Ch. 13
Overview of the World Economy in the Twentieth Century
In the 20
century, population growth in Europe decelerated, while in the rest of the world accelerated. Causes
for the increase was a decline I death rates, demographic transition, good public health and sanitation, medical
care, etc. There was also a decline in infant mortality. This caused an increase in life expectancy at birth.
Population in countries with higher income had better medical care and was better fed, which increased life
Urbanization, which marked Europe in the 19
century has now declined. The reason was that people preferred
small villages, from where they can commute to the city. However, there was still an increased urbanization the
Third World countries.

Internal migration was still high, while international migration continued, but under different circumstances.
There are also forced migrations, which also happened due to political oppression.
There were also chain migrations, movement from the same regions of the sending country to the same regions
of the receiving country.
Migration reached its peak before WWI, and was later temporarily halted. After the war, there were high
movements of refugees from the wartime devastation.

The character of American immigration, which used to be dominated by Europeans was now dominated by
immigrants from Latin America and Asia. There were also illegal immigrants – wetbacks.

The character of European immigration changed, since Europe became a haven for political refugees and land of
opportunity for population of eastern Europe and Middle East. The process began with the Russian Revolution of

West Germany took the most refugees, but, with its strong demand for labor, this was a blessing.

European Jews migrated to Palestine during and after WWII. The state of Israel was proclaimed in 1948 when
immigration of Jews became legal.
The growth of population caused high pressure on demand for resources. There was also an increasing
interaction of science with the economy. Scientists created new resources in form of synthetic products.

The most important change is the one in primary energy. Coal has been replaced with petroleum and natural
gas. Petroleum took over coal by 1960, which caused it to acquire geopolitical significance. Europe, which was
very well endowed with coal, had no major sources of petroleum.

First large scale production of petroleum was in the United States, who soon turned from exporter to an
importer of petroleum. Other major producers were countries of the Middle East and Russia.


Technology continued to be the major force of growth. The mark of success in the 20
century was the ability to
manipulate the environment to the needs of society. Technology was based on modern science.
Transportation and communication had very fast developments. Transportation improved with automobiles,
airplanes and space rockets.

Communication also had high growth, due to innovations like telegraph, telephone, radio and television.

• 1927 - Commercial radio-telephone service between US and UK was introduced.
• 1956 - First telephone cable was laid under the Atlantic.
• 1990 – expansion of mobile telephones

Scientific basis of modern industry resulted in many new products and materials.

• 1898 – invention of rayon (fabric)

Another novelty was use of plastic materials, made from petroleum, which replaced wood, metals and other
The increasing use of electrical and mechanical power brought changes in conditions of life and work.

• 1830s – first mechanical calculating machine
Requirements for research
Many developments required research expenditures so vast , that governments were obliged to finance it.
Requirements of war and national rivalry lead governments to invest even more in research and development of
military equipment.
Human labor
Another requirement was a sizable pool of educated manpower. Literacy and education became very important.
However, mere literacy is not sufficient for high-technology world. Now, advanced study at a university level is
required. This meant that advanced studies became much more important, and supported by public and private
Application of scientific technology greatly increased the productivity of human labor and lead to economic
• 1960s – Green revolution increased productivity in Asian nations
Power production
Rise in power production was remarkable, since it increased more than fourfold between 1900 and 1950-
Electric energy
Electric energy has many advantages, like being cleaner and more efficient, easy to transfer, etc. Its application
provided illumination, heat, air conditioning, and its application was also in domestic appliances.
Nuclear and geothermal energy
Europe is especially reliant on nuclear and geothermal energy, followed by North America.
Asia and Africa are more reliant on thermal sources.
South America is especially dependant on hydroelectric power.

Automobile and airplane
Automobile mass production was introduced by Henry Ford, with a moving assembly line. Automobile became a
symbol of economic development. This industry also stimulated demand for other industries. Automobiles
needed roads and cement, steel, rubber and glass.
Japan emerged as an economic power thanks to automobile export.

Aircraft industry became very important during the wars for military purposes. After the war, they were used for
mail delivery and passenger flights.
• 1903 – Flight of Wright brothers
• 1930s – Development of commercial aviation with the trans-Atlantic service before WWI
During the war, Germans started experiments with jet-propelled planes and with rockets. Later on, Americans
and Russians took over developments in space exploration and aviation.
Space exploration
The most spectacular application of science to technology was in space exploration.
• 1957 – Soviet Union put a capsule into orbit around Earth
• 1958 – United States put a capsule into orbit. Unmanned satellites were put into orbit too.
• 1968 – United States put a space crew in orbit around moon
• 1969 – United States astronauts Armstrong and Aldrin set foot on Moon. This event was witnessed by
the largest audience to that time.
International relations
The World before WWI was dominated by Europe, United States and Imperial Russia. World War I and the
Russian Revolution of 1917 changed this structure:
• Imperial Russia disappeared, and was replaced by the Soviet Union
• Habsburg Empire disappeared, replaced by several national states
• Germany lost its overseas empire as well as other territory and population
• Fascist dictatorships emerged in Italy, Germany and several other countries
Japan became an important economic power. Its participation in WWI was motivated by the desire to take over
German possessions in the Pacific and China, in which they were successful. They also extended their interest in
Manchuria, which they occupied in 1931.

They also maintained constant pressure on China and, in 1937 provoked a military incident and undeclared war
on China. They captured major cities but, with the outbreak of war in Europe, the Japanese found new
opportunities for expansion elsewhere.
Consequences of World War II
WWII brought fundamental changes in international relations. The rivalry of European powers was replaced by
the rivalry between United States and the Soviet Union. Europe was divided even more between East and West,
who were under influences of the Soviet Union and United States, respectively.

After the war, old imperial nations attempted to retain their authority of their former possessions, but were not
able to do so. The Arab nations threw off the controls of the French and the British. Various colonies in
Southeast Asia, occupied by Japan, also gained their independence.

