Economic Impact of World Wars & Great Depression (1914-1945)
Economic Consequences of World War I (1914-1918)
World War I dismantled the world economic order that existed from the late nineteenth century. In addition to its consequences, it also sparked a structural imbalance that the economy would suffer in later decades (the 1920s and 1930s).
Economics of War
This war, lasting from 1914 to 1918, was a conflict in which economic performance played a key role. The major industrial and financial powers of the world faced each other. Victory went to those countries able to feed and arm a greater number of men. The war meant the implementation of new measures of economic organization. It involved putting into practice a war economy characterized by:
- An immediate diversion of productive factors to war industries and transport (notably, the industrialization of the automobile and aviation).
- The supply of food, energy resources, and raw materials became the main concern of the governments involved (supplying both the troops and the rear).
- Implementation of measures by the countries’ central banks to finance major military expenses.
State Intervention
The seriousness of the situation led governments to take control of the economy. They created specific authorities, providing them with powers, financial resources, and human resources to organize the entire war production. Key features include:
- Control over the distribution of goods (staples) through rationing.
- Distribution of existing labor.
- Opening of labor credit so that operators could be equipped for the conflict.
- Process of import substitution, replacing what was once acquired.
Economic Consequences of the War
- Loss of life: An estimated 8.5 million military casualties (Germany and the USSR lost the most lives). This accounted for 15% of those mobilized and 2% of the total population of Europe. Seven million were disabled, and 15 million were injured to varying degrees. These were qualified young people (loss of human capital), representing the most dynamic labor segment (20-30 years old). Civilian casualties, excluding Russia, amounted to 5 million deaths.
- Disruption of normal economic relations: Communications were disrupted due to the destruction of railways and roads. The gold standard currency system was no longer valid for the post-war world.
- Physical destruction and loss of capital: This especially affected occupied countries, particularly Belgium and France. They lost about one-third of their fixed assets (Europe). In 1920, industrial production had fallen to 1913 levels. This caused a deceleration of the global economy, which would take time to recover.
- Disruption of international trade: The war resulted in the disruption of trade between the contestants, who were consumers and suppliers to each other. There was an economic war (the English blockade). The dedication to the production of military equipment meant the loss of foreign markets.
- Inflation and abandonment of the gold standard: Funding the war was done by abandoning the gold standard and using the budget deficit (spending more than was received). Credit, not taxes, was charged with financing this war.
- Method to obtain money by issuing public debt: Internally, the link between money supply and metal stocks was broken. Externally, fixed exchange rates were abandoned, affecting the mobility of capital and trade.
- Shift of the global economy from London to New York: The war strengthened this process. The U.S. became the only country during and after the war able to address the economic and financial needs for recovery. As a measure of the country’s economic strength, the U.S. had a net creditor position with a balance of approximately $12 billion.
Economic Consequences of the Peace
Economic Nationalism
This interventionism in the economy manifested in two ways:
- Direct forms of intervention: Control over strategic sectors through nationalization and planning.
- Indirect forms of intervention: Through price regulation, licensing, and credits. This forced the creation of a public sector that would develop over the 1920s, especially after the crisis of 1929.
Creation of New States
Territorial agreements were reflected in a series of treaties that provided for the disintegration of the old empires of Central and Eastern Europe: the 2nd German Reich (Prussian), the Austro-Hungarian Empire, the Russian Empire, and the Ottoman Empire. New nations emerged: Finland, Estonia, Lithuania, Latvia, Poland, Yugoslavia, Czechoslovakia, and Hungary. The Treaty of Versailles set the new German borders, involving the transfer of 13.5% of its territory and 10% of its population from 1910.
Financial and Monetary Disorders
The problem of war reparations, the reconstruction of the international economy, the gold exchange standard, and the Dawes Plan (capital injection) were discussed. The gold exchange standard, inflation, and monetary conditions caused by the war ended the former monetary system (gold standard). Countries met at two important meetings: Brussels in 1920 and Genoa in 1922. They established the pattern of change. The maintenance of a currency’s gold value should be secured by an adequate supply of assets, not necessarily gold. The new system distinguished between key currencies of countries that would become centers of gold and other peripheral currencies indirectly convertible into gold.
Reparations totaled $33 billion, distributed among the victorious countries. Inter-Allied debts amounted to $26.5 billion. The U.S. and Britain were the main creditors, and France was the most indebted nation. Reparations and debts affected 28 countries. A simple technical solution could have been established, with compensatory arrangements between debt and reparations. However, there was a lack of political will, due to both American intransigence and the French demanding immediate payment of their debts.
