Lecture Week 2

1. Lecture Week 2 Disintegration in the world economy (1914-1940)

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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. 

13. 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.

14. 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%.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

27. 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.

28. 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.

29. Recovery from the Great depression 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.

30. 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.

31. 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.

32. 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.

33. 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

34. 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

35. 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.

36. 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.

37. THE NEW DEAL • Creation of the National Recovery Administration. This was 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.

38. 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

39. 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