Modernism in the arts and modernist theory came of age before, during, and after World War I; some of the most interesting writing and art of the modernist movement occurred during the 1920s. The political order of Europe (Russia, as usual, was an exception) and the United States during the 1920s was beset by struggle and conflict, but while the economies of the west struggled to recover from World War I, there was at least some economic growth. That growth came crashing to a halt in 1929 with the advent of the Great Depression.
The Great Depression has the dubious distinction of being the worst economic disaster in the modern era. It constituted an almost total failure of governments, businesses, and banks to anticipate or prevent economic disaster or to effectively deal with it. The Depression explains in large part the appeal of extremist politics like Nazism, in that the average person was profoundly frightened by what had happened to their world; instead of progress resulting in better standards of living, all of a sudden the hard-won gains of the recent past were completely ruined.
The background to the Depression was the financial mess left by World War I. The victorious alliance of Britain and France imposed massive reparations on Germany - 132 billion gold marks. In addition, the former members of the Triple Entente themselves owed enormous sums to the United States for the loans they had received during the war, amounting to approximately $10 billion. Over the course of the 1920s, as the German economy struggled to recover (at one point the value of German currency collapsed completely in the process), the US government oversaw enormous loans to Germany. In the end, a “triangle” of debt and repayment locked together the economies of the United States and Europe: US loans underwrote German reparation payments to Britain and France, with Britain and France then trying to pay off their debts to the US. None of the debts were anywhere near settled by the end of the 1920s, not least because more loans were still flooding into the market.
The Depression started in the United States with a massive stock market crash on October 24, 1929. The ill-conceived cycle of debt described above had worked well enough for most of the 1920s while the American economy was stable and American banks were willing to underwrite new loans. When the stock market crashed, however, American banks demanded repayment of the European loans, from Germany and its former enemies alike. The capital to repay those loans simply did not exist. Businesses shut down, governments defaulted on the American loans, and unemployment soared. In one year, Germany’s industrial output dropped by almost 50% and millions were out of work. In turn, inspired by liberal economic theories, governments embraced policies of austerity, cutting back the already limited social programs that existed, balancing state budgets, and slashing spending. The result was that even less capital was available in the private sector. In the United States and Western Europe, the Depression would drag on for a decade (1929 - 1939), at which point World War II overshadowed economic hardship as the great crisis of the century.