Economic Consequences of World War I: 1920s Impact
Immediate Effects of War on the Global Economy
The immediate effects of World War I significantly weakened European contenders, negatively affecting their population, production, and international cooperation. Almost one-tenth of the productive equipment was unserviceable, the prices of staples rose, and European currencies lost value. Moreover, Allied countries were indebted to the U.S. due to orders placed during the conflict.
The Treaty of Versailles generated economic disagreements, destabilizing the international monetary system and reducing investor confidence. Germany was held responsible for the conflict and required to pay war reparations. Most of these allowances were demanded by France to settle their war debts. The U.S. opposed this, arguing that Germany lacked the economic capacity, but still required payment of the inter-Allied debts. This further weakened the already poor European economy. Germany’s effort to pay the debts resulted in the failure of its monetary system and unprecedented inflation. Between 1923 and 1925, France and Belgium occupied the Ruhr, the main hub for coal mining and German steel, to ensure payment of their debts. This further destabilized the German economy and encouraged support for radical nationalism.
Trade Imbalances After World War I
The new boundaries fixed by the treaties amended the exchange of goods. Following the Treaty of Versailles, Germany lost many territories and commodities. Austria and Hungary considerably reduced their territory and economy, as did Bulgaria, Turkey, and Russia, which were also adversely affected.
All this led to an imbalance in trade between industrialized countries and countries exporting food and raw materials. The European countries tried to recover by increasing production, resulting in a surplus of food and raw materials. The decline in agricultural prices worsened the trade balance of these countries, which imported more than they exported. Consequently, they could not repay their loans and had to seek new loans, mainly from the U.S.
The Booming U.S. Economy in the 1920s
The war strengthened the superiority of the U.S. against Britain. Britain was committed to maintaining strong free trade so it could be competitive, but that negatively affected their exports and their production. The dollar was imposing itself as a currency, and U.S. banks had established themselves as the most dynamic. Thus, the U.S. became the only financial center capable of maintaining a system of long-term loans.
At the peak of U.S. influence, there was also:
- A trade imbalance between the U.S. and Europe.
- Increased competitiveness, resulting in a favorable trade balance for the U.S., which exported more than it imported.
The U.S. became the financier of European reconstruction. The United States was the supplier of capital goods, which accelerated the growth of industrial production. The increase in exports led to penetration in most markets previously supplied by European powers.
High Economic Growth in the United States
The expansion of the U.S. economy was due to:
- Technical innovation.
- Changes in work organization.
- Renewal of the energy sector, increasing the use of electricity and oil.
- The automobile was the first to apply mass production through assembly lines.
- Construction of skyscrapers in cities where the population increased above average.
Business concentration was the result of strong price competition. Consequently, there was a large increase in productivity, and reduced production costs were allowed. All this increased employment. Between 1922 and 1929, there was a great period of prosperity for the U.S.
The Consumer Revolution
Small establishments had to face large department stores. Hire purchase or credit allowed families to increase their purchases, which increased the demand for products. The desire to sell more gave advertising and marketing a major role. The massive increase in consumption and the dissemination of new trading systems led to a consumer revolution that resulted in a consumer society. The confidence that they had a good future even led them to spend more income than they had, causing household indebtedness.
The Unequal Distribution of Income
Not everyone saw the situation improve. Corporate profits and dividends grew significantly, but the increase in wages was much smaller. The purchasing power of workers was not enough to absorb increased production, as there was overproduction. Agriculture was the hardest-hit sector. Farmers who had borrowed during the war to increase production saw eroding revenues due to declining exports and prices from 1922. Industrial prices remained above farm prices.
Stock Market Fever and the Crash of 1929
In 1925, business profits tended to be invested in credit circuits and the stock market. The stock market boom was the result of a good business position and good prospects. However, the rise in prices led to a speculative bubble. The increase in stock value was produced by the belief that investors would buy as soon as possible to make a greater profit, resulting from the difference between the price of buying and selling (capital gain stock). The interest in the stock market led retail investors to even borrow to buy shares. While the stock price remained constant, there was euphoria. The problem began in 1929 when the stock value began to decline, leading to the Crash of ’29.