Post-WWII Economic Shifts: Recovery, Golden Age, and Global Impacts

Posted on Dec 8, 2024 in Economy

Post-War Economic Recovery

The damage of World War II was higher than the first. In spite of this, the subsequent recovery was much faster. This was because Germany was not required to pay compensation for damage caused. This made the recovery faster, and economic exchanges increased. The recovery was aided by the U.S., which was as involved in this recovery as in the first. The first economic aid to Europe came mostly from the U.S. and had two sources:

  • Distribution of food and medicine to the production by the Allied armies.
  • Administration and Reconstruction Aid by the United Nations (UNRRA) in 1945-1946, which cost over a billion dollars and distributed 20 thousand tons of food, clothing, blankets, and medicines. The U.S. accounted for more than 2/3 parts.

The UNRRA then gave way to another organization. Unlike what happened after World War I, all the countries involved in World War II were aware that it was impossible to return to the same state of affairs before the war. Against the isolationism of the 1920s, the U.S. was significantly involved in the reconstruction of the European economy. American aid was not disinterested, for three reasons:

  1. They were interested in rebuilding an international, multilateral system against the nationalism and protectionism of the war period, where state policies were closed.
  2. A decrease in U.S. exports was expected, which would have some negative effects on commercial activity and employment in the U.S.
  3. The beginning of the Cold War (East and West blocs) led the U.S. to be very concerned that Western Europe maintain a strong economic and political stance against the USSR.

The Marshall Plan

On June 5, 1947, the Secretary of State of the U.S., George Marshall, ruined in order to help Europe and to approve the “Marshall Plan” (ERP), also called the European Recovery Program. American aid was distributed over four years of implementation and provided a total of $13 billion between the end of 1947 and early 1952. Neither Germany nor Spain received this aid. It was intended primarily to pay for European imports: food and raw materials, essentially coming from the dollar area (South and North America). The priority went to capital. Although economic recovery was already underway when authorities started the ERP, it is clear that this accelerated the process. The critical issue of the European economy was the shortage of foreign exchange to buy needed imports. Between 1945 and 1950, the pace of European economic recovery was impressive, most notable in Western Europe than in the East.

Factors Behind the Recovery

  • Politics of the respective governments: Governments took measures such as international economic cooperation.
  • Cooperation: All countries involved human capital.
  • Wealth of Europe: Priority was given to investment over consumption.
  • Containing inflation.
  • Reduction of trade deficit: Increasing exports.

By 1950, the external position of Europe still remained weak, and trade deficits continued to exist in many countries well into the 1950s. Germany was included in the ERP, undertaking the unification of the three areas controlled by the Americans, Italians, and French. This created the embryo of the German Federal Republic in September 1949, and a month later, in October, the German Democratic Republic came under the aegis of the USSR.

The recovery of the German Federal Republic started in 1948 with the help of:

  • Foreign aid.
  • Recovery of exports.
  • Flexible supply.
  • Stimuli for investment activities undertaken unilaterally.

This process aggravated tensions with the Soviets, whose response was to blockade with Soviet troops. This process culminated in 1948 when Great Britain, France, and the Benelux countries formed the Brussels Treaty Organization. With the subsequent integration of the U.S., Canada, Denmark, Norway, Portugal, Iceland, and Italy, it was transformed into NATO.

Base to Achieve European Economy: The Multilateral System

The first step was in 1941 when the U.S. and Britain signed the Atlantic Charter, which committed both countries to economic recovery. Two organizations of this new international order were created in 1944 at the Bretton Woods conference, laying the groundwork for two key international institutions in the following decades:

  • International Monetary Fund (IMF): Responsible for leading the structure of trade between the various global currencies and financing payment imbalances between countries. The IMF had to ensure that member countries set a par value of their currencies in terms of the Euro and the U.S. dollar. These values would be fixed, and parity could only be altered to correct imbalances in the basic balance of payments. This system, which defines the gold standard, lasted until 1973.
  • International Bank for Reconstruction and Development (World Bank): Its function was to lend money for rebuilding economies destroyed by war and for the development of the poorest nations in the world. It began work in 1946 and fully developed its role in the 1950s.

