Economic Crises and Policy Responses: 1917-1932
Responses to the Economic Crisis
Initially, almost all countries adopted austerity policies aimed at improving profitability by reducing production, selling surpluses, and reducing wages. These measures were intended to reduce production and financial costs by restricting credit. It was believed that this strategy would allow the most efficient firms to survive and help maintain the state budget deficit. However, this strategy further deepened the crisis by encouraging under-consumption, as it placed the effects of the crisis on workers. The public budget balance was affected by constant subsidies and aid to many businesses, which were increasingly affected, and a decrease in government revenue due to the contraction in output, income, and consumption. This deflationary strategy was a failure, leading each country to adopt different and unorthodox economic policies. In all cases, the state had to engage more actively in the economy due to the failure of market mechanisms to correct the situation.
Significant Examples
- Great Britain: Broke with free trade due to the crisis, implementing protectionist measures. Only raw materials and food products affecting domestic production were excluded. It broke the paradigm of the gold standard, leading to the devaluation of the pound. The loss of financial dominance in favor of the USA was also recognized.
- United States: Implemented the “New Deal,” marking a change from the previous “no intervention” policy. This new program recognized that the problems stemmed from under-consumption, so most measures aimed to stimulate demand. The dollar was devalued to encourage exports, and control measures were introduced on banks by raising the reserve requirement.
- Agricultural Sector: Attempts were made to limit supply by granting compensation to reduce production and subsidies to ensure income levels.
- Industry: A strategy was developed to avoid overproduction while maintaining activity. Wages were maintained, working hours were reduced, and cartelization was promoted to compensate companies.
- Sweden: The triumph of the Social Democrats led them to focus on capital bases, particularly public investment policies that stimulated demand. A social production system enabled moderate wage growth and facilitated the accumulation of benefits for enterprises, which were reinvested in the production process. These funds also contributed to the state budget through taxes. A social covenant was instituted to facilitate interaction between unions, employers, and workers, contributing to economic recovery and strengthening the welfare state.
Disintegration of Central and Eastern Europe
Industrial Sector
The policy adopted was “import substitution,” intended to encourage domestic industry and thereby waive the comparative advantage of the international market. This involved creating industrial complexes oriented toward the production of consumer goods, financed partly by the state and partly because the industry had lower capital requirements. The results of these policies were high costs and higher prices. Despite the pursuit of economic independence, technological dependence remained.
Agricultural Sector
State-driven reform processes with an anti-oligarchic nature were implemented, reflected in the distribution of land among peasants. The result was a dual agricultural sector: one part, geared primarily for export, financed the industrial policy, while the other served domestic demand. This policy also failed due to the depressing international situation.
Demography
Another factor contributing to the worsening economic situation was population growth, exacerbating the process as immigration, the safety valve, was gone. This resulted in a saturated labor market, reflected in the growth of unemployment and misery. Remittances were also reduced.
The Soviet Experience
The economic structure exhibited dualism: a backward agricultural industry coexisting with a modern capitalist one, leading to significant economic fragility during the war. This resulted in the bourgeois revolution in February 1917. However, this experience was short-lived as it failed to meet the people’s demands for an end to the war and social reforms to alleviate famine.
Phases from 1917
- War Communism: When the Bolsheviks came to power, they applied Integral Communism, nationalizing all economic activity and creating government plans to promote expansion and modernization. However, the Civil War required sacrificing any medium- and long-term planning for the sake of achieving final victory.
- New Economic Policy: Aimed to revitalize the productive system, which had many problems. This strategy authorized proven management of craft activities, retail, and farming with the kulaks. This phase of improvement laid the foundation for underdevelopment. However, the Communist Party saw this phase as a threat and decided to return to orthodox communism, suppressing private enterprise and assuming full state control of the economy.
- The Five-Year Plans: The first Five-Year Plan began in 1928. In the agricultural sector, forced collectivization was carried out to accumulate enough capital to finance industry through price control, as the state kept the price differential between product and consumer. In industry, large industrial complexes were planned with a combined character, attempting to produce economies of scale in the same space. The Five-Year Plans sought to better match forecasts and provide better care for the classification of labor, recognizing that skilled labor was essential for improving production.