In 1947, Britain agreed to lose control over the Indian subcontinent, and two nations were created: Hindu Union
of India and Islamic state of Pakistan. Britain also lost control over Ceylon, which was renamed Sri Lanka.
Japan was devastated by American bombardment, including the two atomic bombs, and underwent an
occupation by the American forces, during which, it reshaped all of its major institutions, under supervision of
the Americans. Within a few decades, it became the world’s second largest economic power.
China underwent two radical changes.
• 1911 - A group of young reformers overthrew Qing dynasty and attempted to create a modern
democratic republic. However, they did not manage to establish control, and the Japanese invasions
stopped any economic development.
• 1949 – Communist party drove out the government and allied themselves with the Soviet Union. After
the breaking of the Soviet Union in 1960 they attempted to establish diplomatic and economic relations
with the United States, which they managed to do in 1970s.
International organizations
Several international organizations were formed even in the 19
• 1864 – International Red Cross
• 1874 – Universal Postal Union
League of Nations
League of nations was created by the Treaty of Versailles in 1919, based on the idea of Woodrow Wilson.
However, since the U.S. Senate did not ratify the treaty, and United States did not join the League, was one of the
reasons it failed. One of its agencies, International Labor Organization (ILO) still exists, as a part of United
The Role of Government
The 20
century witnessed an enlargement of the role of government in the economy. In the Soviet Union,
government assumed total responsibility for the economy. During the two wars, most of belligerent nations also
adopted government control and participation in the economy. In the interwar period, most of them pursued
policies of recovery and stabilization.
After the WWII, most of Western European countries were mixed economies, with some forms of economic
planning done by the government.

The exceptions to these systems were:
1. Directly productive activities carried out by or on behalf of governments. There was an increase in state-
owned enterprises, sometimes because of failure of the private sector.
2. Transfer payments, or redistribution of income by means of taxation and expenditure. First introduced
by Bismarck in 1880, was a system of insurance for workers and a limited pension system. These
innovations were extended in other countries, who sought to create a welfare state, with developed
social security .

Government expenditures typically increased during the wars, ranging from 20% to 50%.


The Forms of Enterprise
The joint-stock companies, corporations were already well established, but were mostly used for large scale
industries, while in the wholesaling and retailing and service sector, the family firm predominated.
Large corporate enterprises, chain stores came to dominate retailing in industries, and they integrated backward
to the production stage. In other cases, many also integrated forward, relying on franchised dealers to handle
the sale.
Another novelty of the time was corporate conglomerate, a corporation engaged in production of wide variety of
products. This development was facilitated by the use of holding companies, corporations whose only business
was to own other companies.
These trends in corporate form of organization were pioneered in the United States.
Multinational firms also became quite common. Some of them included production and sales on every continent
and almost every country.
Organized Labor
The interwar period witnessed an increase in union membership. In the United States, the New Deal legislation
was favorable to organized labor and it reached its peak in 1945, as a result of expansion of war industries, and
then it dropped off slightly.
In Europe, trade unions were closely identified with political parties. In Great Britain, for example, the Labour
party is supported mainly by union members. Immediately after the war it won a clear victory over the wartime
prime minister Churchill. It alternated with the Conservative party, but split in two, forming a Social Democratic
The Social Democratic party in pre-World War I Germany was a worker supported party, the largest in Germany.
Under the Weimar Republic it participated the most of the coalition governments, but with the advent of the
Nazi Adolf Hitler in 1933, it was forcibly dissolved. The Nazis abolished political parties and trade unions, and all
workers had to become members of Labor Front. Similar things happened in Italy and the Soviet Union, where
trade unions were used as instruments to maintain party discipline.
Informal Institutions
The 20
century witnessed also an increase in the activity of informal institutions, whose goal was to create rules
of economic behavior which was not explicitly enforced by the government. It can be said that if people and
organizations can be trusted to perform as expected, transaction costs are reduced. Lack of trust raises
transaction costs.

By the end of the century, there was a clash of civilizations among nations split along lines of Islam, Buddhism,
Christianity and atheism.
On the other side, there was an increase in the number of NGOs and their influence in international


Ch. 14
International Economic Disintegration
The Economic Consequences of WWI
Before known as the Great War, WWI was one of the most destructive wars in history, particularly when it comes
to human casualties:
• Military casualties: 10 million
• Civilian casualties: 10 million
• War-caused disease: 20 million
• Money cost of war: 180-230 billion dollars

Most of the damage occurred in northern France, Belgium, Italy and eastern Europe.
Ocean shipping suffered also, due to submarine warfare. Losses of production were also caused by shortages of
manpower and raw materials, depreciation etc.
Even more damaging, in the long run, was disruption of normal economic relations which continued during the
interwar period.
During the war, some governments imposed control over prices, production and allocation of labor, which
stimulated some sectors of the economy, but restricted others.
Trade Relations
Trade relations with Germany stopped, although United States attempted to maintain the during the neutral

Britain imposed a blockade on German ports and sometimes confiscated German cargo. This caused some
frictions with the United States but was offset by German submarine warfare. British navy as well as merchant
ships were attacked, and in 1917 the Germans unleashed unrestricted submarine warfare, which was one of the
major causes of America’s entry into war.

Germans were completely cut off from overseas markets and, without the ingenuity of its scientists and
engineers, it would have been forced to capitulate much sooner than it did.

Overseas nations had to increase manufacture and purchases from other overseas nations goods they had
formerly purchased in Europe. This benefited United States and Japan, who entered markets formerly reserved
for Europeans. United States greatly increased exports to the Allies.
Agriculture was also affected by the war, and led to increase in agriculture production in overseas countries. This
caused overproduction and a fall in prices in 1920s. During the war, many farmers bought land to increase
production, under high inflation, but, when the prices fell, they were unable to repay the mortgages and went
into bankruptcy.
Shipping and other services
German merchant marine was bottled up during the war, and had to be handed over to the Allies. British
merchant fleet also took a heavy toll from the German submarine warfare. United States, on the other hand,
became the major competitor in international shipping.
London and other European financial centers lost some of their income from banking, insurance and other
financial services, which were transferred to New York and Switzerland.

