Economic Impact of World War I: 1919-1929
Imbalances in the Global Economy After World War I
The First World War had profound economic and social effects between 1919 and 1929, including the consolidation of the economic supremacy of the United States.
Consequences of the War
The Great War marked the disarticulation of the economies of the combatant countries, which had oriented their production and economic activity towards war efforts. This resulted in millions of human lives lost, the destruction of infrastructure, and new investment needs. Additionally, the enormous conflict had financial costs, leading countries to resort to various sources of funding: gold reserves, issuing public debt, increasing paper money in circulation, and requesting loans from other countries.
Economic Consequences of the Peace Treaties
The peace treaties also had several negative effects. They imposed heavy financial indemnities on the defeated countries and dismantled large unified economic spaces. Germany, in particular, lost important mining and industrial regions, and a large part of the war reparations fell on the defeated. The lack of understanding between the Allies regarding the payment of war reparations also had an effect. Due to the lack of agreement in the Treaty of Versailles, a reparations commission was established in 1921, setting the amount that Germany had to pay at 132,000 million gold marks in 42 annual installments.
Effects on the International Economy
The war also disrupted the global economic system. One consequence of the war was the commercial imbalance between non-industrialized countries, exporters of raw materials, and industrialized nations. From 1921, as production in Europe recovered, imports decreased while exports from industrialized countries increased. The prices of the primary sector fell, causing an economic crisis in less industrialized countries. The conflict also disorganized the international monetary system based on the convertibility of currencies to gold. International trade was dislocated, producing monetary anarchy fueled by inflation.
The Decline of Europe and the Rise of the United States
Following World War I, the United States took a hegemonic step in the global economy.
Changes in Industry and Trade
At the industrial level, Europe’s economic and financial weight declined significantly between 1914 and 1919, and the USA became the leading industrial power in the world. Europe was losing its overseas market share, while the U.S. experienced a surplus that led it to accumulate nearly half of the world’s gold reserves.
Financial Changes
The supremacy of the U.S. dollar was manifested in the displacement of the pound as the main international currency, and the New York Stock Exchange became the global financial center. However, the U.S. did not adapt well to the new situation and adopted a dangerous lending policy.
The Post-War Economic Crisis, 1920-1921
After the war, the economy partially recovered, but soon the first serious crisis occurred, mainly affecting European countries. Between 1919 and 1920, there was a short but intense economic boom. European infrastructures needed to rebuild their productive economies. The U.S., the United Kingdom, Japan, and Canada benefited significantly from the increased European demand. The economic growth and the expansion of credit favored a sharp rise in prices, generating inflation on a global level. Economic growth was soon interrupted, as the U.S. abruptly halted its credit policy to the exterior.
Recovery and its Limits, 1921-1925
To carry out international reconstruction of the economy, an attempt was made to restore the pre-war system. The first step was to curb inflation and return to the gold standard. However, the lack of international cooperation made it difficult to achieve these goals because most countries established exchange policies that favored inflation.
The Problem of Inflation
It was very difficult to apply effective measures to address the economic problems. The lack of international cooperation led to the implementation of economic policies to overcome inflation:
- The U.S. and the United Kingdom managed to contain it through deflationary policies and intensifying protectionism to combat external competition.
- France, Belgium, and Italy had significant debts and saw persistent inflation.
- Germany, Austria, Hungary, Poland, and Czechoslovakia lost control of prices and experienced hyperinflation.
When Germany suspended the payment of war reparations, France and Belgium occupied the Ruhr basin in January 1923 to compensate for the default, a catastrophe that caused the collapse of the German monetary system.
Reestablishment of the International Monetary System: The Dawes Plan
To restore the international monetary system, an International Conference was convened in Genoa in 1922 with the objective of stabilizing currencies and restoring the gold standard. The U.S. had already gone ahead and restored the gold standard, excluding other states. Hence, the proposal of the so-called gold exchange standard, which partially supported currency reserves with gold. After much discussion, the Dawes Plan was accepted, aimed at normalizing the German economy. It drastically reduced Germany’s payments and also provided a substantial loan from the U.S. Germany established the Reichsmark, which made economic recovery possible. However, all these measures created a problem: they assumed that the equilibrium of the world economy rested almost exclusively on the action of U.S. capital.