Before WWI, the United States was a debtor nation
Before WWI, the United States was a debtor nation. We owed vast sums of money to Europe, especially Britain. During the war Europe was not only forced to liquidate their U.S. investments, but to take on debt as well. This established the United States as the prime creditor in the world. In fact, we financed eighty percent of the post-war relief. After the war, the European countries had a heavy trade deficit, making it impossible for them to pay us back. As a creditor, we should have imported more than we exported, allowing these nations to reduce the debt. We had become self-sufficient, however, ...view middle of the document...
The saturation of the consumer market and a relatively high level of structural unemployment should have caused a natural decrease in prices. The FRB, however, didn't want this to happen, so they expanded credit that ended up in a violent readjustment. The actions of the FRB created a stock market and property boom that merely served to fuel speculation. It appears, that if the FRB had allowed deflation to occur the decline in prices would have allowed the standard of living to go up and might have increased consumption.
Political factors caused by the war also hurt Europe's ability to recover. The redrawing of political boundaries created new states with little regard to economic viability. These small states attempted to be self-sufficient by increasing exports and setting high tariffs, but they had to borrow heavily to do so. Increasing population was another factor to contend with, forcing these countries to spread out their already low incomes. Finally, increased trade and population movement barriers caused by the war compounded Europe's economic problems.
The economic climate of the time was one of excessive optimism. Most people, including investors that should have known better, felt that there would be no end to the expanding economy. Lenders in the U.S. actually went out and solicited borrowers. They were ready to loan to anyone. One of the main short-term causes of the 1929 crash was overspeculation. The common trend was to throw as much money into the stock market as possible because it was a sure be