Economic Impacts of World War I and the Great Depression
The Economic Consequences of World War I
The First World War caused a lot of military and civilian casualties, but it also resulted in significant monetary and material costs.
The government had to intervene in the economy, which was necessary during the war (control on prices, production, labor, etc.). Some controls remained, but the economic system changed.
The war also caused a disruption of international trade. Non-belligerents promoted domestic production (import substitution), European countries lost foreign markets, and the USA and Japan greatly expanded into overseas markets. There were also problems of overproduction and falling prices.
After the war, inflation affected the countries, causing an abandonment of the gold standard (except for the USA), which increased loans and banknotes, leading to price rises (USA X 2.5, UK X 3, France X 5.5, Germany X 15).
The inflation also caused changes in competitiveness and real values of currency, which resulted in commercial problems.
Economic Consequences of the Peace
After the war, the peace also brought economic consequences.
Growth of Economic Nationalism
- Break-up of the Austro-Hungarian Empire into several states and markets.
- Soviet economy under state control; international trade decreased.
- Increasing protectionism in the West (including increased tariffs, quotas, prohibitions, etc.).
Monetary and Financial Problems
- War debts and reparations: With the Versailles Treaty, Germany assumed its war guilt. The reparations commission demanded 33 billion dollars (twice German GDP). There were also inter-allied debts (the USA was the main creditor). The USA insisted on repayment, while the UK and France demanded reparations from Germany.
- The German hyperinflation: Germany couldn’t pay, so it ceased payments. French and Belgian troops occupied the Ruhr. Mark depreciation occurred (1$ = 4.2 trillion marks). They removed the mark and returned to the gold standard in 1924, leading to growth.
- Economic problems in the UK delayed the return to the gold standard until 1925.
Between 1924 and 1929, they experienced the “Happy Twenties” (a return to prosperity, heavily dependent on US investments).
The Great Depression, 1929-1933
The Great Depression started with the Wall Street crash in 1929. The origin of this crash was the rapid economic growth in the USA during the 1920s and the rise of the New York stock market.
American investors withdrew from Europe to invest in the New York market. Many individuals with modest incomes purchased stock on credit, leading to a financial bubble that became apparent in 1929 (decline in auto production).
The crash had severe effects in the United States: “Black Thursday” (the fall in share prices) and the collapse of stock prices, which transmitted to banks (banking panic). The money supply and GDP fell, while deflation, bankruptcies, and unemployment increased.
The crash also affected countries outside the United States:
- Crisis in countries producing raw materials.
- Crisis in industrial countries (trade and output decreased).
- Creditanstalt suspended payments.
- The UK suspended gold payments first, followed by 24 other countries.
- Currency chaos and a drastic fall in foreign trade.
Lausanne called the World Monetary Conference to restore the gold standard, while Roosevelt suspended international commitments of the USA.
Reconstruction: The New Deal
Between 1932 and 1933, the USA faced a critical situation: serious social unrest (demonstrations, strikes, violence, etc.). Roosevelt won the elections in 1932.
The New Deal aimed to restore peace and growth by increasing state intervention:
- Agricultural Adjustment Act (paying subsidies to farmers not to plant on part of their land and to cull excess livestock).
- Approval of trade unions and new rights for workers (minimum wage).
- Suspension of the Sherman Act and approval of the NIRA (authorizing the President to regulate industry to raise prices after severe deflation and stimulate economic recovery, while also establishing a national public works program).
- SEC (Securities Exchange Commission) that offered protection to small investors.
- FDIC (Federal Deposit Insurance Corporation) that provided deposit insurance to depositors in US banks.
- Suspension of gold payments, with increased public spending.
While it did not achieve spectacular economic results, the USA began to recover by 1938. The main achievement of the New Deal was preventing the break-up of American society.
Europe adopted similar measures, with varying effects depending on the country.
After this, we entered the beginning of the Keynesian era. Keynes wrote The General Theory of Employment, Interest, and Money, where he argued that public spending was necessary to activate the economy and employment, and that the money supply was not as important. Keynesian ideas began to gain traction from then on.