The plans for the new liberal international trade order resulted in the creation of the General Agreement on Tariffs and Trade (GATT), signed in Geneva in 1947. It initially integrated 23 countries, and 20 years later, more than 50 countries. The signatories undertook to:

  • Try to reduce tariffs.
  • Not resort to quantitative restrictions and eliminate existing ones.
  • Consult each other on policy changes.

Ultimately, industrial countries maintained their hegemony in world trade and implemented these commitments only when they could stand to gain from them. GATT members have conducted eight tariff conferences called rounds. The seventh round was the Tokyo Round, which ended in 1979. The eighth, the Uruguay Round, began on September 15, 1986, and closed on December 15, 1993, with an agreement that included the replacement of GATT by the WTO (World Trade Organization).

The Golden Age of Capitalism and Business Management

The growth rates of total output, exports, and national income levels achieved in the world were unprecedented. Growth was a widespread fact but was stronger in more developed Western countries. This economic growth accentuated the inequalities that already existed in the world economy.

Economic Analysis of the Golden Age

Demand

From the perspective of demand, there was an unprecedented expansion of domestic and international markets. Per capita income growth increased both private and public consumption, therefore increasing internal and international trade. After World War II, modern mass consumer societies appeared in developed countries. In this case, there was a structural change in the relations between labor and capital. Now there was a shortage of labor that strengthened the bargaining power of workers and their unions. The State ensured that increased labor productivity and the benefits of that increased productivity increased the remuneration of labor (wages). It was not only the gold standard. Economic growth with full employment and a fairer distribution of income were the foundation upon which the welfare state policy arose after World War II. The average level of wages, both real and nominal, increased considerably over the decades of the 1950s and 1960s. In most Western European countries, wages tripled between 1953 and 1970, and in some cases, improvements for workers quadrupled. Other improvements were:

  • Reduction of working hours.
  • Significant improvement in the social welfare of workers (health, education), all financed through assessments on workers, businesses, and the state itself.

Getting more product in less time caused salaries to increase.

Supply

From the supply side, there are three main aspects:

  • Contribution of labor (labor-intensive): From agriculture and especially from immigration.
  • Contribution of capital (investment): Increase in capital stock per capita.
  • Contribution to productivity: Investment in productivity explains the decrease in input (labor) in economic activity.

The development of new technologies and new production processes contributed to this increase, as did increased spending on R&D (by companies and the state). The development of the electronics industry, the pharmaceutical and chemical sector with the spread of antibiotic production tools.

Characteristics of the 1950s and 1960s

  1. The Mixed Economy: Developed by the states of industrialized countries, it tended to stimulate economic growth, and the role of the state was absolutely relevant. The aim was to achieve full employment, economic growth, and redistribution of the benefits of growth among the population. The state’s role in the economy was strengthened through increased public spending, a key factor for the growth of domestic demand and, in turn, production. The state offered wide services to all citizens by creating a universal Social Security system. It also expanded the supply of public services (education, transport) to coordinate economic policy with trade unions and employers. These stability conditions encouraged increased productive investment in three directions (state share) related to industrial sectors, the welfare state, consumer durables (cars and houses), and the service sector (all types). Major basic needs were covered, and new industrial regions were created within each country.
  2. Moderate Price Increases: The increase in prices was moderate because of:
    • Monetary discipline imposed by fixed exchange rates in countries where export prices tended to rise.
    • Very low price rates in the U.S., as its currency was the hub of the international monetary system.
    • The elimination of trade barriers and productivity growth tended to stabilize export prices.
    • Stability of commodity prices such as food, raw materials, gold, and oil.
    • Modest wage pressures due to labor supply and growth of income per worker due to increased productivity.
  3. Marked Stability of Growth: The main explanation lies in the sustained increase in demand in developed countries, partly explained by institutional achievements nationally and internationally. At the international level, agreements encouraged foreign trade, one of the most important sources of demand. The new state of the economy had an impact on business and consumer behavior, as expected steady growth. Both retained their respective levels of investment and consumption even when temporary imbalances in demand or income appeared.

