The end of World War I and the Great Depression

The Great Depression of the 1930s is often remembered as a uniquely American disaster that spread globally after the Wall Street crash of 1929. Regardless, the economic causes of the Depression stretched far beyond the United States. The end of World War I—especially the Treaty of Versailles, the burden of reparations, and the interlocking system of Allied war debts and U.S. loans—created a fragile global financial order. The way in which the global economic system was set up was dangerously dependent on American credit and highly vulnerable to collapse, as evidenced by the behavior of the German economy during the same period. When U.S. markets faltered in 1929, the weaknesses of this postwar order magnified the downturn and helped turn a stock market crash into a worldwide depression.

When the First World War ended in 1918, European economies were devastated. Britain and France had borrowed heavily from the United States to finance their war efforts, leaving them with roughly $12 billion in debts to American lenders. These governments expected to repay their loans by collecting reparations from Germany. The Treaty of Versailles, signed in 1919, imposed a reparations bill of 132 billion gold marks on Germany, equivalent to more than $30 billion at the time. German leaders protested that the demand was excessive, but France and Britain depended on this flow of money to stabilize their own finances and to meet their obligations to the United States.  Essentially, what this created was a vicious cycle of debt.

By the mid-1920s, it was clear that without outside help, Germany could neither pay reparations nor rebuild its economy. That outside help came largely from the United States. In 1924, the Dawes Plan restructured Germany’s reparations and provided the country with an international loan of 800 million Reichsmarks.  Under this plan, Germany received loans from the United States, which it used to pay reparations to Britain and France. These governments, in turn, repaid their war debts to Washington. This “circular flow” kept the system functioning but left it dangerously dependent on U.S. capital. As the American economy was not the behemoth it was today, By the end of the decade, Germany had received approximately $22 billion in loans, much of which was American.

Initially, this would be a help to the German economy. It stabilized, inflation subsided, and international trade revived. Germany was heavily dependent on foreign loans, while Britain and France were dependent on German reparations.

The Wall Street crash of October 1929 brought the system crashing down. American investors began calling in foreign loans and stopped extending new credit abroad. For Germany, this was catastrophic. Without U.S. loans, it could not continue the reparations payments. Banks collapsed, unemployment soared, and political unrest deepened. As Germany faltered, Britain and France were unable to pay their debts to the United States. The financial crisis that began on Wall Street rippled outward through the fragile international order constructed after World War I.

The Great Depression cannot be understood apart from the legacy of World War I. The Treaty of Versailles imposed an enormous reparations burden that Germany could not deal with without foreign credit. The Dawes Plan created a cycle of debt that would eventually consume the United States' economy, which ultimately led to the entire global economy crashing. In this sense, the Great Depression was  the culmination of a flawed international financial order created during and after the First World War.

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References

“Milestones in the History of U.S. Foreign Relations - Office of the Historian,” State.gov, 2025, https://history.state.gov/milestones/1921-1936/dawe

Charles Poor Kindleberger, The World in Depression, 1929-1939 (Berkeley, Calif. University of California Press, 1986). 291.

J Adam Tooze, The Deluge : The Great War, America and the Remaking of the Global Order, 1916-1931 (New York, New York: Penguin Books, 2015). 196.