The World Economy in Crisis: 1914-1945
The World Economy in Crisis (1914-1945)
The Complexities of 1914-1945
The period from 1914 to 1945 presented immense economic complexities and difficulties. Several key events marked this era:
- Two World Wars: World War I (1914-1918) and World War II (1939-1945)
- The Great Depression (1929-1935)
- Crisis of liberal democracies and the rise of fascism
- The emergence of an economic system antagonistic to capitalism (socialism/communism, 1917-1989)
World War I and its Economic Consequences
Economic factors played a crucial role in the origins of World War I, including globalization, the Second Industrial Revolution, technological advancements, and imperialist rivalries. These factors largely stemmed from the need to balance Germany’s growing economic power with its political influence. The war disrupted a period of economic stability that had lasted nearly 40 years, ushering in an era of instability that would persist for another four decades. The foundations of pre-war stability included economic growth, structural change, public deficit control, increased foreign trade, low interest rates, and a fixed exchange rate monetary system based on the gold standard. All of these elements vanished with the outbreak of war in 1914.
The war led to the militarization of European economies, diverting state resources towards the war effort. The demographic and economic losses were greater than any previous European conflict. Twelve million soldiers died, with over 16 million Russian casualties, 70% of whom were men aged 20-30. This significantly impacted birth rates. Additionally, a 1918 flu pandemic claimed over 22 million lives, resulting in a combined total of approximately 50 million deaths in four years. Consequently, Europe’s population in 1920 remained similar to its 1913 level.
The immediate economic consequences were severe, leading to significant reductions in GDP for many countries. The key consequences of World War I included:
- Decentralization of the global economy: The economic center shifted from Europe to the United States. However, this did not lead to convergence between rich and poor nations in the medium term.
- Economic and financial instability: The abandonment of the gold standard contributed to a prolonged period of instability. This instability stemmed from several factors:
- War financing through foreign borrowing, money issuance (inflation), and hyperinflation in the postwar period.
- Disruptions to foreign trade and the withdrawal of investments.
- The financial resolution of the conflict, including the imposition of demanding reparations on Germany, which hindered both Germany and France from repaying loans to the United States.
Impact on Different Countries
Neutral countries (Spain, Switzerland, etc.) experienced short-term economic benefits but faced long-term negative consequences due to inflated wartime economic activity. For other countries, the economic impact was largely negative, with the exception of the United States. Germany suffered the most severe consequences:
- Loss of approximately 15% of its territory, including significant iron and coal reserves.
- Loss of its colonies.
- Obligation to pay war reparations equivalent to 6% of GDP, leaving only 10% of budget revenues to cover expenditures.
Three potential solutions emerged:
- Debt forgiveness by the United States.
- Balancing the budget through increased exports and reduced imports, requiring raw materials, machinery, and production capacity.
- Issuing currency.
In 1924, the United States, recognizing the unlikelihood of repayment under the existing conditions, devised a recovery plan:
- Low-interest loans to finance raw material purchases and debt repayment.
- Debt restructuring based on annual economic performance.
Germany became a prime destination for U.S. investments. However, Germany’s economic recovery remained heavily reliant on foreign capital, making it vulnerable to future withdrawals.