The Great Enterprise Management

The benefits are competitive with other companies, and higher organizational capabilities, which had been developing from the past, consolidated now. Businesses only increased in size when they created an administrative hierarchy capable of coordinating productive activity volume much greater than that generated by a small family business owner. Salaried managers’ careers became increasingly professionalized and had less to do with the owners of the company. This started to cause conflicts and debates among shareholders and capitalists. Shareholders aimed to increase dividends, while the new class of salaried managers favored the stability of long-term dividend growth of the company. These large industrial companies, run by salaried managers, came to dominate key sectors of the economy, modify its basic structure, and ultimately the whole economic system.

National Business Models

Europe: The German Company

Regarding the size of the U.S., the North American market and its growth rate are based on its business power and the establishment of large companies. This country was the first to have a true mass market with a very wide variety of products. The Managerial Revolution (constitution) and organizational structure, starring U.S. firms from the late 19th century and early decades of the 20th century, was the answer to that challenge. The country then exported the model.

Germany

The German company maintains a reduced staff (team of managers, engineers, technicians, supervisors, employees, administrative, and commercial). The number of managers is also reduced. The German worker is a prepared employee. This system tends to lead to collegial decision-making in Germany, which one historian has referred to as “cooperative managerial capitalism.”

Japan

The Japanese business system has Toyota as its origin. It produces a flexible and diversified output in relatively small series and under a high-cost economy. This system, developed by Toyota, stems from the need to produce cars of different classes in small series. The solution to reduce the costs of diversification was to redesign the factory to facilitate the flexible use of machinery. Entrepreneurs reached out to workers, tasking them with easy-to-handle machines and scheduling to maximize the use of staff working time. As funding, they resorted to bank debt (borrowing money from banks). The cheapness of the interest rate allowed companies to maintain a very high regular debt rate. Shareholders received a reduced, virtually fixed salary and had little or no participation in the management of the business, which resided in employees. The company’s profits were reinvested, generating reserves and overall growth. The low profitability in the short term was compensated by high returns on capital in the long term.

Expansion of the Soviet Model (1944-1946)

This model expanded not just in Eastern Europe but also in China, Vietnam, Cuba, and other countries. Democracy in this context refers to a socialist economic regime. Both Albania and Yugoslavia were freed from German domination by internal resistance, although they clearly received Soviet aid. In the other Eastern countries, the Soviet army was the liberating force, enabling access to Communist parties. In general, political entrenchment was progressive. The consecration of democracies was not solely due to Soviet interests but was influenced by the granting of the Marshall Plan to Western Europe. The Marshall Plan was not conducive to helping these countries.

The destruction of war was difficult to measure, with the most significant damage occurring in East Germany, Yugoslavia, and Poland. There was another problem: reconstruction had to be carried out within changed geographical frameworks, particularly in East Germany. Most countries were primarily agricultural, with overcrowding in the fields and very low productivity. Only Czechoslovakia and East Germany could be considered industrialized countries; the rest were not. Even the latter had a big problem: their industry was closely related to the other Germany, and the industrialization of eastern Germany depended on the raw materials of the Ruhr.

Agriculture: The Agricultural Problem

Most of the population worked in farming. Before World War II, agrarian reform had been attempted, but the aristocracy was able to block it. After World War II (1945), a true reform of land ownership occurred. The peasants demanded the expropriation of large estates and land distribution at the end of World War II. It was the only condition that allowed Communist parties to gain a foothold. These parties respected the private ownership of the means of production and, under these conditions, divided the land. This contradicted one of the principles of socialism and demonstrated that these countries did not entirely follow the Soviet model (whose main objective was to get land). Land was confiscated without compensation, so the deals made with the peasants were free. However, there were some exceptions: in Czechoslovakia, Poland, and East Germany, compensation was paid for estates of a certain size. Medium owners paid for the land obtained, while the poor did not in these countries. Foreign-owned lands were also expropriated, as were the farms of collaborators, the church, banks, and businesses. These were the countries with large expropriated areas. A national agricultural fund was created with the expropriated land. Most of the farms were divided among the peasantry, and the state reserved some land to create state farms.

