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.
World War I itself was not actually responsible for declines in economic productivity. The industrial countries were already poised for a recession due to the cyclical structure of their economies. The war did, however, make recovery from this recession more difficult by depressing productivity. This meant that the world, especially Europe, was suffering from lower than normal levels of productivity when the next cyclical depression struck in 1929. A more important factor of instability brought about by the war was the reversal of the change of capital flows.
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, and maintained an isolationist stance, allowing very few imports. This forced countries to develop a surplus in trade with other nations before they could pay us back. Since very few countries could do this we had to continually loan out money to help them rebuild their economies to pay us back. The destabilizing effect of this loan cycle will be discussed later.