7.4 Economy in the Interwar Period

Global economic instability after WWI

WWI left European economies devastated by debt, inflation, and destroyed infrastructure. The Treaty of Versailles forced Germany to pay heavy reparations, fueling hyperinflation. War debts among Allied powers strained international finance. The global economy became increasingly interconnected but fragile, setting the stage for a worldwide collapse.

The Great Depression spreads worldwide

The 1929 U.S. stock market crash triggered the Great Depression, which spread globally through interconnected trade and financial systems. Banks failed, trade collapsed as nations raised tariffs (like the Smoot-Hawley Tariff), and unemployment soared. Countries dependent on exporting raw materials or cash crops suffered severely as demand plummeted.

Government responses to economic crisis

Governments experimented with new economic approaches: the U.S. adopted Keynesian economics and the New Deal (state intervention, public works). The Soviet Union pursued state-controlled industrialization via Five-Year Plans. Fascist states like Germany and Italy used militarization and public works to boost employment, while some nations turned to protectionism and autarky.

Key terms

Great Depression

Severe global economic downturn beginning with the 1929 U.S. stock market crash, causing mass unemployment and trade collapse.

Reparations

Payments Germany was forced to make after WWI under the Treaty of Versailles, worsening its economy.

Smoot-Hawley Tariff

1930 U.S. law raising tariffs on imports, which deepened the global depression by reducing international trade.

New Deal

FDR's set of programs using government spending and intervention (Keynesian economics) to combat the Great Depression.

Five-Year Plans

Soviet Union's state-directed programs for rapid industrialization and agricultural collectivization under Stalin.

Try an AP-style question

The Great Depression began with…

1. the Versailles Treaty
2. the 1929 U.S. stock market crash
3. the end of WWII
4. the Russian Revolution