, businesses failed, banks closed. People lost the money in their savings accounts at banks farmers lost lands when they failed at their mortgage payments. By 1933, 1/4 American workers were jobless.

    • A Global Depression
      • This depression spread across the world as bankers demanded repayment from overseas loans and investors took their money back. American demand for foreign goods dropped as imported goods got high taxes. This policy backfires, and the economy continues to worsen. Foreign exporters also suffered and World trade dropped by 65 percent. Unemployment soared.
    • Effects Throughout the World
      • Because Germany and Austria depended on American loans, they were hit hardest. The Austrian bank failed in 1921, Asian exports dropped by half, and Latin American products collapsed.
  • The World Confronts the Crises

    This depression challenged democracies, as each country dealt with it uniquely.

    • Britain Takes Steps to Improve Its Economy
      • Britain was hit hard by the depression. Their response was an elected National Government. This government passed high taxes, tariffs on imported goods, and regulated currency. It slowed the depression and started a steady recovery. Britain avoided the extremes and kept democracy.
    • France Responds to Economic Crisis
      • France was more self-sufficient. Even so, it was still affected – by 1935, 1 million French workers wee unemployed.
      • The political instability was enhanced by the economic crises and five coalition governments came to power and fell in one year. Soon, people formed anti-democratic forces. Soon, moderates, Socialists, and Communists formed a coalition called the Popular Front. Despite this, France also preserved democracy.
    • Socialist Governments Find Solutions
      • The Socialist governments in nations like Denmark, Sweden, and Norway also met the challenge. In Sweden, government sponsored projects kept people employed. In these Scandinavian countries, the government taxed all citizens to meet challenges. Democracy remained intact.
    • Recovery in the United States
      • 1932 was the first election since the start of the Depression. During this election, Franklin Roosevelt’s confident manner appealed to the Americans hurt by the Depression. In 1933, he restored the American faith in the nation,
      • Roosevelt began the New Deal – large public projects gave jobs. Government agencies gave help to business and farms. Public money was used on welfare and relief programs. Regulations reformed the stock market.
      • This New Deal reformed the American economy, preserving American faith in democracy.