Economic Imbalances & Crisis After World War I
Economic Problems After The First World War
The Rise of Fascism and the Second World War
The First World War, ending in 1918 (not 1829), had profound economic consequences, including the rise of fascism, which contributed to the Second World War. The war also led to the rise of neo-capitalism and influenced the Russian Revolution.
Inflation and the Crisis of 1929
Inflation is the sustained increase in prices over wage increases, resulting in a loss of purchasing power.
The Crisis of 1929 was influenced by several factors:
- The aftermath of World War I
- Unpaid war debts (with the USA as a major lender)
- Destruction of economic structures
Imbalances in the World Economy
The First World War had profound economic effects, coupled with imbalances in international economic and financial relations due to the decline of Europe and the rise of the United States.
Economic Consequences of the War
The State of Affairs After World War I
War disrupts economies. Post-war, nations faced serious problems, including loss of life, destruction of infrastructure, and halted investments. The conflict incurred huge financial costs, forcing nations to seek alternative funding sources beyond normal revenue.
These measures had serious economic consequences. Excessive money creation led to currency depreciation, rapid price increases (inflation), and escalating domestic and external debt.
Economic Impact of the Peace Treaty
The peace treaties had several negative effects. They imposed reparations and fragmented the great empires of Europe, dismantling large economic zones. Germany, burdened with heavy reparations, lost vital industrial and mining regions.
Disagreements arose between Europe and the United States regarding Allied debt and German reparations. The US demanded debt repayment, while European allies, especially France, prioritized receiving compensation for damages.
Lacking agreement, and according to the Treaty of Versailles, the Reparations Commission set the amount Germany was to pay in 1921.
Effects on the Economy
One consequence of the war was a trade imbalance. Between 1914 and 1920, food and raw material prices rose due to booming European demand, decreased imports, and increased exports from industrialized nations.
Falling prices in the primary sector caused economic crises in industrialized countries. The war disrupted the international monetary system and the gold standard, leading to disrupted international trade, monetary instability, and soaring inflation.
The Decline of Europe and the Rise of the U.S.
After World War I, the European-based international economic system crumbled, giving way to U.S. hegemony in the global economy.
Changes in Industry and Commerce
Industrially, Europe’s economic and financial weight declined due to the strain of the war (1914-1918), while the United States emerged as the world’s leading industrial power. Europe also lost overseas markets, and the U.S. experienced a trade surplus, accumulating nearly half of global gold reserves.
Financial Changes
U.S. loans to Europe during the war shifted its position from debtor to creditor. The dollar replaced the pound as the major international currency, and the New York Stock Exchange became the world’s financial center.
U.S. lending practices were risky, involving investments with questionable profitability and short-term loans that could be recalled at any time.
The rise of Fascism was linked to the crisis, fueled by nationalism seeking to overcome economic hardship.
The Crash of 1929 (Black Thursday): Many borrowed money to invest in the stock market. The crash triggered a massive drop in prices, leading to panic selling and a market collapse.
Stock Market: A marketplace for trading company shares.
The Economic Crisis of 1920-1921
After the war, a brief economic recovery was followed by a severe crisis, primarily affecting Europe. Between 1919 and 1920, the international economy experienced a short but intense boom. European countries needed to rebuild infrastructure and productive capacity, benefiting from increased demand.
European spending was fueled by the credit system established during the war, providing easy access to cheap loans. Economic growth and expanding debt led to a sharp rise in prices and global inflation. The abrupt halt of U.S. foreign loans triggered the severe recession of 1920-1921, highlighting the difficulties of transitioning from a wartime to a peacetime economy.
Recovery and Limitations (1921-1925)
Efforts were made to restore the pre-war liberal economic system. This involved reducing the money supply and returning to the gold standard. However, a lack of international cooperation hindered progress, with most countries adopting protectionist trade policies.
The Problem of Inflation
The lack of cooperation was evident in the diverse economic policies implemented to combat inflation:
- Neutral countries adopted deflationary policies, leading to decreased production and increased unemployment. They also intensified protectionism.
- Heavily indebted countries struggled to control inflation.
- Some countries experienced hyperinflation, losing control over prices.
Germany, to finance its war debt, printed excessive amounts of money, triggering hyperinflation and economic collapse. Germany suspended reparation payments, leading France and Belgium to occupy the Ruhr industrial basin in January 1923.
Restoring the International Economic System: The Dawes Plan
To restore the international monetary system, the Genoa Conference was convened in 1922. The U.S. had returned to the gold standard in 1919, unlike other nations. The conference proposed the gold exchange standard, backing currencies with gold reserves and funds from other countries.
Protectionism increased globally, including tariff hikes in the U.S. European monetary stabilization depended on resolving German war reparations and inter-allied debts.
In 1924, the U.S.-proposed Dawes Plan was accepted. It aimed to stabilize the German economy without changing the total reparations amount but reducing annual payments. U.S. banks provided Germany with a substantial loan to facilitate payments, implement monetary reform, and return to the gold standard. The new Reichsmark enabled economic recovery after 1924.
The Dawes Plan also stipulated reduced interest rates on Allied debts. However, this created a dependence on U.S. capital flows for global economic balance. Most loans went to Europe and overseas territories.