Foreign investments
Before the war Britain, France and Germany were the most important foreign investors. The income they
received from foreign investments helped them pay for the trade deficits they had. During the war, they were
obliged to sell some of their investments in order to finance the war.
Large French investments in Russia were not recognized by the new Soviet government which caused large
losses. German investments were confiscated as reparations.
United States, on the other hand, went from net debtor to net creditor as a result of its booming export surplus
and loans to the Allies.
The Gold Standard
The pressure of wartime forced all belligerents except United States off the gold standard. They resorted to
large-scale borrowing and printing money to finance the war. This caused inflation, and great disparity in prices,
which was another difficulty for international trade.
Economic Consequences of Peace
The Peace of Paris (1919), instead of attempt to solve economic problems actually created even bigger problems
for the economy. Two major problems resulted from the treaties:
1. The growth of economic nationalism
2. Monetary and financial problems
Treaty of Versailles
This treaty was made with Germany. The decisions of the treaty were:
1. Restored Alsace and Lorraine to France
2. France occupied Saar (rich in coal)
3. West Prussia and most of Upper Silesia were given to Poland
4. Germany was deprived of 13% of its territory and 10% of its population
5. Colonies in Africa and the Pacific were also occupied by the Allies
6. German navy was surrendered to the allies, including the arms and ammunition
7. Restrictions on its armed forces
8. Allied occupation of the Rhineland for fifteen years
9. War guilt clause declared that Germany accepts full responsibility for the loss and damage – which
provided justification of the claims for reparations. The amount of reparations was not specified but,
instead, a Reparations Commission was established. John M. Keynes opposed these conditions and
resigned his position
Territorial changes in Europe
Austro-Hungarian empire was broken apart and created two new states – Austria and Hungary.
Czechoslovakia was created, as well as Poland.
Serbia also obtained some territory and unite with Montenegro.
Romania obtained territory from Hungary, whereas Bulgaria lost its land to Greece, Romania and Yugoslavia.
Italy gained Trieste, Trentino and Tyrol.
Ottoman Empire lost all of its territory in Europe and became Turkish republic in 1922.


Development and international trade
Newly formed states were jealous of one another and tried to become self-sufficient. Their efforts hindered the
recovery of the entire region and led to a disruption of transportation. After the war, every country refused to
allow the trains on its territory to leave.

These forms of economic nationalism also happened in Russia, which appeared after the civil war as the Soviet
Union, where the international trade was determined by the state.

Great Britain had imposed tariffs during the war and retained a protectionist policy after 1932. They also
negotiated numerous bilateral trade treaties, and abandoned the principle of the most favored country.

United States had high tariffs before the war, and raised them even more after it.
• 1921 - Emergency Tariff Act placed an embargo on imports of German dyestuffs.
• 1922 – Fordney-McCumber Tariff Act set the highest tariffs in history
• 1930 – Smooth-Hawler Tariff set even higher tariffs
Each new measure of protectionism was followed by retaliation from other countries.
Inter-Allied debts
The problem of reparations was one of the part of the problem of inter-allied war debts. Until 1917 Great Britain
was the chief financier of the Allies. After that, the United States took the role of financing warfare. Altogether,
inter-allied debts amounted to more than 20 billion, about half of which was loaned by United States. Other
creditors were Great Britain and France.
Among the European allies, the debts were expected to be cancelled, but the Americans regarded them as
commercial propositions, and expected a return.
At this point, France and Britain requested Germany to pay reparations that amount the entire cost incurred by
the Allies in the war.
The French asked for debts to be cancelled and reparations to be canceled, whereas British asked for both debts
and reparations to be canceled.
The Americans refused to cancel the debts.

In the meantime, Germans already started paying the reparations, in cash and in coal and other goods.
• 1921 – Reparations Committee informed the Germans that the total amount of reparations was 33
billion dollars

The only way for Allies to repay their debts was if they received the same amount as reparations from Germany,
who had to create export surplus to pay these reparations.
• 1922 – Since Germans were not able to repay the reparations, the value of the German mark began to
depreciate and, by the end of the year, Germans stopped paying reparations
• 1923 – French and Belgium troops occupied the Ruhr and took over coal mines. Germans replied with
passive resistance.
Inflation in Germany
The German government printed huge quantities of paper money to repay the reparations, which caused
inflation. When the inflation reached its peak, Germans decided to demonetize the mark and create a new
currency, rentenmark.
Inflation spread to other countries, Bulgaria, Greece an Poland, and even the French franc suffered.
The consequences of inflation were redistribution of income, where most of citizens lost their money.

Dawes Loan
Charles Dawes, investment baker, recommended scaling down of annual reparations, reorganization of the
German Reichsbank and an international loan of 200 million dollars. This, so called Dawes loan, enabled
Germany to resume reparations and return to the gold standard in 1924.
The loan was followed by private loans from America to Germany, which helped Germany to obtain foreign
exchange it needed to pay reparations.
Great Britain
Great Britain suffered great losses because of the war. It was very dependent on international trade, and it lost
foreign markets, foreign investments and a large part of their merchant marine.
They had to export, but the factories were not functioning and unemployment was high.
The government policies did not provide any response to this crisis. They created system of relief payments and
pared expenditures to the bone, but this did not bring satisfactory results.

• 1914 – Britain went off the gold standard

Since London was a financial center, there was a growing pressure to return to the gold standard, but there were
two major unsolved questions:

1. How soon can it return?
This depended on the accumulation of gold reserves by the Bank of England, which was estimated for 1920s.

2. At what value for the pound sterling?
Since the United States remained on the gold standard during the war, and Great Britain did not, and had
suffered high inflation, returning to the same rate for pound sterling would place Britain at a competitive
disadvantage. Moreover, since British foreign investments were denominated in gold, to return to a lower rate
would penalize the owners of those investments.
Winston Churchill decided to return the system to gold standard, at prewar rates. In order to keep the industry
competitive, this necessitated a fall in wages, and a redistribution of income.
The coal industry was one of the most affected by this change, which caused workers’ strikes in 1926, but these
soon failed.


The Great Contraction (1929 – 1933)
After the war, United States emerged stronger than ever.
• 1928 – American investors began to cut down purchases of German and other foreign bonds in order to
invest in the New York stock market. Many individuals were tempted to purchase stocks on credit.
• 1929 – Europe was starting to feel the cessation of American investments and even American economy
had ceased to grow. However, stock prices were extremely high.
• October 24 – Black Thursday – a wave of panic selling on the stock exchange caused stock prices to
decrease and eliminated millions of dollars
• October 29 – Black Tuesday – Index of stock prices fell and even more investors were selling their stocks
at any price they could get.
• 1930 – American investors sold their assets in Europe and withdrew their capital, which caused a strain
on the financial system. Financial markets stabilized, but commodity prices were falling.
• 1931 – Austrian Creditstalt suspended payments. The panic spread to Hungary, Czechoslovakia,
Romania, Poland and Germany, where there was a large-scale withdrawal of funds.
New, Young plan, obliged Germany to make further payments. President Hoover proposed a one-year
moratorium, but it was too late.
• 1931 – Bank of England suspended payments in gold.