In 1922, Germany was incapable of dealing with reparations. There was some possibility of paying in kind, but the French and British refused, fearing competition. Another possibility was to export, but it was a bad time for exports, as countries had implemented protectionist policies. The Germans, unable to pay, asked for a moratorium on their payments to France, which unleashed the Ruhr occupation in January 1923. Strikes were declared, times of famine ensued, and hyperinflation caused prices to soar.
The first solution came in April 1924 with the Dawes Plan, by which the U.S. reduced Allied debt while reducing the demands on Germany regarding reparations. France abandoned the Ruhr, and Germany, after reforming its destroyed monetary system, began receiving American loans to rebuild its economy.
Economic Instability of the 1920s
Phase 1: Biennium (1920-1921) – Depression and Conversion Crisis
The conversion crisis was related to the transition from a war economy to a peace economy. The return to normal situations led to overproduction and falling prices (production at a higher rate than required needs). Countries responded with protectionist policies and deflationary policies (containing wage increases). The crisis was short, and the economy bounced back from 1922.
Phase 2: Reconstruction (1922-1925)
After the previous crisis, an economic recovery process began, crystallizing in the 1922 Geneva Conference, which established a monetary framework. The Dawes Plan also crystallized in 1924. However, recovery was slow, and only Western European countries reached pre-war production levels after seven years. Recovery coexisted with high unemployment and political instability.
Phase 3: Stability and Growth (1925-1929) – The”Happy 20″
Favorable political and economic preconditions emerged. Four agreements ended Franco-German tensions and smoothed out reparations and war debts. The progress of European reconstruction and the recovery of raw material prices were symptoms of an improving international economic climate. However, unemployment remained high, and excessive stock market speculation and Europe’s financial dependence on the U.S. began to emerge.
The Great Depression of 1929 and the 1930s
World War I demonstrated the leadership of capitalism, shifting from Britain to the U.S. globally. Not only did the leading producer change, but so did international investors. The U.S. became the leading creditor country compared to France and Britain, who had held that position before the war. After World War I, international trade contracted. Unlike England before the war, the U.S. imported little, and countries borrowed to an increasingly greater extent.
The U.S. played a small role in international commercial networks during the 1920s. Overseas investors sought higher returns than at home, where they received better pay on domestic equity. Loans abroad were withdrawn, leaving debtors in a dramatic situation.
Radiography of the Crash of 1929
The crisis of 1929 originated in the U.S. financial sector, in the so-called stock market crash. Between 1926 and September 1929, the New York Stock Exchange experienced a speculative boom, rising from 100 to 216. This rise had no connection with increased profits or business performance; shares were purchased for capital gains. The first signs of trouble appeared in July 1928 but were recovered the following month.
National reserve banks lent at 5%. These funds were provided to individuals in the short term at 12% to invest in stocks and speculate. Psychological causes (optimistic statements) also played a role. On October 24, 1929 (Black Thursday), demand dropped dramatically due to excess supply. Banks momentarily bought to support prices, but on Monday, October 28, they could no longer do so. The crash occurred, and those who had bought shares with loans went bankrupt, dragging down the banks that had provided them.
The Start of the Depression of the 1930s
A chain of bankruptcies ensued, reducing production and increasing the number of unemployed in the U.S. The crisis swept the rest of the world due to the enormous weight the Americans had gained in the global economy. Production decreased in the U.S., and imports of raw materials were cut. The increased number of unemployed also meant a decline in the ability to import consumer goods. Other countries (Europe, Latin America) lacked currency ($) to buy U.S. exports, creating a vicious circle. The measures taken were protectionism and currency devaluation, which encouraged autarky and increased the economic recession.
Political Solutions to the Crisis
Social Democracy (U.S., Great Britain)
United States: The New Deal
The U.S. developed the”New Dea” policy, aiming to reactivate supply and encourage rising demand and prices, giving investors confidence and distributing purchasing power (generalized trade relations). Four types of measures were carried out:
- Devaluation of the dollar: To promote exports and hinder imports, affecting domestic prices, which began a slight increase.
- Credit facilities: To assist speculation, facilities were provided to depositors so that banks could invest capital.
- Efforts to raise farm prices: The state acquired and accumulated stocks to reduce supply and increase prices. Incentives were provided to reduce acreage, but this was not very effective as production did not decrease.