This resulted in excessive fragmentation of farms, necessitating the extension of plots to make them more profitable. They also had to adapt to the socialist model. The way to fit in was collectivization, a process that was weak and slow between 1953 and 1956 and slightly faster between 1956 and 1960. This process involved the state pushing for the installation of machinery and tractors to accustom the peasant to work and the common use of extensive areas. Nationalization, where the state takes charge of agriculture, was not achieved.

Industry

The nationalization of industry was much slower than in the Soviet Union. It occurred in two stages: control institutions and workers’ councils were created, culminating in the nationalization of companies. Compensation was paid to owners, and following the Soviet model, strategic sectors were nationalized: mining, electricity, heavy industry, transportation, banking, and later insurance. More units were used, and more workers went to a specific public sector. This process culminated between 1948 and 1952.

After achieving the first two goals—the collectivization of agriculture and the nationalization of industry—a third goal was posed: planning. This included two types of plans:

  • Reconstruction Plans: Aimed at rebuilding the economic potential after the war, setting basic goals such as high investment levels and pushing for economic development.
  • Five-Year Plans: The objective was to rapidly develop production capacity, mainly in industry, especially heavy industry. Expected levels were met in East Germany, but other countries never reached them in that time frame.

The first problems arose in the planning field, causing difficulties in the supply of cities. The scant attention paid to the agricultural sector became a problem in the growth strategy. This had to be rectified, coinciding with an economic crisis and social protests from the peasantry and the proletariat. The adjustment was as follows: an increase in real wages, an increase in nominal wages, and an attempt to lower prices so that real wages could grow. They also aimed to influence the agricultural sector by offering other benefits to farmers and cooperatives. The first steps were taken in coordinating the bloc’s economic policy to facilitate and promote trade between the countries.

Conclusions

The maximization of benefits became a prime target in socialist companies. Economic growth stimulated the rural exodus from 1950 to 1973. Over a quarter of the total labor force left the countryside in search of other occupations. Socialist countries showed economic growth rates very similar to those of the West and the Far East. However, there were differences:

  • Consumption figures were much lower in these countries.
  • The quality of the products was generally low.
  • There was a limited choice of products, and the supply was unreliable.
  • The service was generally of poor quality, and housing was substandard.

The standard of living was lower in this area than in Western Europe. Socialist economies continued to devote more resources to heavy industry and capital goods, failing to address the interests of consumers. Real wages grew more slowly than overall production.

The Birth of the Third World and Development

Decolonization and the term “Third World” are explicit references to the first two worlds:

  • First World: Constituted by the capitalist bloc led by the U.S., with advanced market economies, a system of private property, and political democracies.
  • Second World: The Communist bloc led by the Soviet Union, with prosperous centrally planned economies, collective ownership systems, and political democracies (dictatorships).
  • Third World: All other countries, the poorest. This group created the Non-Aligned Movement, consisting of both capitalist and socialist countries, with both market and planned economies, and both formal and popular democracies. The idea was not to be subject to either the U.S. or the USSR. The bulk of the Third World were countries that had been colonies of Western powers (France, England) and Japan.

Decolonization

Decolonization was the main binding factor for Third World countries. The first to operate this process were Latin American countries.

  • Japanese Decolonization: Occurred during the last years of World War II, with the release of all countries occupied by Japanese troops between 1930 and 1939, constituting the entire Far East.
  • English and French Decolonization: Ranged between 1945 and 1965, with key moments around 1947-1949 (India, Pakistan, Indonesia) and 1960 (bulk of French decolonization of Africa and acceleration of British decolonization in Africa).
  • Portuguese Decolonization: Occurred later, between 1974 and 1975.

Independence offered new opportunities for political and social development, but these did not always materialize. The recipes that worked for Western Europe after the war did not do the same in the newly emerging countries of decolonization. The economic performance of the Third World was generally very positive during the Golden Age of Capitalism. Asian GDP growth was 5.2%, and African GDP growth was 4.5%. However, strong demographic increases during those years consumed a large part of this economic dynamism. Despite matching growth, modes were quite different in each area. The contribution of production factors was very uneven in that generalized growth.

