0. The Great War, 1914−18, and its aftermath
EC120 The World Economy in Historical Perspective
The Great War, 1914−18, and its aftermath
Topics:
Overview: the world economy 1914−39
The gathering storm: world tensions before 1914
The Great War, 1914−18 (a.k.a. World War I, First World War)
Economic impact of the war
Domestic policy objectives after the armistice
Economic consequences of the political settlement
Financial policies in the early 1920s
Restoration of the Gold Standard
International trade: the war and its aftermath
Summing up: economic performance in the 1920s
Reading: get started with
Eichengreen, B. Globalizing Capital, pp. 45 – 72
Key issues:
What were the key factors driving the development of the world economy in the years immediately preceding the outbreak of war in 1914?
What were the economic effects of the Great War, 1914–18, including the peace settlement that followed? How were states’ domestic and international economic policies affected?
What were the main features of the world economy in the 1920s (to 1929)? How is it possible to account for the different experiences among the major industrialised countries in this period?
How is it possible to account for the monetary upheavals following the war and their effects on economic performance?
How, why and with what implications was the Gold Standard restored in the 1920s? Why was restoration so fraught with difficulty?
Key concepts: fluctuating exchange rates; Treaty of Versailles; reparations; hyperinflation; Gold Exchange Standard
EC120, week 19

1. Overview: the world economy, 1914−39
EC120 The World Economy in Historical Perspective
Overview: the world economy, 1914−39
Four phases:
The `Great War’, World War I, 1914−18
The aftermath of war in the 1920s
The Great Depression, late-1920s to mid-1930s
Recovery from mid-1930s and rearmament
Four phases:
The `Great War’, World War I, 1914−18
Marked a watershed of political, social and economic affairs
Dislocation of economic life, massive destruction, esp. loss of life. Influenza pandemic at the end of the war may have killed more people, world-wide, than the hostilities themselves.
The aftermath of war in the 1920s
A decade of upheaval as Governments sought, with only partial success, to restore the stability and prosperity of the pre-war era: circumstances had changed
Fractured international relations, partly stemming from: (i) reparations from Germany; (ii) inter-allied debts; (iii) geo-political divisions resulting from re-drawn national boundaries.
International policy focused on restoration of the Gold Standard, and trade policies (tariffs and import quotas)
The Great Depression, late-1920s to mid-1930s
From 1929 the U.S. led the world into deep economic decline
Continued retreat from open international trade to autarky
Recovery from mid-1930s and rearmament
Abandonment of the GS enabled nations to pursue recovery policies, e.g. New Deal in U.S., building boom (albeit mild) in UK
Germany adopted National Socialism: the militaristic Third Reich
As another war loomed, many nations adopted rearmament policies
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2. The Gathering Storm: the world before 1914
EC120 The World Economy in Historical Perspective
The Gathering Storm: the world before 1914
Instabilities in the world economy:
Globalisation created tensions: the “great specialisation” of international trade had reached its limits
Political developments had international implications
Europe drifted to war, propelled by national rivalries
Instabilities in the world economy (identified with hindsight):
Globalisation created pressures for economic change as the “great specialisation” of international trade reached its limits:
“South”: as primary producers seek to industrialise they impose tariffs
“North”: declining agricultural sector secures protection
Era of low primary product prices may have been drawing to a close
Political developments had international implications
Extensions of the franchise fuel nationalist ideologies and policies:
Demands for government intervention to address social ills, expanding the role of governments into costly welfare programmes, requiring higher taxes
Simmering ethnic tensions, especially antisemitism in Europe
Support for protection from foreign competition (e.g. tariffs)
Europe drifted to war propelled by national rivalries:
A nexus of “isms”: nationalism, imperialism, militarism and socialism nationalism – ethnic allegiances, not necessarily reflected in geographical boundaries imperialism – quest for colonies, partly for “status”, partly for economic gain militarism – increased wealth paid for military power to assert nationhood and acquire colonies socialism – mass working-class movements given voice with the extension of the franchise
“Balance of power” is upset with the consolidation of Germany, together with uneven population growth (esp. in Russia and Germany)
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3. EC120 The World Economy in Historical Perspective
The Great War, 1914−1918
Fought mainly in Europe on two fronts, East & West
Mostly a land war: stalemate at sea
Became a war of attrition
Economic policy: `maximum slaughter at minimum expense’ (?)