- State investment in public works.
Conclusion of the”New Dea”: Although the election results were good, from an economic point of view, the New Deal’s results were doubtful. However, it is a milestone as the first case of state intervention in the capitalist economy, marking the beginning of a trend that would later generalize.
Great Britain
Foreign economic policy measures consisted of:
- Abandonment of the gold standard: Stopping payments with gold and paying with pounds.
- Devaluation of the pound: The first time it was devalued.
- Protectionist tariffs: Levies on the entry of products.
- Reference agreements with certain countries in the pound area: The Commonwealth (colonial empire using the pound: Canada, South Africa, Australia, New Zealand).
Internally, the government helped overcome the crisis in accepted mining areas (Wales, Durham, south and west Scotland) and the textile industry in Lancashire. Monetary policy kept interest rates low to facilitate investment.
Fascism (Germany, Italy)
Germany
The German government proved very successful in fighting the recession, having 6 million unemployed in 1933. Six years later, in 1939, the German economy had more jobs than workers to fill them. This was achieved through a public works program (work paid by the state) that ended up as a rearmament program, both directed by the German state. The Nazis removed voluntary union membership and replaced it with compulsory union membership in the National Labor Front. Collective bargaining was eliminated and replaced by underrepresented workers to determine wages, hours, and working conditions. They persuaded workers to collaborate.
In the monetary realm, exchange controls had been restored since 1931 to prevent capital flight. State control over almost all foreign exchange transactions directly influenced the balance of trade payments. The government’s goal was autarky.
Italy
The political economy of the Mussolini dictatorship did not exist in the same way as Germanic National Socialism. Notable was the creation of the corporate state, which coordinated the interests of workers and entrepreneurs. It implemented public works plans and invested in the arms industry.
Communism
The revolution began in February 1917, a liberal revolution that ended the power of the Tsar (old regime) and established a liberal government. The first decision of this government was that Russia would continue in the war. This decision led to the Bolshevik Revolution in October 1917, abolishing the liberal government and establishing a new one.
The new Bolshevik government ordered Russia’s withdrawal from the war, a division of large estates (large farms), and worker control of enterprises.
Phase 1 (1917-1921)
A civil war began in Russia, causing the economy to be even more controlled by the state.
Phase 2 (1921-1928): New Economic Policy (NEP)
The Bolsheviks remained in power, and a mixed economy or state capitalism was established. Features of this period:
- A number of leaders.
- Harnessing the economy so that farmers gained freedom (ability to bring products to market).
- Priority to agriculture over industry, as there were more farmers at this time.
- Entry of foreign capital into the USSR.
These were opening measures of short duration implemented by Lenin. The formal establishment of the USSR occurred in 1922.
Phase 3: Industrial Development and Settlement
Starting in 1926, Stalin ended the previous policy. He purged the Bolshevik party, established centralized power, and constituted an authoritarian dictatorship that sought rapid, especially industrial, growth. The economy was regulated by a public body, the Gosplan, which developed Five-Year Plans, marking the objectives to be achieved during those five years. These decisions caused problems, as they were taken by an authority without considering certain factors.
- Production of capital goods and heavy industry experienced extensive growth in this model due to the massive use of production factors.
- Military spending was another component of growth, allowing the USSR to counter Germany in World War II.
With Stalin’s arrival, a policy of reorganizing collectivized agriculture began (land in state hands). Worker cooperatives, called Kolkhoz, were created. They were given a small plot of land to cultivate individually, and they could bring these products to market for sale. Farmworker cooperatives, called Sovkhoz, were also created, but they depended directly on the state.
Economic Aspects and Impact of World War II (1939-1945)
Phase 1 (1939-1942)
Germany occupied most of the European stage exceptionally quickly. German success was due to establishing exponential military supremacy (working at full capacity in armament factories) and the absence of opposition from other countries. During the first phase of the war, the impact of the German economic war was very small; in 1940, consumer spending in Germany was higher than war costs. In 1942, the Soviet Union’s resistance to the German advance in the east and the entry of the U.S. into the conflict marked a total turning point.
Phase 2 (1942-1945)
Strong growth in arms production.
Characteristics of World War II
The war effort was supported by three main factors:
- Increased production: From 1942, war production mainly affected aviation and submarines.
- Decreased consumption: From 1942, capital resources were exhausted. All money from abroad was brought in.
