Economics: The Road to Depression; The Great War created a seismic shift in the global balance of economic power-and paved the way to the Great Depression

Economics: The Road to Depression

The Great War created a seismic shift in the global balance of economic power—and paved the way to the Great Depression.


June 20, 2014 5:35 p.m. ET

The Great War was a financial catastrophe for Europe. For four years, the major European powers devoted some 50% of their GDP annually to fighting the war, only a fraction of which could be financed by taxes. Europe was left saddled with a gigantic overhang of public debt.

European governments also came under pressure to expand the welfare state after the privations of the war years. Unable to raise taxes because of deep postwar social and political divisions at home, most of them (with the exception of Britain) resorted to high inflation. This destroyed the middle class’s financial savings and helped undermine European political stability for a generation.

The Great War also created a seismic shift in the global balance of economic power. While European economies shrank, the U.S. emerged with an even stronger economy—and went from being the world’s largest debtor to a major creditor. At the Paris Peace Conference of 1919, Britain and France failed to persuade the U.S. to forgive their war debts and sought, disastrously, to balance their books by imposing punitive reparations on Germany.

Throughout the 1920s, this web of interlocking debts hobbled the international financial system. Germany was only able to pay reparations and finance its recovery by borrowing large, unsustainable amounts from the U.S. When these capital flows came to a sudden halt after the 1929 Wall Street crash, Germany defaulted on its debts, and the economies of Central Europe collapsed.

So barely a decade after the end of the Great War, the world was hit by the Great Depression. To protect themselves from the downward spiral in the global economy, countries around the world resorted to beggar-thy-neighbor policies, imposing strict controls on trade and capital flows. The Great Depression and the ensuing retreat from globalization were the most damaging and consequential of the war’s economic legacies.

—Mr. Ahamed is the author of “Lords of Finance: The Bankers Who Broke the World,” which won the 2010 Pulitzer Prize for history.



About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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