Post-WWI Economic Turmoil and Policy Responses
Economic Difficulties and Precarious Monetary Stability
Production Dynamics
Production is divided into two stages:
1. Reconstruction (1921-1925)
In Europe: After World War I, Europe did not reach its 1913 GDP level until 1927. Recovery was slow due to:
- Social and political conflict: Socio-professional conflicts arose because full employment was not achieved, leading to low purchasing power. Border conflicts resulted from the redrawing of Europe’s map. Social and political instability persisted as many countries struggled to form stable governments.
- Financial problems.
- Regional differences: Western Europe experienced less damage and recovered more easily. Eastern Europe suffered greater damage and had to deal with significant economic imbalances.
In the rest of the world: Growth continued, driven by a greater demand for raw materials and foodstuffs. From 1925, there was net growth across most countries, maintaining incentives for economic expansion. However, some peripheral overseas countries began facing difficulties exporting due to the recovery of European production.
2. Atypical Growth (1925-1929)
During the late twenties, efforts were made to maximize productive factors, but unemployment persisted in 1929; growth was insufficient to absorb the jobless population.
Monetary System Challenges
When the war ended, only the United States and Japan had avoided major financial setbacks, so the value of their currencies remained relatively stable. European countries emerged from the war with high levels of debt, which obviously affected their currency values. Each country devalued its currency indiscriminately, and some even created new currencies. Most new values were decided autonomously. Depending on political prestige, some countries devalued less than needed; Great Britain was particularly damaged by its attempt to maintain the pre-war value of its currency.
The Gold Standard System Shift
The traditional gold standard system stopped working as gold reserves dwindled. It was replaced by the gold exchange standard, referencing stronger currencies like the US dollar. This further increased Europe’s dependence on the United States.
Responses to Economic Instability
British Economic Response
1. Devaluation of the Pound
The value of the pound sterling relative to gold was decreased (a measure not taken promptly). This acknowledged the supremacy of the US dollar and allowed the pound to adopt a flexible exchange rate determined by the market, aiming to promote exports.
2. Protectionism
This was the most noticeable change for a country traditionally committed to free trade. Protectionist measures, primarily tariffs, made foreign products more expensive. However, these tariffs were generally not applied to primary products and raw materials. A system of preferential trade (customs bonds) was established between Britain and its former colonies that had gained independence (Canada, South Africa, Australia), eliminating customs barriers between them. This pattern of strengthening ties between metropoles and former colonies became common, contributing to a reduction in overall international trade. With these alternatives, the British economy recovered gradually.
United States: The New Deal
The solution in the US emerged around 1932 with the New Deal, a federal economic policy agenda involving significant government intervention in the national economy. The US transitioned towards becoming an interventionist state.
Finance: The dollar was devalued to promote export growth. Banking actions included:
- Implementing mechanisms to halt stock trading when prices reached a minimum.
- Inspecting deposit funds to ensure stability.
Agriculture: Faced with excess supply, policies aimed to manage surpluses. Aid was provided for crop losses, guaranteeing minimum income compensation, and similarly, ensuring compensation for lower prices.
Industry: To promote consumption of goods:
- Wages were raised, and minimum wages were established.
- The working day was reduced to decrease unemployment.
- The goal was to increase the number of consumers with higher incomes.
- Companies were allowed to merge, seeking economies of scale to reduce costs.
Unemployment: The government formalized a policy of public works to reduce unemployment and implemented social protection policies.
Initial Responses to the Crisis
The first solutions attempted were based on classical economic theory. These included:
- Public austerity measures in the public sector to encourage private investment.
- Reduction of credit availability.
- Pay cuts to reduce costs and increase profits.
However, these measures failed. Reducing public spending contributed to lower prices (deflation). A reduction in wages led to a decrease in private consumption, negatively affecting aggregate demand. Decreasing credit availability reduced investment. Consequently, countries began seeking their own solutions, many of which were influenced by the economic thinking of John Maynard Keynes.