Great Depression in Central Europe

The effects of the Great Depression were profound throughout Europe, though the greatest impact was on Germany, Austria and Poland, where one in five of the population were unemployed as a result, and where output fell by some forty percent. Inevitably this had effect on domestic politics virtually everywhere, especially in countries like Germany and Austria, where democracy had shallow foundations.

Effects on Domestic Politics

Internationally the Depression in the USA led to a rush towards protectionism, as each nation attempted to defend its own economic interests. By November 1932 every European country had increased tariffs, or introduced import quotas, to prevent further damage to their domestic economies. Competing trade blocks had a geo-political effect also, with the rise of more aggressive and predatory forms of nationalism and imperialism. This was made all the worse because international co-operation between the leading democracies was also weakened by protectionism and competition. And there was no powerful international body to counter the effects of economic nationalism.

The sources of the problem can be traced back to the First World War and the rise of international indebtedness. At the conclusion of the war the United States had become the world's banker. Under the Dawes Plan the German economy had boomed in the mid-1920s, paying reparations and increasing domestic production. But the whole thing came to a sudden halt in 1929-30, when Dawes Plan loans dried up. This was not just a problem for Germany; for Europe at large had received almost 8 billion dollars in American credit between 1924 and 1930, on top of pre-existing war time loans.

The problem of credit financing was compounded by slavish adherence by governments to the gold standard, the great economic shibboleth of the day.Fact|date=May 2008 Falling prices and demand induced by the crisis created an additional problem in the central European banking system, where the financial system had a particularly close relationships with business. In 1931 the important Creditanstalt bank in Vienna collapsed, causing a financial panic across Europe and the rest of the world.

Germany's Weimar Republic was hit hard by the depression, as American loans to help rebuild the German economy now stopped. Unemployment soared, especially in larger cities, and the political system veered toward extremism. Hitler's Nazi Party came to power in January 1933. In 1934 the economy was still not balanced enough for Germany to work on its own. Repayment of the war reparations due by Germany were suspended in 1932 following the Lausanne Conference of 1932. By that time Germany had repaid 1/8th of the reparations.