Despite the tensions, Europe had enjoyed relative peace since 1815:
Conflict had occurred (e.g. Franco-Prussian War, 1870−1) but mostly outside Europe and, with the exception of the American Civil War, 1861−5, without massive loss of life and property
1914−18 war fought mainly in Europe on two fronts, East & West
Also: Mesopotamia, Gallipoli, Balkans, N. Italy & parts of Africa
Mostly a land war: stalemate at sea; British naval blockade of Germany; countered by German U-boat action that disrupted merchant shipping
Central powers: Germany, Habsburg (Austria-Hungary) & Ottoman Empires
Allied powers: France, Russia, Britain, Italy & U.S.A. (from 1917)
Initially expected to be `over by Christmas’ 1914 but dragged on to 11/11/1918
Became a war of attrition, mainly on the Western Front in France, which suffered the most physical damage and loss of life among the Allies on the Western Front
Even more severe losses on the more mobile Eastern Front; Russia made a separate peace in 1917 (ahead of the Bolshevik Revolution, Oct. 1917), after suffering the greatest loss of life among the Allies (on any front of the war)
Economic policy: `maximum slaughter at minimum expense’ (Bertrand Russell quipped somewhat unfairly and probably inaccurately against Keynes’s supposed advocacy)
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4. Economic impact of the war, 1
EC120 The World Economy in Historical Perspective
Economic impact of the war, 1
Diversion of industrial resources to the war effort
Disruption of international trade:
Allies attempted to blockade German imports
German U-boat campaign against allied shipping
Shipping costs increased: market `disintegration’
International trade did not collapse, it was distorted
Diversion of industrial resources to the war effort
Increased production of war materials: munitions, armaments, ships
Diversion of `human capital’ (increased female labour force participation)
Domestic production to substitute for imports deemed inessential
Disruption of international trade
Allies attempted to blockade German imports, with a `distant’ blockade
German U-boat campaign against allied shipping reached a climax in 1917
Belligerent governments’ commercial policies directed trade for strategic goals, e.g., British McKenna tariff, 1915, on imports of `luxury goods’ contrary to Free Trade commitment; tariffs maintained after the war
Shipping costs (e.g. insurance) increased: market `disintegration’
But international trade did not collapse: its pattern was distorted in ways that resulted in long-term disruption to international economic relations.
Allied imports not reduced as severely as those of Germany. Even so the European allies (esp. Britain) lost overseas markets, that proved very difficult to recover after the war (indeed some markets were lost forever as some countries, esp. North and South America pursued industrialisation themselves).
Large falls in belligerents’ exports: substantial trade deficits, matched by surpluses elsewhere, especially USA (which exported armaments and munitions to Europe).
Primary producers (e.g. Canada, Latin America, also USA) expanded to meet shortfalls in European production – though the Central powers (most importantly Germany) were excluded.
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5. Economic impact of the war, 2
EC120 The World Economy in Historical Perspective
Economic impact of the war, 2
Dislocation of international and domestic finance
Domestic Govt debt increased to fund budget deficits
Inter-allied debts accumulated
Government intervention to control economic activity
Physical losses
Mainly military and naval personnel
Destruction in France, Belgium, Italy and Poland
Dislocation of international and domestic finance
Domestic Government debt increased to fund budget deficits
Depletion of British overseas capital assets, especially in U.S.
Gold Standard façade was maintained but direct controls meant that GS was effectively suspended – and European currencies depreciated such that exchange rates no longer matched pre-war gold parities. Most importantly the U.S. dollar became overvalued compared with most European currencies.
Inter-allied debts accumulated (plaguing relations after the war’s end)
Government intervention to control economic activity
Mobilisation achieved with government directives to industry and labour, reversing decades of very limited intervention, e.g., conscription reluctantly imposed in Britain from 1916
Government intervention was only partially dismantled after the war. Demobilisation was swift (and disruptive) but many other controls remained.
Physical losses
Mainly of human capital, i.e. military and naval personnel (very limited direct civilian losses, unlike World War II)
Destruction of parts of France, Belgium, Italy and Poland
Allied merchant shipping suffered from U-boat attacks (but not on the scale of World War II)
Spanish ‘flu pandemic: the severity of the pandemic became evident in the latter months of (probably its inception was several months earlier), probably stemming from war-time conditions in Northern France and Germany; a particularly lethal variety of ‘flu, what began as epidemic spread throughout the world, arguably resulting in more deaths than directly in war- time action (though spread more widely).
