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Interwar period and World War II

After the war, inflation began to devalue the Krone, which was still Austria's currency. In autumn 1922, Austria was granted an international loan supervised by the League of Nations. The purpose of the loan was to avert bankruptcy, stabilise the currency, and improve Austria's general economic condition. The loan meant that Austria passed from an independent state to the control exercised by the League of Nations. In 1925, the Austrian schilling was introduced, replacing the Krone at a rate of 10,000:1. Later, it was nicknamed the "Alpine dollar" due to its stability. From 1925 to 1929 the economy enjoyed a short high before nearly crashing after Black Tuesday.

The First Austrian Republic lasted until 1933, when Chancellor Engelbert Dollfuss, using what he called "self-switch-off of Parliament", established an autocratic regime tending towards Italian fascism. The two big parties at this time, the Social Democrats and the Conservatives, had paramilitary armies; the Social Democrats' Republikanischer Schutzbund was now declared illegal, but was still operative as the 12–15 February 1934 Austrian Civil War broke out.

In February 1934, several members of the Schutzbund were executed, the Social Democratic party was outlawed, and many of its members were imprisoned or emigrated. On 1 May 1934, the Austrofascists imposed a new constitution ("Maiverfassung") which cemented Dollfuss's power, but on 25 July he was assassinated in an Austrian Nazi coup attempt.

His successor Kurt Schuschnigg acknowledged the fact that Austria was a "German state" and he also believed that Austrians were "better Germans" but he wished that Austria would remain independent. He announced a referendum on 9 March 1938, to be held on 13 March, concerning Austria's independence from Germany.