The impact of each of these factors varied considerably from one country to another. The U.S. was undoubtedly the most benefited from the conflict. Despite the huge costs of the war, which led to high leverage and large increases in the money supply, the inflation rate in most Western countries was very modest. This was due to tighter monetary control, a larger proportion of military spending financed by taxes, and the intensive use of price controls and rationing.
Trade
The war caused a change in world prices of goods. The terms of trade moved against the developed economies of Western Europe (importing more than exporting), which were large-scale importers of food and raw materials. The sale of investments abroad, the destruction of part of the merchant fleet, and the transfer of insurance markets and maritime transport pushed Europe to lose all its invisible revenue. Former foreign markets for European products were taken over by the U.S., which became the world’s leading carrier.
Loss of Life
Losses far exceeded those of World War I, with an estimated 40-60 million deaths, the majority being civilians. Along with these deaths, there were about 35 million injured. Unlike in World War I, the low birth rate seems to have been very low. Geographically, Central and Eastern Europe were the hardest-hit areas. Russia suffered a total of 25 million deaths. Poland lost one-fifth of its population. Germany and Yugoslavia suffered large losses of all kinds. In northwestern Europe, the excess of births compensated for the losses.
Destruction of Capital Assets
Destruction was much higher than in World War I. Intense bombardments damaged houses, fields, and transport systems. At the end of the war, industrial production was less than half that before the war, except in the UK, Switzerland, and Scandinavia. The decline in agricultural production was 40% over previous levels for cereals and 30% for livestock.
When the war ended, the immediate problem was not so much the shortage of assets but rather the severe lack of essential supplies and food, inflation, and debt positions.
Spanish Economy in the First Third of the Century
Stage 1: The Disaster of 1898 to World War I
The war in Cuba (1898), in which Spain lost its last remaining colonies, and the U.S. expanded its colonial empire, was a real blow to Spanish politics. During this phase, a shift in nationalist economic policy occurred. Industrial and agricultural groups allied around this national policy, in contrast to the European economy, which was witnessing a process of internationalization of markets (openness). The reserves of the domestic market favored large industrial groups that developed oligopolistic strategies to minimize competition, partly diminishing the importance of farming and hindering the possibility of widening domestic demand.
Two Political Events
- The stabilization policy: Enabling the”Villaverde reform (1899″ that contained public spending through measures, including improving the return of capital taxes.
- The return of capital from Cuba: Promoted by Spaniards leaving Cuba after the war.
Population
The population experienced a moderate increase associated with the fall in mortality. The most important factor was external migration, paralleling the agrarian crisis. The sectoral distribution of the active population did not evolve much because industry did not absorb the excesses of the rural population.
Agriculture
Agriculture suffered the effects of the fin de siècle crisis (end of the century), aggravated in Spain by the scourge of phylloxera and the reduction in livestock output. The crisis was favored by tariff protection linked to the modernization of the sector, a gradual process.
Industry
Industry experienced a diversification process that ran parallel to electrification and the development of cities. A modern chemical industry arose in Spain. The textile sector expanded due to the extra demand generated by the lack of supplies in the Latin American market. The steel sector followed the same line of production specialization. This sector used war profits to reshape facilities (electricity for factories).
Consequences of the War in Capital Accumulation
Remaining neutral, Spain had a speculative nature associated with special prices, and wages could not contain price increases. Quick profits were favored over fixed capital investments. The counterpart to expansion came at the end of the war, when the return to normalcy nullified all previous advantages. Devaluations in industrialized countries opened the way for their goods, and Spain had to adopt a more protectionist stance.
Stage 2: 1923-1931 (Dictatorship of Primo de Rivera)
To maintain the business cycle without war, an intensive public works policy was implemented to secure employment in exchange for social peace and control the wage process.
Agriculture
Progressed slowly, albeit with some loss of market for the export sector (agriculture in the Levant).
Industry
Progressed slowly under the protectionist option, registering sustained growth thanks to strong public demand in basic industries (electricity, telephone, rail). The impact of public works policy (roads, reservoirs, bridges, etc.) was significant.
Stage 3: Second Republic (1931-1936)
The crisis reached Spain through trade. Industry was badly hit by the collapse of public order. The shipbuilding and rail sectors were also damaged, as were mining and consumer industries (more linked to the market). The main difficulty facing the Republic was the agrarian issue, and it was ultimately unable to resolve the social conflict around land, leading to the Civil War.