As a result of fall in commodity prices, many countries departed from the gold standard. Foreign trade fell
drastically. There was no agreed international standard, currencies fluctuated wildly and economic policy
decisions to impose tariffs and to suspend gold standard were made by national governments.

• 1932 – European powers gathered in Lausanne to discuss the consequences of the end of the Hoover
moratorium. Although the Europeans agreed to end reparations and war debts, the agreement was
never ratified by the United States, who insisted that two things were separate. Thus, both reparations
and debts simply lapsed.
• 1933 – World Monetary Conference, proposed by the League of Nations, called for restoration of the
gold standard, a reduction of tariffs and other forms of international cooperation. This, however, failed,
because American president Roosevelt , whose role was essential, said that United states have to deal
with the domestic economy first. He also declared bank holiday to allow the banking system to
reorganize and took United States off the gold standard.
What caused the depression?
There is no general consensus on this issue. Some say cause were primarily monetary - a decline in the quantity
of money.
Others say the cause was fall in consumption and investment.
Other view the prior depression in agriculture, dependence of Third World countries on unstable markets for
their primary products, and shortage of the world’s stock of gold as potential causes.
Role of Great Britain and United States
Some say that, before the war, Great Britain was world’s leading commercial , financial and industrial nation, and
had a role in stabilizing the world economy. Its large foreign investments allowed countries with deficits to
obtain resources to balance their payments. London’s preeminent role as the money market, meant that nations
with temporary balance of payments problems could obtain relief by discounting bills of exchange.
After the war, Great Britain was not stable enough to continue this role of stabilizer and Unite States was
unwilling to accept the role of the leader.


Long-run consequences
The long-run consequences are:
• Growth in the role of the government
• Gradual change in attitudes toward economic policy
• efforts of Latin America and Third World countries to develop import-substituting industries
• rise of extremist political movements
Rival Attempts at Reconstruction
Roosevelt’s New Deal (1933)
When Franklin Roosevelt took office in 1933, the United States face one of its worst crisis. Problems were also
high unemployment and requests of the WWI veterans.
New deal was Roosevelt’s plan for recovery. In the hundred days, new legislation was made at an
unprecedented rate. Reforms were made in every aspect of American economy and society.
National Industrial Recovery Act
This created National Recovery Administration (NRA), which was supposed to prepare codes of fair competition
for each industry. In essence, it was a system of private economic planning with government supervision to
protect the public interests.
NRA was declared unconstitutional in 1935. Several other measures did not prove to be sufficient to cope with
the depression.
French was one of the most affected countries in the war. Most of the war was fought on its territory, and they
suffered a large number of human casualties. Counting on German reparations, the French started a program of
physical reconstruction.
Since Germans failed to pay the reparations, the French tried to solve the problem by occupying Ruhr. This,
however, was a failure.
Franc depreciated even more, and it was finally stabilized in 1926, however, at a rate much lower than before.
As in Germany, inflation contributed to the growth of extremism.
The franc was actually undervalued, which stimulated exports, hindered imports, and led to an inflow of gold.
Thus, the depression struck France alter, in 1936.
In 1936, three political parties formed a coalition, the Popular front and won the elections.
They nationalized the Bank of France and the railways an enacted several measures affecting labor.
Monetary standards and exchange rates
When Britain and France returned to the gold standard, many other smaller countries also went on the gold
standard. Their central banks, instead of keeping gold reserves, kept deposits with central banks of larger
After Britain departed from the gold in 1931, most of the countries that traded with them also left the gold
standard and aligned their currencies with pound sterling, constituting the sterling bloc (Commonwealth
countries, Portugal and Scandinavian countries).
When United States devalued the dollar in 1933, most of its trading partners tried to align their currencies with
the dollar. This left France at the center of the gold bloc (nations trying to maintain convertibility into gold).
They held until 1936. Finally, France cut its ties to gold.

• 1936 – Tripartite Monetary Agreement – governments of Britain, France and United States undertook to
stabilize exchange rates and to avoid competitive devaluations.

Rise of fascism
In central and eastern Europe there was a rise of fascism.
In Italy, the rise of Benito Mussolini in 1922 started the rise of fascism, an ideology which glorified the use of
force, war as the noblest activity, denounced liberalism, democracy, socialism and individualism.
Mussolini brought forth the corporate state, an organization which allowed private ownership of property but
the interests of both owners and workers were subordinated to the interests of the society.
All industries were organized into 12 corporations, corresponding to trade associations.
All labor unions were eliminated and the functions of corporations were regulation of prices, wages and working
However, this organization did not help to deal with the depression. Fascist government created large state-
supported enterprises, but they were more concerned with maintaining high employment than increasing
Germany was much more successful in dealing with the crisis. The unemployment in Germany went from 6
million to the point of having more jobs than workers to fill them. The result was achieved primarily by large-
scale public works program.
The Nazis established a compulsory membership in National Labor Front and abolished collective bargaining.
One of the principal objectives was to achieve self-sufficiency in the event of war. This was done through science
and research, development of new ersatz (synthetic commodities), etc.
Reichsbank received higher control of foreign exchange, and Germany negotiated new trade agreements, which
allowed them to avoid the use of gold for payments.
Spain was not involved in WWI, and benefited from it through increased wartime demand. Second Republic was
established in 1931 and in 1939 General Francisco Franco came to power, after a civil war. They tried to follow
the autarkic regime of Germany and Italy, but without the advance technology.