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6. Policy objectives after the armistice
EC120 The World Economy in Historical Perspective
Policy objectives after the armistice
Government policies remained more interventionist
Swift demobilisation of armies
Commercial policy: favoured trade barriers
Political pressure for greater economic intervention
Force Germany to pay punitive reparations
Government policies remained more interventionist
Attempted, not always successfully, to facilitate the return to a peace-time economy, e.g. swift demobilisation of armies
Money & finance: attempted to return to pre-1914 Gold Standard
Commercial policy: favoured trade barriers to sustain changed patterns of production in the war
Extension of the franchise and the development (which had started before 1914) of socialist political parties continued the shift towards greater state involvement in economic life:
State gradually accepts greater responsibility for social welfare (e.g. unemployment compensation, pensions, relief of poverty, education)
Acceptance (perhaps reluctantly) of a role for organised labour, e.g. shorter working week, wages more downwardly rigid
Continued trend towards larger business units, often supported by the state, but reducing competition (more monopoly pricing)
Demand by the Allies, especially France, to make the defeated nations, especially Germany, pay punitive reparations
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7. Economic consequences of the political settlement
EC120 The World Economy in Historical Perspective
Economic consequences of the political settlement
Treaty of Versailles, 1919
Reparations: heavy burden imposed on Germany
Other geopolitical developments:
Disintegration of Habsburg and Ottoman empires; Japan acquired territory on Asian mainland
The October Revolution, 1917: Communism in Russia
The “aching tooth” of inter-allied war debts
In the photo (left to right): David Lloyd George (UK), Vittorio Orlando (Italy), Georges Clemenceau (France), Woodrow Wilson (USA).
Treaty of Versailles, 1919 (resulting from the Paris peace conference)
Reparations: heavy burden imposed on Germany
Criticised for being unrealistically high, esp. by Keynes
A sequence of negotiations and plans during 1920s never fully resolved the issues; although some payments were made, attempts to collect reparations were effectively abandoned in 1932
Disputes greatly soured international relations in 1920s & beyond
Changes in Germany’s boundaries: loss of territory to France and Poland
Other geopolitical developments with economic consequences:
Disintegration of Habsburg and Ottoman empires (resulting in several new nation states); Japan acquired territory on Asian mainland
Russian revolution: communist USSR retreats into autarky
Extension of the franchise: many nations became `more democratic’
Inter-allied war debts, mainly to U.S., which insisted on full payment
Europeans tried to link debts with reparations but U.S. resisted; engaged in bilateral negotiations but without overall international co-operation. In the pre-war decades European nations had accumulated overseas assets which cushioned against fluctuations in international payments (gold losses) – the war was such a shock that it replaced assets with debt (Germany being the extreme case) rendering stabilisation much trickier.
“Like an aching tooth, war debts distracted attention.” (Kindleberger) – “distracted attention” from the pressing problems of re-constructing trade and world economic harmony.
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8. Financial policies in the early 1920s
EC120 The World Economy in Historical Perspective
Financial policies in the early 1920s
Interwar policies dominated by the `Return to Gold’
Early 1920s: freely floating exchange rates
1919: boom and slump
Governments struggle with debt management & fiscal imbalances
Hyperinflation most severe in Germany, 1922−23
Currencies stabilised without international co-ordination
Interwar policies dominated by the `Return to Gold’
But most countries returned only from mid-1920s to early 1930s
Among Govt’s it was generally accepted that the GS should be restored as soon as possible after the war, thereby restoring monetary stability
Although wartime currency controls were lifted shortly after the armistice, few countries swiftly re-introduced convertibility to gold
Early 1920s: freely floating exchange rates
1919: boom and slump (consequence of changing patterns of demand)
European Govt’s were pre-occupied with debt management and fiscal imbalance: reluctance to raise interest rates or reduce budget deficits
Budget deficits (lax fiscal policy) & high short-term debt conflicted with the tight monetary policy needed to restore GS: inflation relative to $US
Hyperinflation most severe in Germany, 1922−23
Different currencies were stabilised without international co-ordination, although exceptionally stabilisation of the German mark was achieved with international co-operation.
