On November 11, 1918, rifles and cannons fell silent in the European trenches. The First World War had ended and, months later, in 1919 the Treaty of Versailles was signed, which would have profound economic repercussions.
After four hard years of human catastrophe, the world had undergone a great economic change. International trade had suffered a very strong fall, because with the outbreak of the conflict, Germany and the allies cut their commercial relations. In this sense, it was more than evident that the First World War had promoted economic nationalism.
A world economy turned upside down by war
Countries with free market economic systems had seen governments take control of the economy, intervening in prices and deciding how resources were allocated. The effort of the nations was turned into the production of weapons, which considerably boosted heavy industry.
To add insult to injury, intervention in a conflict the size of the First World War had wreaked havoc on the financial system. The states decided to use their gold reserves to acquire war material, while increasing the amount of money in circulation to be able to meet internal expenses. As a consequence, European countries were experiencing high inflation.
With the world turned into an economic wasteland, it was urgent to abandon the war economy and make the transition to an economy of peace. Precisely, the Treaty of Versailles tried to address the economic and labor effects that the Great War had caused.
The United States becomes the great world power
Before the outbreak of the conflict, Germany and Great Britain were fighting to be the great powers at the political and industrial level. However, the war had cost Great Britain its world hegemony, which had been assumed by the United States.
The Americans had increased their economic power and their loans had helped to finance the conflict, so many countries had a debt with the United States. In 1914, the United States had a debt with other countries worth about 3.7 billion dollars, but after the war, its situation had completely changed. In other words, in 1919 the Americans were creditors for a total of 3,000 million dollars. And it is that, only New York had the financial capacity to provide long-term loans.
The growing economic influence of the United States was more than evident, and its currency, the dollar, had become the only one that could be converted into gold. By contrast, the pound was no longer a currency convertible to gold.
Heavy punishment for Germany
But the treaty signed at Versailles in 1919 turned out to be a real fiasco on a political and economic level. The outlines of what the new world economic system should be had not been drawn.
Germany, which lost a good part of its territories and said goodbye to its colonial empire, was condemned to pay the economic cost of the war. The unaffordable war reparations imposed by the Allies on Germany amounted to 132,000 million gold marks (which would now mean about 642,000 million dollars). Such an amount was simply priceless. Not only was Germany condemned to pay astronomical war reparations, but it was also deprived of its merchant fleet.
With Germany unable to pay war reparations, the country went into suspension of payments. In response, French troops occupied the Ruhr industrial region. In a disheartening scenario of hyperinflation, hunger and social conflict, the necessary ingredients were given for the proliferation of a totalitarian ideology such as Nazism.
Imposing such harsh conditions on an economic powerhouse of the German entity was counterproductive. And it is that, a Germany with good economic health would have facilitated the recovery of the European economy. Indeed, the famous economist John Maynard Keynes, who was part of the British legation at Versailles, warned of the serious mistake involved in imposing such severe sanctions on Germany. Unfortunately, Keynes’s positions were not heard and the disgruntled British economist chose to leave his post at the legation negotiating the terms of the Treaty of Versailles.
While it is true that the Treaty of Versailles failed politically and economically, it did bring improvements to workers’ rights. In this sense, significant progress was made in terms of the length of working hours (8 hours a day), weekly breaks, the payment of decent wages, the prohibition of child labor, as well as more equal wages for men and women.