Economic Impact of WWI and the Roaring Twenties
Economic Consequences of the First World War
What were the immediate effects of the First World War on the economy?
The Great War had profoundly negative effects on the global economy:
- First, it weakened the European powers, adversely affecting the population and production, and causing the breakdown of international cooperation among the Allies. Almost one-tenth of European production infrastructure (machinery, factories, etc.) was devastated by the war.
- Second, the peace treaties signed after the war (especially the Treaty of Versailles) generated significant economic disagreements between countries, destabilizing the international monetary system and reducing investor confidence.
Germany was held responsible for the conflict and required to pay war reparations. The U.S. opposed this, arguing that Germany lacked the financial capacity to meet such large payments. The issue was further complicated by inter-Allied debt payments, with differing opinions on their nature.
The economic problems were particularly acute in Germany. The effort to raise the amounts set in Versailles led to the collapse of its monetary system in 1923 and unprecedented inflation, which ruined those with fixed incomes (pensions and wages).
Causes of American Prosperity in the 1920s
High Economic Growth
U.S. economic growth was driven by a transformation in production, dominated by technical innovation and changes in work organization characteristic of the Second Industrial Revolution. There was a significant renovation of the energy sector, with increased use of electricity and oil. The use of the telephone, automobiles, and household appliances such as radios, irons, and refrigerators became widespread.
The Rise of the Automobile
The automobile was the landmark of this booming sector. It was the first product to utilize mass production through assembly lines. Its effects were positive in existing sectors (iron, steel, glass, etc.) and spurred growth in new ones (tires, fuel).
The Consumer Revolution
This period also saw a change in trading systems. Small businesses faced competition from chain stores that introduced a new method of sale: hire-purchase or credit. This allowed many families to increase their purchases, boosting demand and becoming a major engine of U.S. economic expansion. Advertising and marketing also played a significant role. The increase in consumption and the dissemination of these new trading systems led to a consumer revolution.
Unequal Distribution of Income
Not all population groups benefited equally. Corporate profits and shareholder returns grew at a very high rate, while wage increases were much lower. The improved purchasing power of workers was insufficient, as production exceeded the real needs of consumption. This led to the phenomenon of overproduction, which became a problem for the U.S. economy.
Agriculture was the sector hardest hit in the 1920s.