Interwar Economy: From Postwar Crisis to the Great Depression

Posted on Dec 11, 2024 in Economy

The Interwar Economy: From Postwar Crisis to the Great Depression

Situation at the End of the War

  • Heavy human and material losses.
  • Disruption of national economies.
  • Huge financial costs increased domestic and foreign debt (Inter-Allied debts).
  • Monetary policies that led to high inflation.

Economic Consequences of the Peace Treaties

  • Imposed strong compensation and reparations to countries in arrears.
  • The great empires were fragmented, dismantling their large economic spaces.
  • Germany lost important mining and industrial regions.

The Effects on the International Economy

  • Created a trade imbalance between industrialized countries and non-industrialized nations.
  • Created a trade imbalance between debtor countries and the U.S.
  • This conditioned debt positions of each country on the issue of reparations included in the Treaty of Versailles: France could not cope with their debt by collecting something borrowed, and Great Britain did not need reparations to settle their debt.
  • Disrupted the international monetary system with the abandonment of the gold standard, monetary anarchy, and inflation.
  • The U.S. and the UK adopted deflationary policies, causing decreased production and increased unemployment, and protectionism.
  • The indebted countries were unable to stop inflation.
  • Germany was plunged into an intense process of hyperinflation: This issued large amounts of money and prices soared, and the situation was exacerbated by the occupation of the mining and iron and steel industry of the Ruhr (1923) by France and Belgium because of non-payment of reparations.

The Decline of Europe and the U.S. Boom

  • The U.S. started to have international economic hegemony: it became the main financial, industrial, and commercial power. The dollar became the leading international currency.
  • Europe experienced economic and financial weight loss: the belligerent countries borrowed and lost some of their gold reserves, the reordering of the political map led to a process of disintegration of the European Economic Area. They continued the interventionist measures of the war economy and slowed the development and economic recovery of the continent.

The Postwar Economic Crisis (1919-1921)

  • The war temporarily removed the jurisdiction of the European belligerents and allowed the U.S. and other peripheral countries (Sweden, Spain, Japan, Argentina, and Chile) to expand or create their own industries.
  • The fall in demand led postwar economies to each other: a fall in prices of raw materials and industrial products. A strong adoption of protectionist measures, and increased unemployment and social unrest.

Political and Economic Changes

  • Generalization of universal suffrage (male/female).
  • Integration of leftist parties into the political system. Organized as mass parties.
  • Increased economic and political role of women.
  • Fear of the spread of the Soviet revolution led to the emergence of conservative dictatorial regimes.
  • Protectionism and state intervention in the economy continued the trend started during the war.

The Recovery and its Limits (1921 to 1925)

  • At the International Conference of Genoa (1922), to restore stability to currencies, the gold exchange standard was created, which included gold and currency reserves. It did not bring an end to protectionist policies.
  • The Dawes Plan (1924). To normalize the German economy: stabilized the German currency, which was the creation of Reichsmark; regulated the payment of war reparations, provided loans to revive the American and the German economy, and finally helped to resolve the inter-allied debt problem.
  • The balance of the world economy was going to depend on the investment and credit of the U.S.

The Roaring Twenties in the USA

Causes of the Spectacular Economic Expansion in the U.S. Between 1922 and 1929

  • New industries: automotive, electrical industries (electricity, telephone, movie), appliances (radio), and chemical industries (oil, tires, fertilizers, pharmaceuticals).
  • New energy sources: oil and electricity.
  • Mass production, which increased production and lowered prices: mechanization through electric motors and internal combustion engines, and new methods of work rationalization (Taylorism) and in chain (Fordism).
  • Corporate concentration.
  • Mass consumption through advertising and hire purchase.

The European Situation in the Twenties

  • Europe recovered from the postwar recession but was no longer the center of the world economy.
  • Germany began its economic recovery in 1924: helped by the influx of British and American capital, but with heavy debt, which was an obvious risk for the future.
  • France improved its economy and began a strong recovery.
  • The UK was marked by a stagnation of its economy between 1924 and 1929, caused by the return to gold, which urged its products to the devaluation of the majority of other currencies.

Limits and Imbalances in the Expansion

  • Ongoing crisis in the traditional sectors: the crisis of overproduction in agriculture, and stagnation of the traditional industries (coal, textile) against the expansion of new industries such as electricity, automobiles.
  • Decline in consumption capacity and increasing inventory: weak wage growth and loss of purchasing power of farmers.
  • Stalled world trade: increasing protectionist policies.
  • Instability of the international monetary system: lack of international cooperation and rivalry between financial centers (New York, London, and Paris).
  • Decreased capital investments in productive activities: it was more attractive to speculate on the stock market.

The Causes of the Stock Market Crash

  • The crisis of traditional industrial sectors (textiles, coal, steel, and shipbuilding) and agriculture.
  • The decline in purchasing power of wages and abuse of funds.
  • The crisis in the construction sector due to market saturation. Despite these ominous signs being evident since 1925, the value of the shares of the New York Stock Exchange climbed nonstop in a clear process of stock speculation. A speculative bubble had been created, and the value of the stock was well above the company profits. A withdrawal of shares by leading investors in the spring of 1929 caused a sharp decline in contributions, which in turn caused panic among most investors. On October 24, “Black Thursday,” the stock market began to sink, and the market collapsed. Prices went down and lasted until 1933.

The 1929 Crash and the Great Depression

Causes of the Depression

It was the collapse of the stock market, the destruction of savings (in the ruin of millions of large and small investors), and a reduction in credit, consumption, and investment. With the need to tackle debts, people began to withdraw savings from banks. These sank, which was the collapse of the banking system. Investment and credits to industries ceased, and industrial production had to be reduced by 50%: unemployment, poverty, and the agrarian crisis were accentuated by falling prices and increased poverty among peasants. All this led to the loss of purchasing power and a continued overall decline.

The Crisis Spread and Affected Sectors

  • It mainly affected the more developed countries with industrialized economies and a large volume of trade.
  • Germany and Austria, with their banks and debtor companies, were especially hit by the crisis.
  • It affected commodity-exporting countries: Western Europe, Latin America, China, and Southeast Asia.
  • Food production barely acknowledged the crisis.
  • High levels of unemployment (25% in the U.S.) along with falling prices.