Post–World War I Economic Instability

World War I, fought from 1914 to 1918, left the global economy in tatters, as nations grappled with the aftermath of total war—a conflict that consumed entire societies’ resources and manpower. The war’s end brought not relief but a cascade of economic woes, particularly in Europe, where battlefields had ravaged farmland, factories, and cities. Countries faced massive debts from borrowing to fund the war, rampant inflation—where prices soar as money loses value—and high unemployment as millions of soldiers returned to a job-scarce peacetime. These challenges destabilized societies, fueling unrest and forcing governments to rethink their hands-off economic approaches.

Meanwhile, the United States experienced a brief economic boom in the 1920s, fueled by wartime lending and industrial growth. However, weaknesses such as overproduction—producing more goods than consumers could buy—undermined stability. Global trade faltered as countries turned inward, disrupting the interconnected pre-war economy.

The consequences were severe. Germany’s hyperinflation destroyed trust in government and paved the way for extremist movements such as the Nazis. Britain faced unemployment and labor strikes, while France struggled with costly reconstruction. Economic instability undermined confidence in traditional economic systems and set the stage for deeper crisis.

The crisis spread internationally as global trade collapsed. Tariffs such as the U.S. Smoot-Hawley Act increased import taxes, further restricting trade and worsening economic decline. Industrial economies proved fragile, and unemployment soared. In the United States, unemployment reached 25% by 1932, while Germany and Britain experienced similar crises. Breadlines and homelessness became common sights, and public trust in laissez-faire economic policies eroded.

Government Intervention and Economic Reform

The economic chaos of the interwar period led many governments to abandon laissez-faire and embrace intervention. Intervention involved active government policies designed to stabilize markets, create jobs, and prevent future crises.

In democracies such as the United States and Britain, reforms aimed to restore stability. In authoritarian regimes such as Nazi Germany and Fascist Italy, governments centralized economic control and directed industries toward rearmament and national goals. Across the world, leaders sought to reduce unemployment, stabilize banks, and rebuild confidence.

Public works programs created jobs by building infrastructure. Financial reforms regulated banks to prevent reckless speculation. Welfare systems expanded to assist the unemployed and elderly. This shift fundamentally changed the role of government in economic life.

Public works programs such as the Tennessee Valley Authority built dams and electrified rural areas. The Civilian Conservation Corps employed millions of young men in conservation projects. The Works Progress Administration funded roads, schools, and public buildings. The Social Security Act of 1935 created pensions for the elderly and aid for the unemployed. Banking reforms such as the Glass-Steagall Act separated investment and savings banks to restore confidence.

The New Deal significantly reduced unemployment and expanded federal power. While critics argued it expanded government too far, its reforms permanently reshaped the American economy and established the foundation for modern welfare systems.

Mussolini introduced corporatism, organizing industries into state-supervised groups that united workers and employers under government oversight. Independent labor unions were banned. In Germany, Hitler focused on rearmament and public works projects such as the Autobahn highway system. Both regimes sought autarky—economic self-sufficiency—to reduce dependence on foreign imports.

These policies reduced unemployment and strengthened military capacity but restricted freedoms and prepared nations for future conflict. Economic recovery was closely tied to militarization and nationalist goals.

Economic Nationalism in Latin America

In Latin America, the Great Depression severely disrupted export economies dependent on raw materials. As demand for coffee, oil, and other goods collapsed, governments adopted interventionist policies to reduce reliance on foreign markets.

Import Substitution Industrialization (ISI) promoted domestic manufacturing to replace imported goods. In Brazil, Getúlio Vargas expanded state-run industries and enacted labor protections. In Mexico, Lázaro Cárdenas nationalized oil in 1938 and redistributed land to peasants.

These reforms strengthened national sovereignty and industrial development but also increased government control and dependency on state planning.

Human Costs and Political Consequences

The interwar economic crises reshaped governments and societies across the globe. Democracies expanded welfare systems and regulatory reforms, while authoritarian regimes centralized power and suppressed dissent. Economic instability fueled extremism, nationalism, and militarization.

The global economy did not fully recover until World War II rearmament stimulated production. The legacy of the interwar period was profound: governments permanently expanded their role in economic life, and political systems were reshaped by economic desperation.