Transcript 1914-1939 - Prof. Ruggero Ranieri

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.
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 disintegration of the world economy from 1914 to
1945
 WW1 disrupted the international system and after
the war it proved very difficult to put it together again.
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 USSR from Lenin to Stalin
 The fall of the Tsarist empire generated Lenin’s communist
revolution and the creation of the USSR.
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 War I and its consequences
 Disruption to international trade. Fall of exports from the main
European industrial countries (Britain and Germany).
 Several Latin American and Asian countries established
manufacturing industries which they protected, after the war,
with high tariffs.
 The US and Japan, already strong industrial countries,
expanded into markets which had formerly been supplied by
European manufacturers. The US also increased its exports to
its European allies and to neutral countries in Europe.
World War I and its consequences:
trade
 Neo-mercantilist policies led to retaliation and further
trade disputes.
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.
AUTOMOBILE
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.
STEEL INDUSTRY
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
RATIONALISATION
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.
Germany: THE IMMEDIATE POSTWAR YEARS UP TO HYPERINFLATION IN
1923
The peace treaty for Germany was humiliating and exacting.
Substantial measures included:
- the internationalization of German rivers
- the loss of the power to set tariff for foreign goods which in fact meant
duty-free imports
- the territorial losses amounted to 13% of the territory which had accounted
for roughly 15% of production capacity
- relinquishing of all the colonies
To this was added a very large reparation bill.
However:
- the bulk of German industrial capacity remained in German hands
- this allowed Germany potentially to remain the strongest country in
Europe once she could regain prewar levels of output.
Germany: postwar
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%.
German Inflation
The rise of inflation therefore had many beneficiaries. It was not simply a
German phenomenon: many countries in central Europe had similar
experiences. The slide into hyperinflation however made Germany an
experience of quite a different order.
Hyperinflation meant a slide into economic chaos from which there were
no winners, although the people who lost the most were the low middle
classes living on fixed incomes, and of course pensioners. However
also unemployment increased, real wages declined and shortages
materialised in the economy.
- While the middle classes were hurt they were also increasingly angry
with those who were seen as profiteers from the inflation. Class
divisions, tensions and resentment were the breeding ground for
extremisms and violence.
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.
DAWES Plan
After a few months, confidence was returning and a new step was
taken. IN the spring of 1924 a committee of bankers, chaired by
DAWES, negotiated a loan to Germany and rescheduled reparations. As
a consequence of the Dawes plan,
- Germany was required to join the Gold Standard
- It obtained a new international loan and its currency was renamed
the Reichmark
- and a Reparation Commissioner was appointed to supervise
Germany's payments - Reparations were paid fully according to the
new schedule until 1929 when a new plan, was proposed to adjust
payments, revise some of the more obsolete treaty conditions.
US Capital in Germany
- As a consequence of the Dawes Plan huge amounts of
foreign loans flowed into Germany largely from the US.
Most of them were raised by the sale of bonds by local
governments, and towns although businesses also
borrowed heavily.
- Between 1925 and 1931 Germany received 20.5 million
RM in loans which was nearly what she paid out in the
same year in reparations. Clearly the reparations were
paid by the central government, which was not the same
subject which received the loans;
- the inflow of capital helped the balance of payments.
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.
The failure of stabilization in the 1920s
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
 THE US CRUCIAL TO THE WORLD ECONOMY in two ways: financial and industrial.
 The most important foreign lender - one billion
dollars a year during the Twenties.
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 deflationary
measures which depressed the US economy even further.
The recession spread across the world, highlighting the fragility and
the imbalances of the world economy.
THE UNFOLDING OF THE GREAT DEPRESSION
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.
Financial collapse in Europe
 Financial crises started in Austria, then spread to Germany,
and to most of central Europe. In France there was no
collapse.
 In the German case the crisis was aggravated by the issue of
reparations and by the collapse of Weimar, with the
ascendance of the NAZI party. Germany is forced off the Gold
Standard, not by devaluation but by the imposition of
currency controls. Britain takes sterling off gold in the
summer of 1931.
 The final result was the destruction of the international
payments and trading system which had been restored with
much effort after WWI.
