Economic Impacts of the Industrial Revolution, WWI, Great Depression, and WWII

The Industrial Revolution

The Industrial Revolution was a period in British history witnessing the application of mechanically powered machinery in textile industries, the steam engine, and the factory system. It was somewhat controversial: in the short run, it was not that disruptive. At the beginning, changes were concentrated in a few sectors, small relative to the whole economy. Eventually, changes spread to the whole economy.

Prerequisites and Concomitants

It needed some preconditions to take place:

  • Access to international markets (triangular trade)
  • Commercialization and market integration
    • London growth pole
    • Banking and financial services
    • Geography: isolation and ease of transportation
    • Inland navigation (canals) and road building
      • Turnpikes: 1750, 3400 KM; 1770, 15000 km; 1836, 22000 km.
  • A specific political environment given by the Glorious Revolution.

The Glorious Revolution followed these steps:

  • In the 16th century, England was an absolutist state.
  • Increasing clashes with the Parliament (representing aristocratic and trading interests) over taxation.
  • A Civil War broke out, which resulted in the execution of Charles I (1649). The Commonwealth (Republic based on military rule in the name of Parliamentary supremacy) was under Oliver Cromwell.
  • Royal restoration under the Stuarts (1660) led to political conflict (Whigs vs. Tories), which led to William III of Orange being invited by Parliament to become King: the ‘Glorious Revolution’ (1688).

There were some economic effects of the English constitutional monarchy:

  • New institutional setup: Parliament established prerogatives in taxation, government expenditures, and military issues (Bill of Rights, 1689).
  • The government’s commitment to secure property rights was more credible, so the risk of expropriation was reduced.
  • Reduction of risk premium, which led to a fall in interest rates.
  • Parliament was more willing to vote for tax increases since it controlled the way money was spent. This increased public goods (infrastructure, naval power).
  • A scientific mentality brought by the Scientific Revolution.
  • Agricultural Revolution
    • High agricultural productivity and release of labor.
    • More manure, more intensive use of land, more meat and dairy products.
    • The farm size rose due to enclosures. “Enclosures,” or consolidated farms and liquidation of common land and management, were imposed. This was also done before by private agreements and especially in 1760-1820 by Parliamentary Acts.
    • It brought some innovations, which were made possible by institutional change.
      • New crops: turnips, clover, and other fodder crops.
      • New rotations: convertible husbandry (alternation of field crops with pastures).

It had some consequences:

  • Rising agricultural output initially fed urban growth and the home market for industries.
  • Increasing productivity stimulated by rising urban demand: according to Allen, it was urban growth that caused agrarian growth and not the other way around.
  • It allowed to sustain high real wages.

World War I

At the beginning of the century, the first wave of globalization and economic integration had occurred. Industrialization had spread with the second Industrial Revolution, and there was a stable financial environment (Gold Standard) revolving around London and a liberal world economy (the Belle Epoque). However, political and economic tensions started to grow.

Growing tensions exploded: a terrorist attack occurred in Sarajevo on June 28, 1914, to the heir of the Austro-Hungarian crown. This led to the outbreak of the war.

Casus Belli: underlying reasons such as increasing:

  • Instability of the European states system.
  • Competition among European powers: second imperialism, armaments race.
  • Domestic disaffection (socialism) and reaction to it (nationalism).
  • Unawareness about the nature of modern war.

The Short War Theorem stated that wars had to be brief as they were expensive and disruptive in a world of small state budgets. However, this concept was soon proven wrong as trench warfare and resource mobilization gave way to a “total war.” The role of the state in the economy boomed.

Economics of WWI

The role of the state expanded, something difficult to reverse after the war:

  • Resource reallocation towards war production.
  • Capital investment to expand capacity in certain sectors (structural change).
  • Interventionism to grant military supplies: price and wage controls.
  • Militarization of the workforce.
  • Cartelization.
  • Foreign exchange controls.

Total War: Outcomes

  • Economic mobilization, key to victory in a long, capital-intensive war.
  • Allied access to foreign markets and credits, key in sustaining it.
  • Agrarian empires collapsed: first Russia, then Austria-Hungary.
  • November 1918: Germany was on the edge of revolution because of its war losses.
  • War ended because of economic extenuation, not by military defeat.

The Great Depression

The Great Depression was not caused by the Wall Street crash in 1929 (only a part of the whole mechanism).

  • It was a macroeconomic event, international in its nature and gestation, not simply the sum of synchronic crises.
  • It was characterized by worldwide falling output, trade, and prices (deflation).
  • Financial and currency crises followed the decline in real activity.
  • Economic policies adopted to respond to the latter.
  • Gold-exchange standard.

While trying to keep the Gold Standard, some currencies were undervalued while others were overvalued. There was a deflationary bias of the system and asymmetry of the adjustment.

  • Effects of WWI on world economic structure:
    • The US strengthened its position against Europe because of trade surplus.
    • War debts and reparations increased deficits.
  • Therefore, making US capital exports to Europe the base on which the system relied on.

World War II

Origins

The Great Depression devastated the political system of the Weimar Republic and therefore, the Nazi regime seized power (January-March 1933). They gained power in the government and Hitler was the main leader. His political program was:

  • Prosperity in the 20th century required mass production, US-style.
  • Germany lacked the required resources (agricultural and raw materials) and market size.
  • Peaceful achievement through international trade was impossible (Jewish conspiracy), and war and radical redrawing of Eurasia by force was the only solution.
  • Fordism required Lebensraum (vital space).

Consequences

  • The consequences were similar to the WWI consequences but on a larger scale.
  • On several fronts, Roman-style ‘war (conquer and plunder) was more aggressive towards the civilian population and more disruptive for occupied economies.
  • Population losses:
    • Dead soldiers and civilians: 50-70 million.
    • Mutilated and traumatized soldiers and civilians, loss in education, displacements, etc.
  • There was a destruction of capital stock (productive capital, dwellings, infrastructure).