Post-War Economic Recovery: Bretton Woods to Oil Crisis
Post-War Economic Planning
The end of the gold standard caused economic challenges:
- Foreign exchange controls and bilateral trade led to a decline in trade.
- The need to restore an international payments system.
- The Atlantic Charter of 1941 outlined goals such as no territorial expansion, self-determination, reduced trade restrictions, and global cooperation.
- In 1942, the Mutual Aid Agreement was drafted as a war aid program.
Following this, many countries met in Bretton Woods in 1944 to sign agreements.
They established two major international institutions: the International Monetary Fund (IMF), which created a new monetary system, and the International Bank for Reconstruction and Development (IBRD, or World Bank), to aid Europe’s post-WWII rebuilding.
An attempt to create an International Trade Organization (ITO) failed.
In 1947, the General Agreement on Tariffs and Trade (GATT) was signed by 23 countries, with commitments to:
- Most-favored-nation treatment.
- No quotas.
- Reduce tariffs.
- Consult before major policy changes.
The GATT was replaced by the World Trade Organization in 1995.
European Reconstruction Begins
At the end of World War II, Europe faced significant problems:
- Severe shortages of food and basic necessities.
- The need to rebuild towns, cities, and infrastructure.
- A shortage of foreign currency (dollars).
- The need to restore political systems and public administration.
Europe required aid from countries like the USA and the United Nations.
Governments in exile resumed functions, political parties cooperated, and there was public demand for a more active state role in reconstruction, including nationalization of key sectors and expansion of social services.
The Welfare State expanded, providing services to all citizens.
The Marshall Plan
Despite American grants, European recovery was at risk in 1947. The Cold War and communism threatened political stability, leading George C. Marshall to initiate the Marshall Plan.
The Committee of European Economic Cooperation (CEEC) was created. In 1948, the US Congress passed the Foreign Assistance Act, establishing the Marshall Plan and the Economic Cooperation Administration (ECA).
The Organization for European Economic Cooperation (OEEC) emerged from the CEEC to supervise aid distribution.
The plan had positive effects, increasing aid transfers ($13 billion) and allowing Europe to import scarce commodities.
By 1952, Europe had recovered its 1939 production level, beginning a period of fast growth known as The European Miracle.
The Economic ‘Miracles’
From 1950 to 1973, the West experienced its longest period of growth, with an average GDP per capita increase of 4.5% per year. Countries like Japan, Italy, Germany, and Spain experienced rapid growth (‘miracles’).
This period is considered the ‘golden age’ of Western economic development.
Causes included American aid, high levels of savings and investment, adoption of American technology, and government participation in the economy, providing stability and minimal protection for the underprivileged.
International cooperation was also crucial. The Bretton Woods system became fully effective in 1958. The OEEC created the European Payments Union (EPU) in 1950, shifting from bilateral to multilateral trades. The OEEC became the Organization of Economic Cooperation and Development. Europe also experienced integration.
Europe’s human capital increased after the failure of the Alliance for Progress between the USA and Latin America.
The Oil Crisis and Its Effects
Conflicts in the Middle East, such as the Six-Day War (1967) and the Yom Kippur War (1973), led to the Organization of the Petroleum Exporting Countries (OPEC) declaring an oil embargo against the United States and other industrialized nations.
This resulted in a sharp rise in oil prices and OPEC revenues.
Iraq’s invasion of Iran in 1979 caused the 2nd oil shock.
The sharp increase in oil prices led to increased costs in industrial economies, which were heavily dependent on oil.
The increase in production costs forced companies to raise prices, leading to reduced consumption, production, and increased unemployment. This combination of inflation and unemployment was called stagflation.
Initial Keynesian policies aggravated the situation, but Milton Friedman’s ‘monetarist’ policies proved effective.