Despite diverging price levels, with a general depreciation against the $US (which retained its parity with gold), there was a general expectation that currencies (esp. UK sterling, French franc and German mark) would return to the GS “as soon as possible” (but not necessarily at pre-war parities)
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9. Restoration of the Gold Standard
EC120 The World Economy in Historical Perspective
Restoration of the Gold Standard
Restoration of GS required differential deflation rates
Difficult without international co-operation
Govt’s sought stability at pre-war parities
Domestic political objectives made this difficult
Burdens of reparations & debts inhibited co-operation
Restoration of GS required differential deflation rates in Europe
especially difficult to achieve in the absence of international co-operation
But determination to return to GS was reinforced by inflations of the early 1920s: Govt’s sought stability at pre-war parities (but some devalued)
The restored standard was a Gold Exchange Standard , in which few currencies comprised full-bodied gold coins. Also, gold bullion reserves (which enabled convertibility of paper currency into gold) were only part of official reserves. Part was in the form of reserves of other currencies for which gold parities had been adopted.
Domestic political objectives made this difficult: wages and prices less flexible than pre-1914, reflecting deep conflicts about distribution of income
Parts of society, esp. workers, would suffer (temporarily, perhaps) in the adjustments: Govt’s were more probably more sensitive than pre-1914
Internationally, the burdens of reparations & debts inhibited co-operation Central banks restored depleted gold & foreign exchange reserves each trying to increase its national share of an essentially fixed world total
Despite the difficulties, major nations returned to GS: Germany in 1924, Britain in 1925, & France (effectively in 1926, devalued by 80% from 1913)
Restoration in Britain was particularly controversial: Keynes argued that (nominal) wages would need to be reduced by about 10%, and that this would be hard to achieve − but the pre-war parity had totemic status
Thus, GS was restored without resolving the deeper problems (domestic policy conflicts & weak international co-operation) that led to its demise
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10. International trade: the war & its aftermath
EC120 The World Economy in Historical Perspective
International trade: the war & its aftermath
During 1914−18 world-wide production capacity expanded in key traded goods sectors
Fall in agricultural prices in 1920s was particularly notable (and continued in 1930s)
Widespread intensification of obstacles to international trade
Consequent fall in incomes of primary producers, which reduced their demand (their imports) from the industrialised nations, in turn acting as a break on economic prosperity
World-wide production capacity expanded during the war in key traded goods sectors (to some extent continuing pre-war trends):
Primary producers had expanded, partly in response to reduced European output during the war, e.g. in cereals production
Heavy industries (metals, engineering, shipbuilding) had expanded in Europe to meet the urgent needs of war
Non-European manufacturing capacity had expanded, partly to meet the shortfall from Europe, as production was diverted to war needs
Fall in agricultural prices after the war was particularly notable
Led to depression in Europe and calls for intensified protection
In North America farmers were driven into debt, the burden of which intensified with further falls in price, especially in the early 1930s
Primary producers responded by restricting manufactured imports
Widespread adoption of obstacles to international trade
Partly a reluctance to dismantle war-time controls, partly new trade barriers
Reduced multilateral trade, more bilateral trade deals & discrimination
“… never before in history were trade barriers raised so rapidly or discrimination so generally practised” (League of Nations, 1942, quoted in Findlay & O’Rourke, p.444, spelling corrected)
Tensions of the 1920s were exacerbated in the 1930s, & barriers intensified
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11. Summing up: economic performance
EC120 The World Economy in Historical Perspective
Summing up: economic performance
A mixed performance, despite upheavals:
Labour productivity continued to increase
Mass production of private automobiles & consumer goods
U.S. prosperity in the `Roaring Twenties’
Older, `heavy industries’ stagnated, especially in Britain
Primary producers continued to suffer, with adverse impacts elsewhere
A mixed performance, despite upheavals in the aftermath of war:
Labour productivity continued to increase, with more time being taken in leisure (shorter working week meant that income per worker increased more slowly than productivity)
Expansion in electricity generation supported growth in consumer durables
Mass production of private automobiles and consumer durables, became widespread especially in the U.S. which experienced widespread prosperity in the `Roaring Twenties’, including a real-estate boom
The older, `heavy industries’, e.g. coal, steel, ship-building, stagnated, especially in Britain, in which they had been dominant before 1914.
European countries’ fortunes varied according to when they returned to GS (the later the better) and their dependence on heavy industry and/or agriculture (the less the better)
Primary producers continued to suffer with low export prices but attempted to industrialise behind tariff barriers
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