  • Land: Had little importance in developed countries.
  • Labor: Had less weight in Western European countries due to lower population growth and reduced working hours per person.
  • Capital: The Soviet Union mobilized the most significant capital, twice that of Western European countries.

The greatest differences were in TFP (Total Factor Productivity): 62% in Western European countries, 10% in the USSR, 26% in Asia, and 34% in Latin America. Ultimately, the most advanced countries grew by better pooling of factors rather than by adding more factors. Soviet growth was extended, while that of Western European countries was intensive.

The Spanish Economy: From Civil War to the Economic Miracle of the 1960s

1. 1936-1950: Civil War and Autarky

This was the most negative period in Spain’s economic history. The Civil War (1936-1939) distorted the Spanish economy and made it impossible to join the recovery plans of the 1930s. After the war, the situation remained negative since Spain could not join the Marshall Plan. Economic stagnation paralleled the loss of freedoms and human capital (unrecoverable). Autarky, aimed at achieving economic self-sufficiency and avoiding war, was responsible for the brutal drop in income and the general impoverishment of the country. For 40 years, the Spanish economy was cut off from European industrial progress. Autarky enacted a series of measures:

  • Measures against foreign competition.
  • Measures of support or assistance policies for domestic industry.
  • Sectoral management arrangements or overall market management.

The cost of international isolation was enormous:

  • It prevented the necessary supply of raw materials, energy, and capital goods.
  • It squandered many of the advantages of mass production and specialization by producing only for the domestic market, with low population density and low purchasing power.
  • Monetary disorder caused inflation and seriously damaged exporting companies.
  • The generalization of a system based on prior authorizations had negative consequences for entrepreneurship.

2. 1950-1959: Hinge (Recovery)

Changes were directed towards progressive domestic and foreign liberalization. Two facts explain these criteria:

  • The change of government in 1951, which aimed at a reduction of intervention and controls on the private sector.
  • The 1953 agreement with the U.S., which brought loans and incorporated recommendations of market flexibility and monetary stability.

The accomplishments of this pre-liberalization were unequivocal: indices of GDP, IPI (Industrial Production Index), and per capita income recovered and exceeded pre-war levels. Structural changes occurred, such as urbanization and rural exodus. Spain became an industrial nation following European standards. Remittances from migrants, tourism, and trade began to be important. The recovery was accompanied by inflation. Necessary imports of machinery and energy could not be financed by exports, which were penalized by an overvalued exchange rate that led to debt. In 1957, the government made a significant change by incorporating technocrats who supported economic liberalization. They implemented important stabilizing measures:

  • Devaluation of the peseta.
  • Raising the discount rate.
  • A shy tax reform.

After Spain’s entry into the OEEC and the International Monetary Fund, a Decree-Law was implemented in 1959 for the Stabilization Plan:

  • Public Sector: Aimed to balance income and expenditure, attempting a balanced budget.
  • Foreign Policy: Measures tended to liberalize the movement of goods and capital.
  • Institutional Level: Measures were adopted to reduce interventions, return to market leadership in linking wages and productivity, and reduce rigidities in labor laws.

3. 1960-1973: The Spanish Miracle

These were the years in which the Spanish economy was inserted into the cycle of prosperity in industrial economies. The basis of this growth was, in part, shared by all Western economies:

  • Stable international prices for raw materials and energy.
  • Access to external financing, supplemented by remittances from emigrants and foreign exchange from tourism.
  • A flexible labor market coinciding with the rural exodus.
  • Transfer of assets to incorporate technologies from leading countries.

The results of this expansion were clear: Spain recorded historical GDP growth between 1964 and 1974, reaching levels of 5.9%. This led to talk of a Spanish miracle, although it cannot be considered spectacular since other European countries reported similar levels. However, the importance of this period lies in the structural change that occurred in all sectors of productive activity: industry, primary sector, secondary sector, and trade relations.