From Hyperinflation to Black Tuesday

During the interlude between the two World Wars, deep-cutting shifts in both economic and political landscapes emerged. As a result of the war, several economic crises negatively affected the democratization process of former authoritarian regimes. These episodes - from the German hyperinflation crisis of 1923 to the devastating "Black Tuesday" in 1929 – were not reduced to impacting domestic structures in the countries affected but played vital roles in shaping international relations. In a prosperous environment, there had been no Hitler, right? It is maybe not that easy. Why did the victor of the Great War, Italy, become a right-wing dictatorship, but France or Belgium did not? They faced the same economic hardships. Let's search for some explanations.

Post-World War I Economic Landscape

Post World War I, the world struggled with economic instability, with Germany at the epicenter of one of the most dramatic economic crises in history. Both economically and environmentally, the war was devastating. There was a sharp decline in the working population, a sharp rise in national debt, damaged infrastructure, and immense psychological costs. Germany counted 2.2 Mio casualties, France 1.7 Mio, with a population one-third lower than Germany's. Unemployment was extremely high, creating poverty and starvation. Bringing the soldiers back to work, converting war economies to peace economies, and dealing with the wounded and invalid were tasks of the day. Missing manpower during the upcoming harvest was an issue, too.

The Treaty of Versailles set reparations for Germany at very high levels, but Germany could not pay according to plan. The Dawes Plan (1924) and the Young Plan (1929) were meant to moderate the financial obligations of Germany. But in the end, only a small amount of the reparations were paid because the country was economically unable to.

Hyperinflation in Germany

In Germany, public order collapsed during the first month of the post-war period. There were communist uprisals, and Lenin's hope that Germany was the next piece in the puzzle of the communist world revolution became almost true. The governments of the "Weimar Republic" stabilized the situation to a certain extent, but in 1923, monetary policies were out of control, and the country faced hyperinflation. The price of bread went up from 160 Reichsmark around Christmas 1922 to 200,000,000,000 at the inflation peak in 1923. The government's decision to print an unrestrained amount of money to serve the obligations of the Treaty of Versailles led to the obliteration of the German mark's value, shattering the middle class's financial backbone.

Internationally, this caused significant turmoil, with creditor nations such as France and Belgium occupying the Ruhr region to ensure reparations payments. This episode intensified the prevailing national humiliation narrative, sowing seeds of resentment and facilitating the ground for authoritarian rhetoric. Paramilitary groups from both extremist sides already formed themselves during that period, the most infamous among them the Nazi SA (Sturmabteilung, "Brownshirts"), who collected displaced World War veterans. Still, on international level, the countries found a solution to the problem: The US gave loans to Germany, Germany paid the reparations, and the receivers of reparations bought industrial equipment and weapons from the US. A circular economy! And who profited most?

The US as the new powerhouse – Britain overstretched

The United States evolved as an economic powerhouse, insulated mainly from European colonial entanglements and bolstering its economic infrastructure through strategic national policies. The country emerged from the war as the world's leading political and economic power, while many European economies were harshly affected. This allowed the US to play a substantial role in financing the reconstruction of Europe, fostering a period of significant economic growth. The mass production techniques invented by Henry Ford transformed manufacturing, enhancing productivity and allowing economies of scale.

"This is not a peace. It is an armistice for twenty years" (Marechal Foch)

At the same time, Britain and France invested rather ineffectively into maintaining their colonial empires or building defense lines against the Germans (Maginot line). The French knew it better but still failed to apply adequate policies. As the French Marechal Foch had it after the Treaty of Versailles was signed: This allows not peace, but at best a 20 years' armistice.

Even worse than Mercantilism: Post-war Economic Nationalism

Faced with economic hardships, many countries developed aggressive economic self-preservation strategies. They fell back to old strategies rooted in pre-war mercantilism and engaged in protectionist measures. Still, in 1929, the world looked not that bad. In Europe, Germany was allowed back into the family. In 1926, Germany joined the League of Nations, and in 1929, the country held a share of 11.6% of the global industrial production. Great Britain was at 9.3%, France at 7%. But then problems accumulated.

The catalyst of the upcoming world economic crisis was the Wall Street Crash in 1929, followed by the Great Depression. The US stock market saw a massive sell-off, with a record number of shares traded. Panic began to set in as many shares were sold at much lower prices than bought, causing a substantial decline in stock values. On October 29, 1929 (Black Tuesday), the stock market collapsed entirely, with the Dow Jones Industrial Average falling significantly. The crisis immediately spread to Europe.

In response to the following depression, various governments adopted significant policy changes. In the United States, the administration of President Franklin D. Roosevelt initiated a series of deep-cutting but highly controversial reforms, the so-called New Deal. The aim was to stabilize the economy and establish a social safety net. But even in the US, recovery was slow, and the European countries did not have the financial backbone to establish functionally equivalent policies. The rise of the Nazi party NSDAP in Germany is synchronized with the hardship of the second big economic crisis in the country after 1923.

Towards World War II: The Final Act of Economic Discontent

Hitler built upon this economic downturn when he entered office in 1933. Based on plans already developed during the Weimar time, he established public work programs (Autobahn), pushed an industrial policy based on armament, and did not care about financial obligations stemming from the Versailles Treaty. This was not a sustainable policy and was bound to collapse. As the 1930s neared its end, it became clear that the world had failed to forge a collaborative pathway to economic recovery. And Hitler? As the German economy was not built upon solid ground, he probably had to go to war - or deal with the consequences of his economic policies. Only expansion could save the day for him.

Does the economic crisis explain everything?

Frankly: No. The economic crises were vital for the failure of democratization processes in Europe, but overexaggerating them is wrong. In the end, a monocausal argument does not hold. Sure, an economic crisis may lead to higher electoral volatility and enhanced societal polarization, but institutions in a robust democracy can usually withstand such situations. In Germany, economic problems were paired with elements rooted in the build-up to the First World War (militarism, underdeveloped civil society) and psychological issues caused by the war itself. The general problem was that the breakdown of the Central Powers produced too many losers, and losers were not turned into democrats but enemies of democracy (which was associated with a humiliating Treaty of Versailles or Trianon). In the end, there is no democracy without democrats. The Second World War was caused by expansionist powers: Germany, Italy, and Japan. It is their very constitution and ideological foundation that makes these countries aggressive. But economic turmoil may speed processes up.