Key Economic Shifts in Modern History
Why Britain Led the Industrial Revolution
Western Europe was split into Catholics and Protestants. The Protestant Reformation positively affected literacy and political, religious, and economic freedom.
Conditions Favoring Industrialization
There was a commercial boom in Great Britain due to:
- England had one of the highest wage rates in Europe.
- Agricultural productivity had increased, and less than 50% of the labour force was in agriculture.
This boom fueled demand.
While the English Crown exercised absolute power during the 16th century, the Bill of Rights was written in 1689, granting power to Parliament and establishing freedoms (religion, economy, politics) under the Rule of Law. Also, the Bank of England was founded (1694). This limited monarchy was a key factor, contrasting with the absolute power prevalent in Spain or France.
Moreover, the Royal Society was founded as a new way of thinking arose: the Enlightenment. There was also a Scientific Revolution.
Another great factor was its geography: Britain was fortunate to have navigable rivers and canals, and energy resources such as coal and iron.
The Industrial Revolution (1750-1851)
The Industrial Revolution (1750-1851) was a historic event that radically transformed Great Britain and the world economy.
There was mechanization in the spinning industry (which was initially difficult, requiring patience and skill), until the Spinning Jenny appeared, making this job faster and easier. This also increased the demand for raw materials (often from Caribbean colonies).
Boulton and James Watt were key figures in the development of the steam engine, which powered innovations like the steamboat and later the railway, following improvements in roads and canals in the 18th century. This transport revolution led to social change (increased mobility) and greater market integration (facilitating imports and exports).
The factory system emerged, allowing for the division of labour, the appearance of economies of scale, and increased use of machines.
Henry Cort patented the puddling process to produce wrought iron using coal, which rapidly replaced wood as a building material.
Living Standards and Population Growth
Living standards improved, marked by legislation like the Public Health Act of 1848 and the Sanitary Act of 1866. Urban life developed, and consumption rose due to high employment, which implied higher wages. However, life remained terrible for the unemployed, regardless of the general improvement in living standards.
Population growth occurred due to better living standards leading to more births, and declining mortality rates resulting from advances in medicine and better sanitation.
Post-War Periods: WWI vs WWII
After the Great War (WWI)
Physical Destruction: Approximately 20 million casualties. Lands became battlefields (trenches).
Economic Impact: The war required great expenditure for countries like Great Britain, the US, and Germany, which together accounted for about 75% of the world’s GDP.
US Immigration: Due to the situation in Europe, many civilians immigrated to the US seeking a better life. They were required to pass a literacy test to enter the country (1917).
Inter-Allied Debts: Significant debts existed after the war, primarily owed by Germany.
Peace Treaties: The war concluded with the Peace of Paris, including:
- Treaty of Versailles (1919): Germany was deprived of 13% of its pre-war territory.
- Treaty of Neuilly: Established Bulgaria’s borders.
- Treaty of Saint-Germain-en-Laye: Distributed the Austro-Hungarian Empire.
- Treaty of Trianon (1920): Regulated the states that replaced the Kingdom of Hungary.
German Hyperinflation: Germany faced severe economic trouble due to hyperinflation. Between 1914 and 1923, the value of the German Mark against the dollar plummeted from 4.2 to 4.2 trillion. The temporary solution was to stabilize the currency by introducing the Rentenmark, substituting 1 Rentenmark for 1 trillion old Marks.
After World War II
Peace Settlements: The war ended with the Yalta (February 1945) and Potsdam (July 1945) conferences, where world leaders discussed the post-war order.
Physical Destruction and Casualties: There were between 50-60 million casualties, in addition to widespread physical destruction (ports, bridges, railways, factories, homes).
Shortages and Economic Planning: Shortages of food, raw materials, and capital goods led governments to implement price controls and food rationing, often referred to as “economic planning.”
Economic Recovery: Surprisingly, despite the destruction, GDP per capita rose during the war years, and recovery was relatively “quick,” certainly quicker than after WWI.
Geopolitical Shift: A new world order emerged, leading to the Cold War (US vs. USSR).
Relief Efforts: The UNRRA (United Nations Relief and Rehabilitation Administration) operated from 1943 to 1947, aiming to plan and administer war relief.
Marshall Plan: From 1948 to 1951, the Marshall Plan, proposed by US Secretary George Marshall, provided economic assistance ($13 billion) to help Europe recover. A requirement was that European firms buy US goods, helping to prevent US overproduction.
United Nations: The United Nations was founded on October 24, 1945, to maintain international peace and security and develop friendly relations among nations.
Bretton Woods Conference: In July 1944, the Bretton Woods Conference (named after its location) was attended by 44 Allied countries to establish rules for commercial and financial relations. They also created the World Bank and the IMF (International Monetary Fund).
The Golden Age of Economic Growth (1950-1973)
The Golden Age (1950-1973) was the longest period of sustained economic growth in Western Europe and Japan, which saw their highest growth rates in history.
Factors Explaining Rapid Growth
Supply-Side Factors
- Cheap Energy: Low and stable oil prices.
- Sources of Growth: Both extensive growth (using more inputs like Capital, Labour, Land/Resources – accounted for >60% in USSR, Asia, Latin America) and intensive growth (using inputs more efficiently – accounted for >50% in Western Europe and Japan).
- Labour Increase: Due to the “baby boom” and the massive entry of women into the workforce.
- Capital Accumulation: Aided by the Marshall Plan.
- US Catch-up Effect: Western Europe and Japan grew by adopting technological advances from the US.
- Rural Exodus: Mechanization of agriculture (tractors, harvest machines) led to migration from rural areas.
Demand-Side Factors: Role of the State
The role of the state increased in Western Europe and Japan during the Golden Age, contributing through:
- Economic Planning: Setting and controlling prices, etc.
- Welfare State: The state played a role in protecting and promoting citizens’ economic and social well-being, based on equality of opportunity, wealth distribution, and public responsibility for those unable to support themselves.
The Welfare State guaranteed: minimum standards, social protection (for those without insurance), and provision of services. These services were paid for by the state through taxes on wages and goods. The concept of the Welfare State developed significantly in the UK after 1945 (NHS founded 1948), providing universal access to healthcare (National Health Service) and compulsory education for everyone (until age 15 at the time).
Sustaining Public Expenditure
Large-scale public expenditure was sustained by:
- High taxation on goods and wages.
- Public debt.
- Full employment (a high number of the working population).
Rise of Mass Consumption
Mass consumption increased due to population growth, more workers (low unemployment), and wage growth (higher productivity and work leading to higher wages).
Emergence of Big Business and MNCs
Due to this growth, big businesses, often called “Multinational Corporations” (MNCs), appeared. The number and size of firms increased during the Golden Age in Western Europe and Japan. This led to greater concentration of economic activity and required a managerial revolution.
US Economic Policy During the Great Depression
How did economic policy change in the United States during the Great Depression?