The Russian Revolutions and the Soviet Union
Since Russia was not performing as expected in the WWI, this caused dissatisfaction of people and strikes in
1917. The parliament decided to form a provisional government, and obtained the abdication of the tsar.
The Provisional Government
The provisional government was formed by aristocrats, intellectuals and parliamentarians. It had to share
governance with the Petrograd Soviet. They proclaimed freedom of speech, press, religion and announced social
Lenin and the October Revolution
V.I. Lenin quickly became a dominant figure in the Petrograd Soviet, and carried on a campaign against the
Provisional Government.
Lenin led a mob Red Guards, and overtook the government, forming Council of Peoples’ Commissars.
After nearly four years of war, a peace was established with Germany, but the government was still opposed by
the White armies, who went into war with Poland in 1920.
In order to stay in power, the Bolsheviks, now called Communists introduced War Communism. This included
nationalization of the economy, confiscation and distribution of land to peasants and a new legal system.
In the elections, the Social Revolutionaries won, but Lenin sent troops to dissolve them.
The government granted independence to Finland and several other countries, but resisted to grant it to the few

• 1921 – Treaty of Riga established peace with Poland
• 1922 – Lenin formed a Union of Socialist Soviet Republics
Economic policies
Since the government’s agricultural policy produced no result, this caused strikes of peasants. Lenin sent troops
to confiscate the harvest, but he soon realized that changes are necessary.
New Economic Policy (NEP)
Lenin called it a step backward, in order to go forward.
• allowed peasants to sell their surpluses at free market prices
• Small-scale industries were returned to private ownership
• Electrification
• Establishment of technical schools for engineers

Lenin died in 1924, and two main contenders were Trotsky and Stalin. Stalin was more favored by the Old
Bolsheviks and eventually succeeded in eliminating and assassinating Trotsky. His program was called Socialism
in one country and was based on fiver-year plans.
First five-year plan (Second Bolshevik revolution)
All the resources of the Soviet were used. State Planning Commission had the responsibility to formulate plans,
set output goals, etc. The planning mechanism replaced the market. Trade unions were used to preserve labor
discipline and to prevent strikes and sabotage.
Agriculture was one of the most difficult problems. Stalin insisted that peasants should be organized in state
farms. The estate owned all the land, livestock and equipment, and appointed professional manager. However,
peasants resisted collectivization, and burned crops as a sign of protest. Stain backed off for a time.
The government sometimes allowed peasants to form cooperative farms.
The objectives of this five-year plan were declared to be achieved, but, in fact, they were far from that.

Second five-year plan (1933)
Here the emphasis was on consumer goods. Despite the increases in industrial production, the country remained
primarily agrarian.
The Great Purge was a feature of the second five-year plan – thousands of workers were placed on trial for
alleged crimes. This had an effect on output.
Third five-year plan (1938)
This plan was interrupted by the German invasion, and the Soviet Union fell back on something like War
Economic Aspects of World War II
WWII was the most massive and destructive of all wars. The distinguishing features of the war were reliance on
science as a basis for military technology, use of propaganda at home and abroad.

Aerial warfare was a critical element in the WWII. Naval operations became very important. The production line
became as important as the firing line.

Cost of war have been estimated at more than 1 trillion dollars for direct military expenditure.

Human casualties are estimated to be 15 million in Europe. For Russia it is estimated that more than 15 million
died. China suffered 2 million deaths and Japan 1.5 million.

Another feature was property damage, which was much higher due to aerial bombardment.
Like in the WWI, Britain imposed a blockade, to which Germany retaliated with submarine warfare. Germany
also had access to resources from the occupied countries.

At the end of the war, industrial and agricultural output was half or less than before the war. Institutional
framework of the economy had also been severely damaged.


Ch. 15
Rebuilding the World Economy
Before the war, Europe had imported more than it exported, and paid the difference with earnings from foreign
investments. After the war, merchant marines were destroyed, and foreign investments liquidated. There was an
urgent need for relief.
Relief came through two channels:
1. United States aid – emergency rations and medical supplies.
2. United Nations Relief and Rehabitation Administration (UNRRA)

Overall, United states made available around 4 billion dollars to Europe, and another 3 billion to the rest of the
Planning for the Postwar Economy
One of the first tasks after the war was to restore law and public administration. Many governments formed
their governments in exile. There was a demand for reforms, which took form of nationalization of certain
sectors of economy like banking system, transportation and power production. They also extended to social
sector, including pension and retirement systems and social security.

• 1941 – Atlantic Charter was signed by Roosevelt and Churchill on a battleship in Atlantic. They agreed to
undertake restoration of multilateral world trading system.
• 1944 – Bretton Woods conference which established International Monetary Fund (IMF) and World
• 1947 - General Agreement on Tariffs and Trade (GATT) was set up in Geneva, where they agreed on
reducing tariffs and improving international trade.
• 1994 – GATT was replaced by World Trade Organization (WTO)
The Marshall Plan and Economic Miracles
By the end of 1947 most of the countries were at their prewar levels of production. Because of the Great
Depression, most of countries adopted exchange controls, which meant that their currencies were not
convertible into others, except with a license issued by the monetary authorities.
Dollar shortage
During the war, there were shortages of all kinds. These were solved by importing from overseas, especially in
North and South America. However, to buy these goods, dollars were required.
American relief grants helped ease this dollar shortage. Moreover, United States and Canada loaned 5 billion
dollars to Great Britain in 1945.
However, this plan was not sufficient for recovery. Another difficulty was the growing tensions of the cold war
between United States and USSR.

• 1947 – American general Marshall announced that if the nations of Europe present a unified request for
assistance, the United States would give a positive response.


French and British ministers met in Paris to discuss this proposal, while the Soviet Union minister refused to

• 1947 – Committee of European Economic Cooperation (CEEC) was formed.
• 1949 – Foreign Assistance Act was passed by the U.S. congress, forming the European Recovery Program
(ERP) to be administered under Economic Cooperation Administration (ECA)

However, there was no total unanimity in Europe, as Britain and Russia hopped to receive a more bilateral aid
from the United States.
CEEC converted to Organization for European Economic Cooperation (OEEC) which cooperated with ECA in the
recovery plans.
Overall, aid allowed European countries to purchase the needed commodities from the dollar zone.
• 1945 – United States, Great Britain and USSR met in Potsdam to determine the faith of Germany, but
they agreed only to prolong the military occupation.

Disagreements between Russia and Western Allies led to greater autonomy for Germans, granted by the
Western countries.
As a response, Russians gave similar concessions in their zones of occupation. The ultimate result was division of
Germany into two states:
1. Federal Republic of Germany – West Germany
2. German Democratic Republic – East Germany
Facilitation and monetary reforms
Western Allies reversed their policy of dismantling German industry for reparations, and turned to facilitation of
the German economy. First step was economic unification in 1946 (creation of Bizonia).

• 1948 - The Western powers carried out a reform of the German currency, creating a new deutschemark.
This resulted in an economic revival because previously hoarded goods came into open markets.
Soviet response
Since Soviets were not included in the monetary reforms, they responded by closing off all road and rail links
between their zones. The Western Allies responded with a large-scale airlift, supplying the West Berlin.