Recovery from the Great depression
The recovery from the Great Depression started in
1933 and it was basically led by recovery in the
United States and 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.
Third World countries in the Thirties
 Prices of primary products dropped a further 60% from 1929
to 1932. Income in export earnings dropped in Latin America
by 2/3 in Australia by half, in China by four fifths. Investment
opportunities in these countries fell.
 The recovery from the slump was carried out under the banner
of nationalist economic policies, sometimes by Left wing
governments sometimes by Right wing populist ones.
 Economic policies were designed to reduce dependence on
unstable international markets. There was an attempt to
diversify agricultural production and develop manufacturing.
Latin America provides examples of this, but there were
examples of more assertive economic policies in countries like
India, or in the White Dominions, or in the Muslim Middle
East, like Turkey.
International Monetary Disintegration
 On the financial side there was an attempt after 1931
to rebuild the international system.
 The culmination of this was the World Economic
Conference in April 1933 in London - great hopes.
But no sooner had the Conference convened that the
US announced that it was floating the dollar,
effectively devaluing it and removing it from the
Gold Standard.
Positive Measures
 The Reciprocal Tariff Agreement Act in 1934 passed
by the US which allowed a country to negotiate
mutual tariff reduction on a bilateral basis.
 A Tripartite declaration in 1936 between France,
Britain and the USA, with an agreement to avoid
further competitive devaluation.
CONSEQUENCES OF THE GREAT DEPRESSION
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.
 Effects of the Depression: a greater involvement of
governments in the management of the economy: the
keynesian paradigm.
 The rise of extreme nationalist political movements in
Germany and elsewhere accelerated the crisis leading
to WW2.
AUTARKY AND TRADING BLOCS IN THE 1930S
 Foreign trade did not regain the pre-depression
level.
 There was also no recovery of international
investment.
 There was some recovery in the level of trade in the
last part of the decade.
 Protectionist measures, bilateral treaties and the
establishment of trading blocks. Trade diversion/
no trade creation.
 The Hawley Smoot tariff in the US in 1930, primarily
designed to protect Us farmers.
 Emergency duties in Britain in 1932 with a 10% tariff
on all imports
Countries Relying on autarky: Germany
 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 Eastern
Europe by a number of clearing arrangements. Her main aim
was to maximize imports with minimal exports
Germany and Eastern Europe
 German authorities offered quite favourable prices for E. Europe’s agricultural
exports - but they would pay them in marks, which were inconvertible into
other currencies and could only be spent in Germany and only on certain
permitted goods. There would be a special clearing account for each trading
partner. Because Germany bought more than she exported what happened was
that partners accumulated large balances which they could not effectively use.
 . During the earlier part of the decade they secured access for their products at a
fairly advantageous price - a price higher than the world market one - when
there were no other outlets available. Also the agreement allowed them to trade
without having to pay for their imports with gold or hard currency of which
they were seriously short.
 The position changed with time to the disadvantage of the Germany's eastern
European partners
 When trade is regulated, political influence can always be brought to bear.
THE NEW DEAL
 In the US Roosevelt won the election in 1932. One of his first
acts was to proceed to the DEVALUATION OF THE
DOLLAR, a strategic decision taken to increase exports, and
also increase domestic prices giving a boost to economic
activity.
 During his first one hundred days Roosevelt took an
aggressive, interventionist stance on the economy.
 Interest rates were lowered.
 The government moved to take control of the financial
system, an regulate banks. Separation between investment
banking and deposit banking (Glass-Steigall Act) and
stronger role for the Federal Reserve.
THE NEW DEAL
 Creation of the National Recovery Administration. This was
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meant to supervise industrial "codes of fair competition" essentially a cartelization of industry - which bore some
similarity to the Fascist corporatism.
It also set standards for wages, limiting the hours of work to 40
per week and raising pay. Organized labour became a
government partner.
In Agriculture the government exercised a close control on
prices and marketing.
In 1935 the Supreme Court declared most of Roosevelt's
measures unconstitutional - which compelled the
administration to enact new laws.
The recovery was led by investment.
Wages increased and the increase in wages favoured those who
had a job but checked the fall in unemployment.
Questions for discussions
 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?