Economic Impact of World War I on Europe and the US
The Situation at the End of World War I
The Great War led to the dismantling of the economies of the combatant countries, which had oriented their efforts towards the war. When the conflict ended, European economies faced serious problems. The conflict had enormous financial costs. Military spending could not be sustained, so they made use of gold reserves, increased paper money, and sought credits from foreign countries, leading to debt.
The Economic Consequences of Peace Treaties
The peace treaties also had various negative effects, including indemnities for the defeated. Large, unified economic spaces were dismantled, and new customs borders were established. Germany, in particular, lost Alsace, Lorraine, the Saar Basin, and Upper Silesia. Much of the war reparations fell on Germany, while the United States demanded the liquidation of debts and refused to provide financial aid for reconstruction. European allies, particularly France, demanded compensation for damages.
The Effects on the International Economy
World War I disrupted the global economic system, causing a commercial imbalance. Between 1914 and 1920, import prices fell by 60%, while global trade increased exports from industrialized countries. Primary sector prices fell. The conflict also disrupted the international monetary system.
The Decline of Europe and the US Boom
The USA took the lead in the global economy. The United States became the world’s leading industrial power, while Europe lost overseas markets. The US had a surplus and accumulated almost half of the global gold reserves.
The Financial Changes
The loans the US granted to Europe during the war changed its position from a debtor country to a creditor country. The dollar joined the pound as the leading international currency, and the New York Stock Exchange gained prominence to the detriment of London. The United States made investments of dubious profitability, especially to Germany, and provided short-term loans.
The Post-War Economic Crisis of 1920-1921
A severe crisis occurred in European countries between 1919 and 1920, followed by an intense but short economic boom. The economies of the US, UK, Japan, and Canada benefited from the remarkable increase in European demand for credits. Systems that had been established during the war, by which European countries possessed cheap US loans, favored economic growth, leading to a sharp rise in prices generated by global inflation.
Recovery and its Limits
Between 1921 and 1925, the reconstruction of the international economy attempted to restore the pre-war liberal economic system by curbing inflation. This goal, unprecedented at the time, aimed to decrease the amount of money in circulation and return to the gold standard. However, international cooperation was lacking. Countries like Austria, Hungary, Czechoslovakia, and Poland experienced traumatic hyperinflation, with prices soaring daily, even several times a day. To finance the budgetary deficit and the costs of war reconstruction, Germany issued an excessive amount of banknotes, leading to unstoppable price rises. France and Belgium occupied the Ruhr industrial basin in January 1923 to recover unpaid debts, a catastrophe for Germany.