Interwar years, Great Depression, rise of fascism
The interwar order from Versailles to 1939: reparations and hyperinflation, the Great Depression, and the rise of fascism in Italy, Germany, Japan and Spain.
A Peace That Manufactured Crisis
The interwar period (1919-1939) opens with the Treaty of Versailles, signed 28 June 1919. Article 231, the "War Guilt Clause," assigned Germany sole responsibility for the war and became the legal foundation for reparations fixed by the London Schedule of Payments (April 1921) at 132 billion gold marks. John Maynard Keynes, in The Economic Consequences of the Peace (1919), predicted that a Carthaginian peace would destabilise Europe.
The new diplomatic architecture rested on the League of Nations, founded under the Covenant (Part I of the Versailles Treaty), which entered force 10 January 1920. The League was crippled from birth: the United States Senate rejected ratification on 19 March 1920, citing Article 10's collective-security obligations, so Woodrow Wilson's own creation excluded its most powerful sponsor.
Hyperinflation and the Search for Stability
When Germany defaulted, France and Belgium occupied the Ruhr in January 1923. The resulting passive resistance and money-printing produced the German hyperinflation of 1923, when the mark collapsed to roughly 4.2 trillion to the dollar by November. The Dawes Plan (1924) restructured payments and channelled American loans into Germany; the Young Plan (1929) reduced the total and set a 1988 horizon.
A brief stabilisation followed. The Locarno Treaties (October 1925) guaranteed Germany's western borders and admitted it to the League in 1926. The Kellogg-Briand Pact (27 August 1928) renounced war as an instrument of national policy. This "spirit of Locarno" rested entirely on continued American capital inflows.
The Great Depression
The Wall Street Crash of October 1929 (Black Thursday, 24 October; Black Tuesday, 29 October) severed that flow. American banks recalled short-term loans; world trade contracted by roughly two-thirds between 1929 and 1933. The United States deepened the spiral with the Smoot-Hawley Tariff Act (June 1930), triggering retaliatory protectionism. In Germany, unemployment exceeded six million by early 1932. The Creditanstalt collapse in Austria (May 1931) detonated a European banking crisis and drove Britain off the gold standard in September 1931.
Responses diverged sharply. Franklin D. Roosevelt's New Deal, launched after his March 1933 inauguration, deployed agencies such as the Civilian Conservation Corps and the Works Progress Administration, alongside the Glass-Steagall Act (1933) and the Social Security Act (1935). The gold standard's deflationary logic was abandoned. By contrast, democracies that clung to orthodox austerity left a political vacuum that authoritarian movements rushed to fill. The Depression is the economic hinge of the interwar story: it converted the grievances of Versailles into mass constituencies for dictatorship.
