World War I: Economic Impact and Global Consequences
2) War Economy and Economic War
War Economy
The transformation of the productive system to adapt to war involved the entire economic apparatus being dedicated to achieving victory. Initially anticipated as a short conflict lasting no more than six months, it ultimately spanned four years. The first step was to suspend the free market, as assigning profits became impossible. A process of state interventionism emerged, with the state becoming the allocator of resources and assets.
There was a strong growth in aggregate demand. Recruitment of soldiers caused problems in the labor market and created a public spending debt.
Labor Market
Initially, soldiers were recruited from non-essential sectors. However, after the initial wave and subsequent recruitment drives, productive sectors of the market experienced excess demand for labor. This was addressed by employing women, youths, and even retirees. From a qualitative viewpoint, recruitment discrimination was introduced, preventing certain essential jobs from being vacated.
Supply: Setting Priorities
Priorities were set for the military and the home front, avoiding the consumption of superfluous products to devote resources to war products. Rationing systems were established through quotas. Prices of luxury products were raised, while prices of subsistence products were kept stable. All prices were assigned by the State.
Funding
In the context of conflict, public spending reached unprecedented levels (in Germany, it multiplied by 5). To meet these higher costs, new taxes were established, and existing tax rates were increased. This aimed not only to increase tax revenue but also to mitigate speculative activity and discourage consumption of scarce or essential goods. However, this policy proved insufficient, and all countries resorted to borrowing, first domestically through bond issuance and then overseas. The U.S. became the main lender to the Allied cause (Britain and France).
Economic War
The Allies implemented measures to weaken the enemy’s economic power through the application of blockades, preventing the supply of goods from reaching the Central Powers. These measures extended to neutral countries, which were presented with lists of prohibited products that could not be exported to the enemy, resulting in a decline in exports. On the German side, this economic war manifested in the sinking of Allied ships, resulting in the loss of almost 11 million tons (out of almost 25 million tons). This submarine warfare significantly impacted Allied shipping, and without the U.S. intervention from 1917, the Allied cause might not have succeeded.
3) The Effects of the War
The war incurred direct costs (machinery) of about 186,000 million and indirect costs (retiree pensions, war widows) of 150,000 million.
A) Population Loss
The number of deaths amounted to 40 million (of which 21% were civilian casualties). The demographic effects were profound, as a significant portion of the deceased were of childbearing age, resulting in a decrease in the fertility rate and a decrease in the potential for medium-term growth (generation loss).
B) Lost Materials
Difficult to quantify and geographically varied, the estimated loss in materials amounted to 150,000 million dollars. This significantly reduced production capacity.
Boom in the Overseas Periphery
Europe’s economic position in the global economy underwent significant changes. Europe’s role suffered a major setback, with both production and trade falling by approximately 10%. This decline in international trade participation was capitalized upon by overseas colonies. Countries like the U.S. and Japan accelerated their production to fill the gap. In primary commodities, Latin America and other colonies experienced remarkable growth, both to supply the warring nations and to provide inputs to the U.S. Latin American countries took advantage of the absence of manufactured goods supplied by Europe to initiate their own industrialization.
Financial Dominance: U.S.
Debts owed to the U.S. and the monetary reparations demanded by the victors hindered economic growth, as revenues were earmarked for repayment rather than for the production process.
Rampant Inflation
Inflation was linked to high government debt incurred by European nations to finance the war effort. Unable to secure adequate financing, governments resorted to issuing banknotes. At the end of the war, price controls were eliminated without reducing the money supply, leading to hyperinflation.
Spatial Redistribution of Europe
Peace treaties involved the imposition of economic reparations and changes in the political map of Central and Eastern Europe. Problems arose due to the poor integration of the transport network and the separation of areas or activities that were previously complementary. This was compounded by political instability and dissatisfaction, and land reallocations remained a source of tension until World War II.
Positive Developments
Technological advances, particularly in the development of the internal combustion engine, enabled the development of the automotive and aviation industries, with technologies shifting from military to civilian applications. New forms of labor specialization (assembly line) and medical innovations (especially in medicine and surgery) also emerged.