• 1949 – Federal Republic of Germany was formed, along with the German Democratic Republic. The
Berlin blockade was also set up.
European Payments Union (EPU)
This institution was formed by the Marshall plan, and it regulated payment and trade relations in Europe.
Since there was a shortage of foreign exchange, this institutions allowed for free multilateral trade within the
Precise accounts were kept, and, at the end of the month, countries with trade deficits were debited on the
central accounts and had to pay in gold or dollars; other countries, with trade surplus were credited on the
central accounts and received payments in gold or dollars.

This provided incentives for the OEEC countries to increase exports.

The result was the highest growth (8%) in history. The OEEC countries were able to restore full convertibility of
their currencies and multilateral trade by 1958.
• 1961 – OEEC converted to OECD, Organization of Economic Cooperation and Development.

The Era of High Growth (1950-1973)
The growth was the most rapid in countries with high supply of labor, as well as those with lower starting
incomes. The most remarkable growth happened in Germany, after the currency reform of 1948.
Factors of development
There are several factors that contributed to this high growth.
American aid
American aid was the crucial factor in the recovery. It allowed European countries to purchase needed
commodities and to increase savings and investment.
Technological modernization
Technological modernization was also an important factory, because it allowed Europe, who lagged behind
United States to become more competitive.
Role of Government
Another major factor was the growing role of governments. They participated much more than before. Main
activities were nationalization of some industries, creating economic plans and providing social services.
Nevertheless, the private sector was responsible for the largest part of economic development.
A distinctive feature of the Western countries became mixed or welfare states, whose characteristics were:
• Providing stability and conditions for growth
• Minimal protection for the economically weak
• It left the main task of goods production to private sector
• High degree of intergovernmental cooperation
Human capital
Human capital had an important role in the recover. High literacy and specialized educational institutions
provided skilled personnel and brainpower to make the technology work effectively.
However, labor strikes became more frequent, as workers demanded redistribution of wealth in their favor.
The Emergence of the Soviet Bloc
The Soviet Union suffered the greatest damage in the war, but its vast territory and population allowed it to
• 1946 – Fourth five-year plan was adopted, which emphasized heavy industry and armaments, with
particular attention on atomic energy

Stalin also performed several reforms, like replacing the Council of People’s Commissars with a Council of
Ministers, who supervised purges of personnel.
• 1953 – Stalin died and Soviet Union went through a two-year collective leadership
• 1955 – Government announced fifth five-year plan
• 1956 – Nikita Khrushchev denounced Stalin and the communist ideology which caused confusion both
inside and outside the Soviet Union. The government began a process of de-Stalinization
Heavy industry continued to increase in output, but it failed to overtake United States. It also lagged behind in
the production of consumer goods.


Agriculture was the most problematic sector. Collective farming did not provide incentives for the peasants,
who, instead, concentrated on small private plots of land, which they could use to sell products on the market.
Khrushchev tried several programs, but none of them provided significant results. As a result, the Soviet Union
began importing grain, for which it paid in gold.
Peace treaties and emergence of new countries
• 1947 – Peace treaties were signed with Romania, Hungary, Bulgaria and Finland
Czechoslovakia was liberated by Soviet troops and Eduard Benes, and held free elections in 1946. The new
coalition government wanted the country to become a bridge between USSR and the West.
Marshal Tito liberated the country and received a majority in the elections in 1945, which was followed by the
proclamation of the Federal People’s Republic. Tito refused to accept the dictation from the Soviet, and broke
with them in 1948.
Poland had two provisional governments formed, which eventually merged into Provisional Government of
National Unity, with a promise of free elections. In 1947 the communist assumed complete control. Poland, who
was granted a temporary administration of the area east of Oder-Niesse line, regarded this settlement as a
compensation for the concessions to the Soviet union and expelled millions of Germans who resided in the area.
Romania, Bulgaria , Hungary and Finland
Peace treaties with these countries included territorial changes, as well as reparations. All three countries had to
pay reparations.

Romania regained Transylvania from Hungary, but had to return Bessarabia and Bukovina to the Soviet Union
and Dobrudja to Bulgaria.

Hungary lost the most and did not gain anything.

Finland also had to pay reparations and lost some its territory to the Soviet Union, but it maintained its
Baltic countries
Treaties did not say anything about the disappearance of Latvia, Lithuania and Estonia. They were part of
Imperial Russia, then incorporated in the Soviet Union, occupied by Germany and reoccupied by the Red Army.
COMECON (1949)
Council for Mutual Economic Assistance (COMECON) was formed in 1949, to mold the economies of East Europe
into a stronger union. It was, instead, used by the Soviet Union to make its satellites more dependent on them.


The end of the Soviet Union
When Yugoslavia broke free of the Soviet influence, and with the death of Stalin, this caused strikes and riots in
other countries who wished to do the same.
Hungary (1956)
Hungary was the first to announce the withdrawal from the Warsaw pact, a Soviet military alliance, and asked for
United Nations to guarantee its neutrality.
The response of the Soviet Union was a military action, and, on the other side there was guerilla activities.
Czechoslovakia (1968)
Czechoslovakia also announced they are moving away from the communist influences, and instituted a program
for free markets and relaxation of press censorship. The Soviet Union tried to convince the Czech leaders to
return to the old values, but without success. The Soviet response was again military action.
China was briefly allied with the Soviet Union.
• 1949 – People’s Republic of China was proclaimed, under command of Mao Zedong

New government established one-party system, with high degree of centralized power. They allowed peasant
proprietorship and limited private ownership of the land, but, in 1953 encouraged collectivization of agriculture
and nationalization of industry.

Governments programs failed to reach set goals. One of the main objectives was to restructure the society and
• 1960 – USSR cut off all aid, because the Chinese refused to accept Soviet dictation. They were on a verge
of open warfare.
• 1966 - Mao Zedong lunched a great cultural revolution, characterized by terrorism and violence
• 1980s – after death of Mao the country increased western contacts, and allowed free markets
Mongolian People’s Republic
The country was primarily pastoral, with some exploitation of its mineral resources. It became a member of
COMECON in 1962.
Korea (1948)
Korea was under occupation of America and Soviet Union. Later on, under the regime of Kim Il-Sung it became
one of the most repressive societies in the world.
• 1950 – North Korea invaded South Korea, but were repelled.
Socialist Republic of Vietnam (1945)
Vietnam was established by Ho Chi Minh. They were primarily agrarian country, divided into a Communist North
Vietnam and anti-Communist South Vietnam.
• 1954 – The French tried to reinstate themselves, but were defeated.
• 1960 – South was defeated in civil war
Republic of Cuba
Republic of Cuba was the only country allied with the Soviet Union in the western hemisphere, under the regime
of Fidel Castro. They were cut off from its traditional markets, and received goods from the Soviet. They became
a member of COMECON in 1972.


