Economies in Crisis 995plies arrived on the continent from Australia, Argentina, Canada, and the
United States. The price of locally produced agricultural goods fell. Lower
farm incomes, aggravated by the burden of taxation, in turn reduced demand
for manufactured goods.
European states reacted by erecting tariff barriers to try to protect their
internal markets for domestic agricultural products. Countries like Bul
garia that depended on agricultural exports saw their foreign markets dry
up, or they received less for what they sold. With less income and less
Western investment, Eastern European and Balkan nations could not
repay their wartime debts. Germany’s defeat, the dismemberment of the
Austro-Hungarian Empire, and the Russian Revolution significantly weak
ened the region’s three largest pre-war trading partners.
The contraction of demand and price deflation probably would not have
been enough to generate full-fledged economic disaster. But unrestrained
financial speculation also undercut the world economy. In Germany, high
interest rates attracted considerable foreign investment following the 1924
economic recovery. Credit was easily available, and companies issued huge
amounts of stock shares based upon insufficient real assets. In the United
States, a sizable reduction in demand for goods was already apparent by
- Wealthy people began to invest in highly speculative stocks.
Wartime loans and post-war debts made the finances of the larger pow
ers more interdependent and helped destabilize the international economy.
German reparations also adversely affected the world economy because,
ironically, they accentuated the flow of capital into Germany. Following
the Dawes Plan, which in 1924 extended the schedule of reparations, Ger
many borrowed $110 million from U.S. banks to meet its reduced repara
tions payments to the Allies, rather than paying them out of current
income through higher taxes. German railroads served as collateral for the
loans, which were immediately oversubscribed in New York. Like bonds
and speculative investments, reparation loans diverted investment away
from industry and ignited further foreign lending. Besides loans to pay
reparations, other loans also poured into Germany. Most of this debt was
short term rather than long term, which made Germany even more vulner
able to a sudden calling in of those loans. In 1928, U.S. banks refused to
issue more loans to Germany, investing available funds instead in the Wall
Street stock market, further undercutting German banks.
By early 1929, the U.S. economy was in recession. In late October, the
New York stock market crashed. Thousands of large and small investors were
ruined as stocks lost most of their value. American and British investors
with assets still tied up in Germany now began to pull their money out as
quickly as possible. German gold reserves were depleted, as banks owed
far more money to creditors than they had assets. Table 25.1 shows the
importance of the U.S.-German financial connection, which contributed
to the fact that the Depression began earlier and production fell more in
those two countries than in the other major powers.