After World War I, all of the major powers turned inward and focused on rebuilding their own economies. Nowhere was this more difficult than in Germany. If you remember, they were saddled with billions of dollars in reparations payments. And as they struggled to pay the Allies, France invaded and occupied the Rhineland – a region in Germany that was very important to industrial production. This made it even harder for their economy to rebuild.
By 1923, hyperinflation was rampant in Germany. In 1918 one paper Mark was worth one gold Mark. But just 5 years later, to buy one gold Mark, you would need one trillion paper Marks. To put it another way, if you were an American tourist visiting Germany in 1923, you would head to a bank to exchange currency. You would hand them 1 US dollar and they would give you over 4 trillion German Marks. What? That’s insane.
In the 1920s, people in Germany would use their paper money to wallpaper their homes. Families realized that instead of buying firewood, it was cheaper to just burn their money. Mothers were seen with wheelbarrows full of cash just to buy basic supplies like bread. But then, the American banks stepped in. Woohoo! What could go wrong!
American banks began funneling money into Germany to help them rebuild their economy and make their reparations payments. The new democratic government in Germany, the Weimar Republic, created a new currency to help with the inflation. And everything seemed to be going OK by early 1929.
Meanwhile, in the United States… In the decades leading up to the war, tons of Americans had moved to the cities for the first time seeking industrial jobs. During the War, many men returning from combat stayed in cities instead of returning home. In a way, it’s like what happened during the Crusades. By 1920, more Americans were living in cities than in rural areas – a huge turning point.
With many people living in cities and the introduction of credit, spending and speculative investment increased rapidly throughout the 1920s. Y’all know the drill: flappers, speakeasies, Great Gatsby-type new money. New companies were making tons of money and reinvesting it in speculative expansion. While corporate profits skyrocketed, wages only barely increased leading to a huge gap between the rich and the poor. For example, the wealthiest 1% owned 1/3 of all American wealth. So the Occupy Wall Street movement was way less original than they thought.
By 1929, the spending and investment reached its bubble point and the stock market collapsed. Many Americans, concerned that the banks had been investing their savings in speculative stocks, ran to the banks to withdraw their money. Over the next few years, thousands of banks shut their doors. And bank deposits were not insured, so as banks closed, people lost their entire life savings.
As the American economy collapsed, so did the economies of those around the world that were tied to it. Many European countries had relied on American banks in the 1920s to invest money while they rebuilt after the war. And in 1930, the US passed the Smoot-Hawley Tariff to protect American companies. Trade with other countries dropped dramatically as everyone retreated inward to try to protect their own companies and workers. With the other major powers of the world closing their doors, it was that much easier for new extreme leaders to rise.