The Economic Effects of World War I: Debt Leads to Chaos

During the era of imperialism in the late 1800s and early 1900s, European powers forged military alliances among themselves, wagering that such strong alliances would discourage any attacks. However, when a conflict did erupt, it dragged the entire continent into an unexpectedly bloody and brutal war. Trench warfare and deadly new weapons like the machine gun and poison gas created a stalemate that lasted for most of World War I. Afterward, the huge costs of war led to economic devastation for Russia and Germany. Post-war recessions occurred in the early 1920s in Britain and the United States as military spending fell sharply.

After the Napoleonic Wars of the early 1800s, a relative peace enveloped Europe for roughly fifty years. In the late 1800s, however, a unified Germany emerged as a new power. After decades of internal conflicts, Germany and Italy had become unified nation-states as opposed to blocs of small, independent states. These two new nations looked to compete with the established European powers, Britain and France, for power, prestige, and colonies in Africa.

In 1884, thirteen European nations met in Berlin, capital of the new Germany, to establish rules for the division of Africa. With Britain, Spain, and France having (mostly) been driven out of their former empires in North and South America, the relatively unexplored continent of Africa was a prime target for territorial and economic conquest. Between November 1884 and February 1885, the members of the Berlin Conference divided Africa – without any input from Africans, of course – into many of the separate territories we know today.

As the new European powers rivaled each other for power, they entered military alliances to discourage attacks from enemies. The Triple Entente was an informal alliance of France, Britain, and Russia, established in 1907. Germany, believing that it was being “encircled” by the three historic powers of Europe, became more aggressive toward them. Since 1882, it had been part of a Triple Alliance of the three central European powers: Germany, Italy, and the Austro-Hungarian Empire. Each nation believed that the presence of allies would prevent any rival from attacking because the allies would join the fight as if they themselves had been attacked.

Backed by allies, each European power was more prone to aggression. Years of relative peace had made each power less wary of bloodshed, and everyone thought any conflict would be over quickly. Wars since the Napoleonic Wars, after all, had been quick affairs. The combination of overconfidence, imperialistic ambition, and lack of recent war memory made the European powers more ready to look for a military solution than a diplomatic solution to any threat by 1914.

On June 28, 1914, a Serbian radical named Gavrilo Princip shot and killed Archduke Franz Ferdinand of Austria-Hungary while the latter was visiting Sarajevo (in what is now Bosnia). Outraged, Austria demanded major concessions from Serbia. Serbia, allied with Russia, refused the concessions. War was declared, and allies declared war on members of the opposing alliance. By August, Europe was at war.

When World War I began, Germany found itself at war on two fronts: against France to the west and against Russia to the east. To surprise the Allied Powers, Germany attacked France first rather than attack France and Russia simultaneously, allowing it to use its entire force on one adversary. To catch the French by surprise, Germany invaded neutral Belgium as part of its Schlieffen Plan to swiftly defeat France first and then defend against slower-moving Russia.

Unfortunately for Germany, it could not accomplish its goal and did not make it to Paris. The French managed to dig in and stop the German advance, also aided by speedier allies that forced Germany to divert troops elsewhere. Instead of the war ending quickly, by the end of 1914, it had devolved into a stalemate where neither the Allied Powers (Britain, France, and Russia) nor the Central Powers (Germany and Austria-Hungary) gained much ground. Both sides created trenches from which they would fire while taking cover, making it extremely difficult to maneuver. The static nature of trench warfare meant new weapons like artillery and machine guns could mow down hundreds of enemy troops. Never before had the world seen such brutal warfare.

With the war having bogged down into a stalemate, Germany went to extreme lengths to achieve victory. This included sinking any ships in the Atlantic Ocean, coming from the United States or Canada, that might have military goods or weapons bound for Britain or France. This was a policy known as unrestricted submarine warfare and eventually drew the U.S. into the war against Germany. Britain, meanwhile, used its large navy to blockade Germany and attempt to starve it out of the war. This focus on civilian targets as well as troops on the battlefield was part of a new concept called total war, where an entire nation’s resources are mobilized toward winning a war.

Unlike previous wars in Europe, World War I required a full mobilization of every country’s resources. More and more troops were poured onto the front lines in the hope of breaking the stalemate, to no avail. By the end of 1914, over a million soldiers had been killed, with little change in battle lines. For the first two and a half years of war, little occurred to break the stalemate, despite massive battles featuring machine guns, artillery, and poison gas.

Despite Germany being the best-prepared nation for World War I, it struggled to maintain constant combat against France, Russia, and Britain. Despite having agreed to end unrestricted submarine warfare in 1915 after 128 Americans were killed in the sinking of the RMS Lusitania, a British passenger ship, the Germans reversed course in January 1917. Simultaneously, it was also discovered that Germany was attempting to ally with Mexico in a potential Mexican invasion of the southwestern United States. The discovery of the Zimmermann Note, combined with Germany’s return to sinking American ships in the Atlantic that may have arms or supplies for the Allies, resulted in a declaration of war on April 6, 1917.

