Economic Consequences of War: Trade, Debt, and Stability
Trade Imbalance and Foreign Debt in Warring Countries
The process of trade imbalance in countries at war, which leads to the problem of foreign debt, can be described as follows:
The production and consumption of large amounts of resources, ultimately destroyed at the front, lead to deficits in the trade balance. According to the rules of the gold standard, the external deficit should have been settled by transferring gold to creditors.
Restoration of the Economy: Key Factors
The most relevant factor in the restoration of the economy was the shift in global trade dynamics. When European nations neglected their foreign markets, North America and Japan seized the opportunity to capture a significant number of these markets. After the war, these countries tended to raise trade barriers to protect their newly established industries.
Economic Consequences of War Reparations
John Maynard Keynes’s advocacy for the peace treaties of 1919 and 1920, imposed by the Allied countries (on Germany, Austria, Hungary, Bulgaria, and Turkey), had significant economic consequences. These consequences included redrawing the political map of Europe and Germany’s attempt to demand compensation in the form of war reparations.
Two Aspects of Monetary and Financial Stability
At the end of the war, countries faced the need to stabilize their currencies, both internally and externally. This involved two key aspects:
- Cutting Inflation: The primary objective was to reduce inflation.
- Establishing a Fixed Exchange Rate: Leaders of almost all nations believed this would be achieved through the establishment of a fixed exchange rate and a return to the gold standard.
Factors Controlling Inflation in the US and Britain
The control of inflation by the United States and Britain was determined by several key factors:
- Cutting Public Spending: Governments reduced spending, leading to a decrease in demand and a subsequent stabilization of prices.
- Increasing Taxes: Significant tax increases reduced the disposable income of the population, further curbing spending.
- Tightening Monetary Policy: Control over the issuance of paper money was restricted, leading to job contraction.
Monetary and Financial Stability Arrangements
Since the armistice, governments had attempted to establish new parities for their currencies against gold or another currency. The objective, known as “stabilizing exchange,” proved extraordinarily elusive. There was an agreement encouraging countries to establish a fixed parity for their currencies against gold, adhering to the traditional rules of the system.
Main Failure of the Restored Gold Standard
The primary problem with the restored gold standard was that the fixed parities did not align with exchange rates in the market. Currencies were significantly overvalued, particularly impacting the stability of the gold exchange standard (pound sterling).
Obstacles to Economic Development in the Third World
The main obstacles to economic development in the Third World included:
- Colonial heritage.
- Unequal exchange in international trade.
- Weak domestic markets.
Global Population Growth (1970-2000)
During the period from 1970 to 2000, population growth varied significantly by geographic region. Regions such as Europe and North America experienced very slow population growth, while Africa, Asia, and Latin America saw very high population growth. Overall, the world population increased by 60%.