The Economics of Decolonization
In the immediate postwar years, imperial powers temporarily regained control of their former colonies, but soon
witnessed opposition and a rise for independence. The United States had an ambivalent position, which led to
abandonment of imperial controls.
• 1946 – The Philippines became a Republic
• 1947 – Great Britain granted independence to Indian subcontinent and new nations emerged: India and
Pakistan, which was divided in East and West, but, later, East Pakistan was renamed to Bangladesh.
• 1948 – Ceylon was also granted independence and was later renamed to Sri Lanka.
• 1948 – Burma (Myanmar) gained independence from the British.
• 1949 – Indonesia gained independence from the Dutch
• 1954 – Laos, Cambodia and North Vietnam gained independence from the French
• 1963 – Federation of Malaysia was formed
• 1965 – Singapore stepped out of the Federation and became independent

Most of those countries had common characteristics:
• Climate
• They were predominantly rural and agrarian
• Low literacy rates
• High rates of population growth
• Most endured some periods of dictatorship

An exception to these characteristics is Singapore, which had high literacy rates and, thanks to its position,
developed trade and financial services sectors.
Libya gained independence in 1949 and became a constitutional monarchy. It was a relatively backward country
with a lack of resources. In 1969 a military junta overthrew the king and set up Arab republic.
Egypt was a British protectorate until 1922. In 1952 a military junta overthrew British government and set up a
military dictatorship. Soon afterwards, they took over the Suez canal and nationalized it.
Egyptians wanted to maintain control of Sudan, but Sudanese republic was proclaimed in 1956. It was a poor
country, ruled by military regimes.
North Africa (Tunisia, Morocco and Algeria)
The French granted independence to Tunisia and Morocco but not to Algeria. The people responded with
guerilla war and the French responded with a terrorism of their own. French leader Charles de Gaulle was keen
on keeping Algeria, but after years of war, he agreed to grant it independence in 1962.
Most of these countries were agrarian, except for Algeria, which had deposits of oil and natural gas.


Black peoples’ countries
British soon realized that it would be better to prepare the colonies for self-government, than to continue with
imperial control. They established schools and universities.
• 1957 – Ghana gained independence
• 1960 – Nigeria gained independence
• 1965 – All countries except Southern Rhodesia were granted independence.
• 1979 – Southern Rhodesia became Zimbabwe
With the independence of French colonies, pressures for independence were higher in Belgian Congo. The
Belgians granted it independence in 1960, but, since many of them expected much higher standards of living,
their disappointment created riots. The situation stabilized in 1965 and the country was renamed to Republic of
Portugal colonies
Portugal was one of the last to grant independence to its colonies, Angola and Mozambique in 1974.
Conditions of new countries
Overall, new countries were very poor and mostly run by dictatorships and one-party governments. There was
also a high degree of inefficiency and corruption.
The Travails of the Third World
Countries of Latin America were important participants in the international division of labor. There was a
misguided assumption that they were second-class citizens of the world, because of their specialization in
primary products, which led to programs of import substitution industrialization. This policy proved
counterproductive in some of the countries, compared to export policy.

Almost all of Latin American programs failed for several reasons:
1. Domestic market was too small
2. Lack of international cooperation in the region
3. Lack of human capital
4. Savings rates were low

These countries called themselves the Third World, neither communist neither capitalist.


The Origins of the European Union
The idea of European union is not so new, it can be seen in attempts of Napoleon and Hitler. However, all of
these efforts failed,, because there was no voluntary agreement. The idea of nationalism was spread by the
French revolution, which rejected any kind of infringement on sovereignty.
International organizations depend on voluntary cooperation of their members and have no direct powers of
Supranational organizations require their members to surrender at least a part of their sovereignty.

Motives for supranational organization in Europe were both political and economic:
1. The threat of war in Europe would be permanently eradicated
2. Larger markets would lead to higher productivity and standard of living
Benelux Customs Union (1947)
Benelux Customs Union provided for free movement of goods within Belgium, the Netherlands and Luxembourg
and for a common external tariff.
European Coal and Steel Community (1951)
Originally proposed by French minister Schuman, it proposed integration of French and German coal and steel
industries. Soon Great Britain joined, and the treaty provided for elimination of tariffs and common external
Several bodies were established to supervise its operations:
• High Authority – executive powers
• Council of Ministers – safeguard the interest of members states
• Common Assembly – advisory authority
• Court of Justice – settling disputes
European Defense Community (1954)
This community proposed integration of defense in Europe, but, since this is an important part of sovereignty of
states, it was rejected.
European Atomic Energy Community (EURATOM, 1957)
This Community was established in Rome for the development of peaceful uses of atomic energy.
European Economic Community (Common Market, 1957)
The EEC was also established in Rome, and provided for gradual eliminations of tariffs and trade restrictions, as
well as common external tariff within fifteen years. Important feature of the treaty as that it could not be
unilaterally denounced.

Soon afterwards, high commissions of the three communities merged, and tariffs between member states were
completely eliminated.
European Free Trade Association (EFTA)
Since Britain was unwilling to join the Common Market, EFTA was formed to provide for elimination of tariffs on
industrial products, but with no common external tariff.
Later, Britain signified its willingness to enter the Common Market, but was vetoed by France in 1963 and 1967.

European Parliament
After the merger of the Common Assemblies, they became the European Parliament. At first, member states
were elected from national parliaments and had consultative powers.
Soon after, Parliament was give limited control over the budget and members were elected directly by the
Disruptions in the European Community
Development of the European Community was disrupted with several world events.
• 1971 – Bretton Woods system of fixed exchange rates ended
• 1973 – first oil shock disrupted economic plans and each nation pursued separate strategies
Relation with former colonies
• 1963 – Yaounde convention was signed, offering cooperation to eighteen countries of black Africa
• 1975 – Lome convention with 46 countries of Africa, granting them free access to the community for all
their products. Later on, several trade agreements were signed with other countries.