America’s entry into the war was a tremendous boost for the Allies for two reasons. First, the United States had a huge population and industrial base that had not been battered by almost three years of warfare. Secondly, Russia was leaving the war. As America was entering World War I, Russia was beginning to undergo the violent Russian Revolution. By autumn, the communists had seized control of the national government in Moscow, replacing a provisional government that had continued Russia’s role in the war since March. The communists wanted to exit the war, and the Treaty of Brest-Litovsk formalized Russia’s exit on March 3, 1918. Russia was forced to cede over a tremendous amount of industrialized territory to Germany, creating a race against time: Could America help France and Britain turn the tide against Germany before it could capitalize on its new Russian resources?

The U.S. had not fought a war of this size and scope since the Civil War some fifty years prior. When the war was declared, the U.S. military had only 200,000 men, which was too small to make a difference in Europe. A month after the war was declared, a military draft was imposed. Between the draft and volunteers, close to five million American men would serve during World War I. Demand for military goods, ranging from rifles to artillery shells to ships, soared astronomically. The labor force during the war increased by about 10 percent, from forty million to forty-four million workers. Unemployment declined from 7.9 percent to only 1.4 percent, a tremendous decrease!

To fund this drastic increase in military spending, the United States both raised taxes and sold war bonds. Unlike the previous major war, the U.S. Civil War, the government did not wish to simply print money to buy war material, as this would cause significant inflation. War bonds allowed the government to pay back borrowed money from the public over thirty years, preventing excess inflation. Allowing bonds to finance the bulk of the war effort also prevented the public from opposing the war. Since American soil had not been directly attacked, critics would be more likely to question the need for a foreign war against Germany once they saw a large increase in taxes.

Fortunately for the U.S., the economy was already booming due to wartime purchases from Europe. Since 1914, America had been increasing its production of military capital as an exporter. Thus, when America entered the war itself, it could easily use such factories to make equipment.

The U.S. was an industrial juggernaut and could contribute up to 10,000 new soldiers, known as doughboys, to France each day by July 1918. However, Germany was on the move and decided to break from trench warfare with its Spring Offensive. Launched on the first day of spring 1918, the German offensive went up and out of the trenches in the biggest maneuvers since 1914. The Allies were pushed back, but fresh soldiers from the United States helped stop the Germans in their first major deployment in the war on April 2, 1918.

German aggression in 1918 was not just due to having thousands of soldiers freed up from the Eastern Front against Russia. The British blockade against Germany had strained its economy, including food production, and contributed to public exhaustion with the war effort. Combined with the growing U.S. presence on the Western Front, Germany’s weakened industries and lack of military reserves convinced leaders that its position was unsustainable. On November 8, 1918, after the Allies’ devastating Hundred Days Offensive, Germany asked for an armistice, which was signed three days later.

War Is Bad If It’s On Your Turf… Or If You Lose

Although wartime spending can boost an economy, it can easily be more than counterbalanced by a nation’s loss of industry. France, though a member of the victorious Allies, was economically devastated. The Western Front had been fought exclusively on French territory, and its costs were tremendous. Italy, another Allied power, emerged with a stronger but unbalanced economy that soon led to political turmoil. Russia, a former Allied power that left the war in early 1918, saw revolution erupt largely due to its weakened economy. Only Britain and the United States emerged from World War I appreciably stronger economically than they began, and both had been spared fighting on their respective shores.

Germany and Austria-Hungary, although never invaded on the Western Front, both suffered economic exhaustion. Economic woes and the war’s toll caused the Austro-Hungarian Empire to split into two separate nations, Austria and Hungary. Compared to the brief European wars of the 1800s, World War I was economically devastating, and the use of poison gas warfare and artillery even destroyed large tracts of arable land.

World War I had ended with an armistice, or a cease-fire, in November 1918. Not until the next year would the formal peace treaty, the Treaty of Versailles, be signed. The four victorious Allied Powers – France, Britain, the United States, and Italy – met to determine their demands for Germany, the most powerful Central Power. The other two Central Powers, the Austro-Hungarian and Ottoman Empires, had both just collapsed under social revolutions spurred, in part, by economic unrest. While the U.S. and Britain wanted relative leniency for Germany, France wanted harsher terms, undoubtedly influenced by the devastation it had suffered.

Ultimately, Germany was forced to pay tremendous war reparations to the Allies. The staggering sum, roughly $31.5 billion at the time it was decided in 1921, was considered by many to be too high. By the early 1920s, Germany could no longer make payments on the war debt and was experiencing hyperinflation, or excessive inflation, due to Germany printing money to finance the war. In 1923, inflation was out of control.

As a result of the harsh war reparations and hyperinflation, Germany’s economy was very weak. Turmoil soon erupted, and Germany and Italy experienced social upheaval and mass protests due to economic struggles. In Germany, a new political party, the Nazi Party, grew increasingly popular as people suffered from the poor economy and a feeling of national humiliation from the Treaty of Versailles, which placed the entire blame for World War I on Germany. These post-war economic recessions, later made authoritarian leaders more popular among citizens who wanted stability, order, and access to resources. As a result, many historians directly link the post-war economic malaise in Germany and Italy to the rise of dictators Adolf Hitler and Benito Mussolini, respectively.