Lecture Week 2. Disintegration in the world economy (1914-1940). The disintegration of the world economy from 1914 to 1945. The forces that led to the disintegration of the liberal system after WW1 had been building for some time .
Disintegration in the world economy (1914-1940)
The forces that led to the disintegration of the liberal system after WW1 had been building for some time.
Nationalism become more aggressive, particularly in some countries like Germany, and Imperialism was also a force for carving up markets and resources, rather than sharing them.
Nationalism and imperialism were at the origins of WW1.
Emergence of forces on the left and on the right which challenged the liberal world economy.
The war had meant a collapse of trade and investment, with states imposing controls on their border to maximize national economic efforts. Huge wartime expenditures and post-war claims on the budget meant rampant inflation.
The economy was owned and run by the State.
The industrialization of Russia under Stalin’s 5 year plans from 1929 was a massive experiment in centrally controlled economic management.
The costs to the population were great, but in terms of sheer growth of industrial output the experiment succeeded. Russia became a big industrial producer.
The USSR became isolated from the world economy.
World trade stopped growing, and it only managed in some years to recover the level of 1914. European trade, for example, equalled the level of 1914 only in 1929. At any other time it was much lower.
NEW INDUSTRIES AND OLD INDUSTRIES
The radio with the automobile, bicycles, photography, electrical appliances mark the birth of an extensive consumer durable sector - with sales outlets proliferating and the repair industry also growing.
RADIO - the first product of electronic technology - its origins in wireless communication Its development leads to regular broadcasting programs for entertainment in the US and Holland in 1920, in Britain in 1922
A status symbol for the less affluent.
ELECTRICITY - Consumption of electricity grew fourfold in the interwar years.
Electricity a more efficient power than the steam engine and this efficiency increased as power lines ramified. A process of standardization and concentration was in order.
The first cars date from the 1890's- but for the first decade of the century the car was a luxury good.
Growth of this industry started in the US, with the assembly lines and the manufacture of standard interchangeable parts. Prices were allowed to fall and the car came into the reach of the lower classes.
Europe followed behind - although the gains made there were quite impressive taken on their own. 10 million cars in the four main producing countries/ against 60 million in the US.
ARTIFICIAL FIBRES - compensated for the shrinking of the traditional textile industries - and in some case were an important growth sector in themselves.
The chemical innovations had occurred already at the end of the 19th century.
Rayon was the fastest growing product substituting for cotton and also for silk. Italy became the world biggest producer followed by Germany and Japan.
Reorganization took the form of concentration and of cartels. An example of the former was the creation of the Vereinigte Stahlwerke in Germany, the result of a merger among some of the largest companies in the Ruhr.
There was also a big process of vertical integration, which led to big fuel efficiency gains.
BUSINESS STRATEGY AND ORGANIZATION
a) elimination of overcapacity by cuts
b) the reorganisation and modernisation of capacity within certain branches by mergers, acquisitions, cartels;
c) it was also associated with Taylorism, implying reduction of processes to their component forms and deskilling through the assembly line.
Large firms were created out of VERTICAL INTEGRATION - AND HORIZONTAL INTEGRATION - Cases however cover both together. SEE Vereinigte S. in Germany or IG Farben or ICI Chemicals.
MANY EXAMPLES OF INTERNATIONAL CARTELS - to regulate declining markets and share exports. Diplomacy of cartels.
The post war situation was marked by rising government deficits which the government paid for by increasing its debt and printing more money. Efforts at raising taxes were carried out but they were not very determined. Inflationary government expenditure helped maintain employment and contributed to social stability.
Big Business was happy to let a depreciating mark boost exports and businessmen could hold their export earning in hard currency.
The economy up to 1922 picked up rapidly and grew substantially, while other industrial economies faltered. Unemployment averaged less then 3%.
Germany: THE YEARS OF STABILIZATION
Stabilisation was achieved first in October 1923 by the introduction of the Rentenmark - By that time the urge for stabilization was so strong that the public was prepared to give confidence and hold any new currency which might be supported by the government.
In the event the Rentenmark was backed by gold mark bonds, raised on the value of all agricultural land and industrial property. The Rentenmark was set at the value of one gold (or pre-war) mark and 4.20 dollars, while it was worth one trillion paper marks. Alongside this strict limits were set on government note issue.
Germany Economic policy and stabilization
Since hyperinflation had led to a fall in output, stabilization brought immediate relief and 1924 was a positive year.
- Drastic remedial measures were taken to favour stabilization. Government spending was cut, and measures were taken to lower prices and stimulate exports. Some 700.000 government employees at local and central level were dismissed.
However from mid-1925 to mid-1926 the severe deflationary measured that had been taken affected the economy. The capital goods industry was severely hit. Many businesses failed and unemployment rose, Many firms shed labour in an attempt to become leaner and survive the squeeze. Unemployment remained high. It reached the figure of 18% in 1926. Later it fell but only to 8-9% in 1927-8.
In the 1920s an attempt was made to re-establish the Gold Standard, with Britain moving its currency back to gold in 1926 at its pre-war value.
Other European countries moved back to Gold although not at the pre-war rate. Belgium and France go back to gold in 1926 but at lower exchange rate. Less damage to domestic economy. But the imbalances were too great, inflation too embedded and protectionism had become too widespread to support a global liberal system.
The crisis of 1929 sparked a World Depression.
The Great Depression
Two shocks administered by the Us to the international system.
1- Withdrawal of US capital from abroad, particularly Germany and other European countries starts in 1928.
2- Recession in the US The economy started to falter in 1929 and this was magnified by the stock market crash of October 24, 1929.
The crash and the recession are compounded by deflationarymeasureswhichdepressed the US economy evenfurther.
The recession spread across the world, highlighting the fragility and the imbalances of the world economy.
Crisis brought about by the end of US lending and by the recession in the US. This phase lasted until 1931. It was felt most strongly in Eastern Europe and in Germany.
It was met with DEFLATIONARY MEASURES, rather than with an attempt to reflate.
The US raised its tariff to an unprecedented level (Smoot-Hawley tariff of 1930)
The mechanism of the gold standard has been blamed for this deflationary bias.
The recovery from the Great Depression started in 1933 and it was basically led by recovery in the United Statesand in Germany. Other countries fared less well: France for example continued to experience recession.
In the US itself the recovery was slow. In Germany it was faster. By the middle of the decade nearly all countries had achieved some progress in activity.
A failure of leadership on the part of the main creditor country the US - The US did not take responsibility for the world economy, its tariff policy was restrictive, and its lending erratic. After 1929 the US retreated from the World economy still further.
Some countries erected barriers against the international economy.
Behind these barriers governments undertook to reflate their economy. Germany in this respect was highly successful - for it managed to bring down unemployment dramatically.
Strict control on currency exchanges, rationing currency for imports and determining where the imports should come from.
Germany established a preferential trading area in EasternEurope by a number of clearing arrangements. Her main aim was to maximize imports with minimal exports
Countries Relying on autarky: Germany
Discuss the consequences of WW1 on the world economy and the rise of the US economy.
The 1920s: causes and consequences of German inflation.
Why and to what effect was there a return to the Gold Standard in the 1920s?
Questions for discussions
John Maynard Keynes, did he foresee the Great Depression? And how influential were his ideas?
Was economic policy by the major power a major factor in the Great Depression?
How did Roosevelt’s New Deal attempt to lift the US economy out of Depression?
How did government in developing countries react to the Depression and to what effect?
Questions for discussions