Economic Impact of War & the Great Depression: A Historical Analysis
1. Economic Problems of Peace
1.1 Immediate Effects of War
The Great War had devastating effects on the global economy. European continents were weakened, negatively impacting population, production, and causing the breakdown of national cooperation. By 1918, countless men had lost their lives on the battlefield, while others suffered severe wounds. Commodity prices increased, currencies tripled in price and suffered deflation, and countries became indebted to the U.S. due to war loans.
Signed peace treaties generated economic disagreements. Germany was deemed responsible for the war’s destruction. The U.S. opposed Germany’s payment of reparations, arguing that Germany lacked the resources to meet the debt. However, the U.S. insisted on the repayment of debts from other nations. This impasse further destabilized the already weakened global economy. The economic problems were particularly severe in Germany. France and Belgium occupied the Ruhr basin, further destabilizing the German economy.
1.2 Trade Imbalances
New frontiers established after the war significantly altered the exchange of goods. Germany lost territories, hindering economic relations between its regions. Its overall territory and population decreased. The economies of Austria and Hungary were also adversely affected. These changes resulted in significant trade imbalances between countries.
Post-war recovery led to an oversupply of food and raw materials. The decline in agricultural and commercial prices worsened the situation, particularly in countries like Mexico, which imported significantly more than it exported. These nations needed foreign capital to offset the deficit and were forced to seek new credits, primarily from U.S. financial groups.
1.3 The Rise of the U.S. Economy
The war accelerated the consolidation of U.S. supremacy. While the British pound remained the most used currency, the war negatively impacted UK exports and industrial production. The U.S. dollar gained prominence, and U.S. banks expanded their global presence. The U.S. replaced the UK as the leading global investor.
This economic boom was fueled by the trade imbalance between the U.S. and Europe. The U.S. was highly competitive, employing new technologies and methods, leading to a guaranteed trade surplus as it exported significantly more to Europe than it imported. The U.S. became the primary financier of the post-war world.
2. The Roaring Twenties
2.1 American Prosperity
The U.S. emerged as a major supplier of capital goods, accelerating the growth of industrial production and driving technological advancements that transformed its economy.
The expansion of the U.S. economy was driven by changes in production dominated by technical innovation. The use of electricity and oil increased, the telephone became widespread, and the automobile was mass-produced using assembly lines. Appliances became commonplace, and skyscrapers were constructed. All of this occurred amidst a process of business concentration, increasing productivity and reducing production costs, which in turn generated employment and increased demand, stimulating the growth of supply.
Later, a consumer revolution occurred with the rise of department stores, introducing new sales methods. Hire purchase (installment plans) allowed families to increase their purchases. Advertising and marketing played a significant role in shaping consumer desire and driving this economic boom.
Businesses thrived, but wages did not keep pace, leading to overproduction within a few years. Agriculture was the most affected sector. Agricultural producers faced reduced exports and mounting debt. Industrial prices remained higher than agricultural prices, causing the ruin of many farmers.
2.2 The Stock Market Fever
The economic boom was accompanied by a surge in stock market investment. Stock prices and profits soared, leading to a speculative bubble. High demand for securities drove up market values. Small investors bought and sold shares to other retail investors, generating substantial profits. However, the bubble burst in 1929 when share values began to decline.
3. The Great Depression
3.1 Causes of the Great Depression
- Overproduction: The rapid industrial growth resulted in a surplus of goods.
- Liquidity Crisis: The stock market crash triggered a liquidity crisis. The fall in share prices led to a wave of defaults and closures of industries and banks. Debts were canceled, and prices plummeted.
- Consumption Shocks: Unemployment and the belief that the economic situation would worsen further aggravated the crisis. The purchasing power of investors in the stock market decreased, fear of job loss spread, and agricultural prices and debt continued to decline.
3.3 The Banking and Industrial Crisis
The stock market crash evolved into a crisis that affected all economic sectors. Banks collapsed and were unable to repay loans. Media reports prompted people to rush to banks to withdraw their savings, but banks could not meet the demand, leading to a banking crisis.
To mitigate the crisis, banks reduced lending, but this prevented families and businesses from paying their bills. Stock prices continued to fall, and industrial production declined, ushering in an industrial crisis characterized by economic downturn and rising unemployment. Consumers also reduced their spending to save money, exacerbating the situation.