After World War I, Germany was required to pay heavy reparations to the Allied Powers under the Treaty of Versailles. To support these repayments, Germany borrowed money from American banks and investors through loans and bonds. This practice led to a circular finance system, as Germany used the reparations payments from the Allied Powers to pay back the loans it had received, which in turn allowed it to continue making the reparations payments. However, when the Great Depression hit in the late 1920s, the circular finance system collapsed, leading to defaults and economic instability.