Economic Shifts After WWI: US Rise & Market Crash
Economic Consequences of World War I
The First World War significantly impacted the economic power of the United States and Europe. The conflict had very negative consequences, stemming from disagreements among the Allies about debt repayment and the organization of international economic relations, as well as the effects of peace treaties. The Treaty of Versailles imposed heavy reparations on the defeated nations, particularly Germany, which lost 13% of its territory and 10% of its population, leading to a reduced consumer base. Austria, Hungary, Bulgaria, Turkey, and Russia also experienced restricted domestic markets. A primary source of tension was the victors’ insistence on demanding reparation payments. This created significant problems in relations among the victors themselves. Moreover, a large part of the German population considered the burden of reparations a humiliation. The payment of these amounts led to the bankruptcy of its monetary system in 1923, triggering unprecedented inflation that ruined those with fixed incomes.
Decline of British Supremacy, Rise of the US
The consequences of the First World War accelerated US economic supremacy and, consequently, increased imbalances in the international market. Firstly, there was a widening economic gap between the US and Europe. Secondly, an oversupply of food and raw materials resulted in falling prices. The increased competitiveness of the US trade balance prompted it to lean towards the major power. Europe’s trade deficit was offset by American capital investments in Europe. However, the withdrawal of American investments from the beginning of the 1929 crisis led to falling trade. These difficulties were compounded by a similar imbalance between industrialized countries and exporters of food and raw materials.
The Roaring Twenties
The US took on the role of supplier of goods and capital. Over the years, it experienced accelerated economic growth, driven by changes in its economic structure. The USA became the world’s leading investor, leaving Great Britain in second place. Export growth increased its presence in almost all markets, generating a growing trade surplus. The US expansion was based on a profound transformation of production, dominated by technical innovation. During the 1920s, the use of telephones, cars, and appliances became popular, although their cost was too high for many families to acquire them outright. The spread of installment purchases, along with the increase in consumption, has been called the “consumer revolution,” and it was one of the main reasons for the expansion of the economy. The landmark of this booming sector was the automotive industry, especially Ford’s marketing of the Model T, produced almost entirely through mass production with assembly lines. The construction of skyscrapers also had very positive effects on employment and demand. However, the positive results of this progress were not evenly distributed. While corporate profits and shareholder dividends grew at a phenomenal pace, wages rose at an almost negligible rate. The agricultural sector saw incomes reduced, and many workers in traditional industrial sectors were forced to change jobs and settle in neighborhoods lacking basic amenities.
The Stock Market Boom and Crash of 1929
The stock market boom—that is, increased demand for shares and their subsequent rise in price—gave way to what is known as a speculative bubble. Based on the profits obtained from buying and selling shares, many investors borrowed to buy more. As long as the price of shares maintained its upward trend, the euphoria continued. However, stock prices became detached from company profits, as the former grew much faster than the latter. When the market’s inclination changed and stock prices plummeted, many investors found themselves committed and unable to meet their debts. On October 24, 1929, a wave of sales sparked what became known as “Black Thursday” in US financial history, due to the belief that stock prices would not continue to rise permanently. A similar episode took place on October 29, “Black Tuesday,” when many banks demanded payment of loans used for the purchase of shares, forcing the sale of shares to repay the loans.