World Economy Between the Wars: WWI and Its Economic Impact
The World Economy Between the Wars: A Breach of Economic Equilibrium
8.1. Triggers of World War I
Symptoms of decline began to appear at the beginning of the twentieth century, and as a manifestation of this breakdown, WWI was triggered. Most history books cite the assassination of the heir to the throne of the Austro-Hungarian Empire as the main cause, triggering the system of alliances established in previous years. However, there were three fundamental underlying causes:
- Imperialism: The search for new markets and raw materials generated competition between those who joined later (Italy, Germany, and Belgium) and created political confrontation with an international crisis.
- Militarism: A process of rearmament, with Germany establishing a transoceanic war machine. The British carried out an arms development program. The time for recruiting soldiers increased, and plans for invasion were made. All of this was supported by industry sectors.
- Nationalism: Countries were at odds with others because of border problems. France wanted to regain Lorraine. Italy claimed Tyrol from the Austro-Hungarian Empire. Romania demanded Transylvania from the Austro-Hungarian Empire.
There were also emancipation movements that resorted to violence (within the Austro-Hungarian Empire, there were Czechs, Poles, Bosnians, and Serbs). This focus of conflict led to war.
8.2. War Economy and Economic Warfare
War Economy: This involved the transformation of the production system to adapt to war. The entire economic system was dedicated to winning the war. Initially, it was thought that the war would be short, lasting no more than six months, but it lasted four years. The first step was to suspend the market because benefits could not be assigned. A process of state intervention was implemented, with the state becoming the allocator of resources and assets. There was strong growth in aggregate demand. The recruitment of soldiers caused problems in the labor market and created public spending debt.
- Labor Market: Initially, soldiers were recruited indiscriminately. However, after absences and subsequent recruitment, there were productive sectors of the market with excess demand for labor. This was addressed by employing women, youth, and even retirees. From a qualitative point of view, discriminatory conscription was introduced, so that certain jobs were not called to the front lines, to avoid vacancies.
- Supply: Priorities were established:
- Army
- Home Front: Unnecessary consumption of certain products was avoided to allocate resources to war products. Rationing systems were established through quotas. The price of luxury products was raised, and prices for subsistence products remained low. All prices were assigned by the State.
- Financing: As examples of what the war meant for national finances, public spending in Germany and Great Britain rose by 505% and 562%, respectively. As a consequence, existing tax rates were increased, or new tax figures were created. Tax increases could not be indefinite and therefore only covered a portion of the expenditure. To solve the payment of the remaining amount, countries incurred debt with war bonds, which had low profitability but were purchased out of patriotism.
The Allies also had another type of external indebtedness, especially to the United States. American private companies supplied the French and British armies, and the U.S. government acted as an intermediary.
Economic Warfare: Measures were taken to hinder the economic growth of the enemy. The Allies (France, Britain, Italy, Russia, USA, Romania, Serbia, Montenegro, and Japan) used naval blockades (Mediterranean) and obstructed land rail routes. They also conducted checks on neutral vessels, creating a list of prohibited products (wheat, weapons, etc.). This control significantly affected Germany, reducing its exports by 2/3, and primarily impacted the morale of the civilian population (famine, riots).
Neutral Powers: They carried out similar measures of sea and land blockade, particularly on Russia, which reduced its imports by 2/5.
Submarine Warfare: Submarine warfare was introduced. The Allies lost 11 million gross tons of a total of 25 million they had. By late 1917, the losses were recovered.