Ch. 16
The World Economy at the Beginning of the 21
The collapse of the Soviet Union in 1991 meant the failure of communist system of central planning and self-
sufficient economies.
It is clear that the recovery of the Western countries after the WWII has set an example for other countries.
Japan was the first country to follow the example of the western countries and to achieve very high levels of
growth. From 1940s to 1970s it had high levels of growth, becoming the second largest economy in the world.
There are several factors of Japanese success:
1. Technological catch-up – Japanese were isolated and could borrow many technological innovations at a
minimal cost
2. Human capital – Japan had highly educated population, which enabled it to take advantage of superior
technology and to become a leader in introducing new technologies
3. High levels of savings and Japanese management
4. Export-led growth – Japan maintained the largest export surpluses
5. Collectivist mentality – practices like lifetime employment
South Korea, Taiwan, Thailand, Malaysia and Indonesia
All these countries shared several factors of the Japanese.
1. High savings rate
2. Well educated population
3. Stable government
4. Export-led growth
5. Elastic supply of labor (baby boom)
Latin America
Countries of Latin America found it difficult to replace import substitution with export-led industrialization. They
had trade deficits, which they financed by international credits.
Mexico adopted a policy of encouraging foreign investments and expanding exports. They had a peso crisis in
Argentina stopped high inflation by pegging its currency with dollar. This process proved to be successful, and
followed by many other countries.
Countries of Africa remained a dark cloud on the horizon. They all emerged from the imperialism period with low
levels of resources, of human capital, unstable one-party governments and frequent civil wars.
Another factor that was halting progress was extreme ethnic and language diversity of the African continent.

Republic of South Africa
This country was dominated by white minority of Boer descent, while the black majority gained political equality
in 1990s.
Middle East and Oil Shocks
• 1960 - Iran, Iraq, Saudi Arabia, Kuwait, Libya and Venezuela formed OPEC.
• 1973 - OPEC declared an increase in the price of petroleum, which they repeated several times later. The
effects on the economies of developing countries were large deficits in their balance of payments, and
for the industrial nations stagflation – stagnation of output and employment with inflation.
• 1985 – U.S. dollar was reducedin value.
• 1986 - price of oil dropped dramatically and dollar was weaker, but inflation was brought under control.
Unemployment, however, was still high.
• 2000 – prices of oil tripled, but the effects were not as dramatic, due to increased availability of
alternative energy sources
The Collapse of the Soviet Bloc
In the end of 1980s there was a series of events which brought an end to the Soviet domination in Europe.
Reasons for rebellion in countries under Soviet control were the fact that this regime was imposed against their
will, and there was a clear deterioration in the standard of living. People have shown their displeasure on several
occasions, but they were stopped by the Soviet armed forces.
In 1980 Polish workers formed a labor federation – Solidarity. At first they were tolerated but in 1981 the
government imprisoned its members. Solidarity managed to organize free elections in 1989. This began a process
of reforms, with the finance strategy – shock therapy, which meant deflationary measures with the
liberalization of prices and removal of trade barriers.
However, foreign investors were discouraged by instability and unwillingness of the Polish to cede the managerial
control to foreign companies, which stopped high investments.
In the end, Poland did manage to become the first transition economy to recover, although with high debts.
Hungary constitutred a New Economic Mechanism which was the beginning of free market system.They also
developed closer relations to the western countries. They introduced liberalization which encouraged foreign
investors, so Hungary soon garnered froreign investments. However, due to low exports and failure of privatized
state enterprise, Hungary did not achieve a satisfying growth.
Czechoslovakia had protests with violent repression, but later managed to reach an agreement. In 1992 the
Slovak National Council declared sovereignty, and the Czech Republic agreed to separation.
It had no foreign debt, and began liberalization of prices in order to encourage private investors.
Czech Republic devised a scheme for privatization via vouchers, which enabled everyone to by shares in
investment funds. This scheme proved to be a failure.
• 1989 – destruction of the Berlin wall
• 1990 – economic and monetary union and soon afterwards, creation of German Federal Republic

Conversion of East German currency into the West German currency, which meant that East German people
were 6-12 times better off, while the West German people, who were usually the owners of industries were
worse off. This, along with raised tax, led to an increase in unemployment rates in West Germany.
East Europe countries
Other European countries tried to follow the example of the western Europe.
Blgaria obtained a new reform regime in 1990, but had a devastated agriculture, due to previous collectivization.
They adopted a currency boardin 1999 to end inflation.
Following a deposition of its dictator, Ceausescu, Romania started slow pace reforms.
Albania was freed from the Soviet in 1991, but experience several difficulties in it s economic reforms, like Ponzi
The Evolution of the European Union
• 1979 – European Monetary System (EMS) was established, along with the Exchange Rate Mechanism
(ERM), but the coordination of monetary policy was still not complete
• 1986 – Single European Act (SEA) – was signed, requiring the Community to adopt more than 300
measures to remove all kinds of barriers and to complete the internal market
• 1986 – France and Great Britain allowed a railway tunnel, under the English Channel. It was to be
financed entirely by private capital and was completed in 1994.
• 1991 – Maastricht Treaty was signed, changed the name to European Union, increased the power of the
European Parliament, called for joint actions in foreign and defense policy and introduced the principle
of subsidiarity, under which policy-making power would devolve to the lowest possible level of
• 1993 – European Economic Area (EEA) was formed, by merger of European Community with the most
members of EFTA. At the same time, another free trade area was establishes – NAFTA (United States,
Canada and Mexico)
• 1994 – European Monetary Institute was created.
• 1999 – Central Bank was created from the European Monetary Institute.
Limits to Growth
There are several limits to growth on this planet that will be reached within the next 100 years. These can be
formulated into five major trends of global concern:
1. Accelerating industrialization
2. Rapid population growth
3. Widespread malnutrition
4. Depletion of nonrenewable resources
5. Deteriorating environment

These concerns can be compared to the ones stated by T.R.Malthus, when he introduced the notion of a trap in
which resources will be insufficient to feed the population.
However, some of these concerns are not confirmed.
The population growth, for example can be said to be decelerating, and some experts believe that, when poor
countries reach higher level of affluence, their population growth will also decrease.