UNIT 7: THE WORLD ECONOMY IN THE INTERWAR PERIOD

Index
1. The economic consequences of ww1
a) Introduction
b) Economic consequences of the war
c) The Reparations
d) The German Hyperinflation
2. The Crash of 1929 and the Great Depression
a) The scope
b) The crash of the NY stock market
c) How did the crush turn into a great depression?
d) Why was the depression so severe?
e) How did the depression become global?
f) What did governments do?

7.1 THE ECONOMIC CONSEQUENCES OF WWI

a) Introduction
The war broke out because the revival of imperialism increased tensions between the main European
powers
The Triple Entente (Great Britain, France, Russia) vs the Triple Alliance (Germany, Austria-Hungary, Italy)

At the same time, globalization had increased inequality among societies, what meant:

- At an international level, competition for the control of world resources and markets (→ imperialism)
- At national levels, increasing riots organized by trade unions, and nationalistic and
revolutionary groups.

Immediate trigger of the war => assassination of the Archduke Franz Ferdinand of Austria by a Serbian
nationalist (06/28/1914). => declaration of war in Serbia by Austria-Hungary

The alliances formed in the previous decades were then invoked:

- The Allies: France, GB, Russia, Italy and many others (Canada, Serbia...)
- USA entered into war in 1917, when Imperial Russia left bc of → Russian Revolution.
- The Central Powers: Germany, Austro-Hungarian and Ottoman empires. 


b) Economic consequences
1. CONSEQUENCES ON THE GDP
Real GDP: the real value of goods without inflation
• There is a great decline in the GDP of Germany, Austria, France
• USA’s and the UK’s GDP grew.
=> the war took place in American and British territories, therefore their production wasn’t affected (factory,
transportation, machinery…)

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2. CONSEQUENCES ON TRADE
• World trade collapsed, the flow of goods stopped.
• International relations between countries were tense (confrontations and rivalries), this led to protectionism
(rising taxes) during the interwar period 1926-1929
• While Western Europe’s exports dropped almost a 3% between 1926 an 1929, USA’s only dropped a 2%.
USA was the main exporter of goods necessary to fight in the war.

3. CONSEQUENCES ON PRICES
• Inflation 1914-1920
• Countries financed the war by printing money, which brought a complex problem because countries
wanted to go back to the gold standard (gold dropped and money supply increased)
• How to fight against inflation?
- Increasing interest rates
- Implementing contractionary monetary policies
- Central banks can reduce money supply
• Germany had a special problem with inflation because of the reparations

4. THE INTER-ALLIED WAR DEBT

The USA didn't have debt after the war, but the allied powers owed them 12 million dollars, a sum of money
that they couldn’t afford to pay

c) The reparations
• The Peace of Paris intensified the problems
- Exacerbated economic nationalism
- Exacerbated monetary and financial problems
• 1919 Treaty of Versailles
- The allied powers said that Germany had to pay for the economic consequences of the war.
- USA didn’t initially agree, but ended up accepting bc it was the only way the Allies could repay their
debts
• The reparations weren’t affordable: they were more than twice greater than the German national income

d) The German Hyperinflation

• In 1922 Germany announced the cease of payments => France and Belgium occupied the Ruhr.
• Germany acted with passive resistance
- So that the people wouldn’t work for the enemy, the German government printed more money => The
German mark became completely worthless, it devaluated.

• Prices rose alarmingly: they multiplied a million times

- Living standards worsened
- Increased support to extremist political
movements
- Value of German gold mark fell sharply

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HOW WAS IT SOLVED?
1- November 1923: creation of a new currency “rentenmark”
2- August 1924: DAWES PLAN
• Launched by the USA
• Scaling down of annual reparations payments
• Reorganization of the German Reichbank (central bank)
• Loan of 800million marks to allow Germany to restart reparations payment and return to the gold standard
• It was a private loan, plus it was long after the end of the war

7.2 THE CRASH OF 1929 AND THE GREAT DEPRESSION (1929-1933)

• There was a huge contraction on income and production
• Prices dropped —> the Great Depression was a deflationary crisis
=> Consumption decreased because of the drop on incomes, company sales decreased and they cut back on
production, going bankrupt, more unemployment, less consumption…
• More affected nations: USA, weakest European economies (Germany) and Latino America
• Less affected: countries lees connected to international markets —> USSR, Spain

a) The scope

b) The crash of the New York stock market

• In October 1929 the stock market collapsed
- Black Thursday 24 October 1929
- Black Tuesday 29 October 1929
• There was an out of control sell during years => speculative bubble
Speculation: opportunity to get a profit by playing with the difference between the purchasing and selling
prices

c) How did the crush turn into a great depression?

The crash caused:
a. A dramatic decline of consumption levels
- Families decided to increase their savings because of the uncertainty of the crisis. production, prices
and employment dropped.
b. The collapse of banking
- The crush of the stoke market => panic arose => massive bank runs
- People go massively to get their money back because they didn’t trust their banks anymore // Banks
couldn’t respond to these demands as they didn’t have enough liquidity. They collapsed, went bankrupt

d) How was the depression so great?

a. Real variables are critically affected when the economy is entering the real downturn:
1) Outcome
2) Unemployment
3) Consumption
4) Investment

b. Misguided monetary policy implemented by the Fed

- Increased interest rate: as the interests increased, people reacted by cutting back on asking for loans.
Investment collapsed, therefore leading to a drop in industrial production and output growth.

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 - Increase interest rate => reduction of monetary supply => deflation => unemployment & less
production

e) How did the depression become global?

• Because of the predominant role of the US in the world
• Economies were interrelated because of the gold standard
=> 2 main vehicles
- international trade: US reduced its purchases from other countries → European and other countries’
exports fell → those countries reacted reducing their imports and increasing protectionism → contraction of
international trade
- international investment: US funds were invested in Europe

f) What did governments do?

- no international agreement: slow recovery
- LONG TERM
- increasing role of governments in the economy, supervised financial markets
- change in political economy towards the Keynesian ideology
- SHORT TERM
- Countries abandoned the gold standard

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CLASS ACTIVITY

American banks financed families to buy stocks (90%), they just had to pay a 10%
If people didn’t repay the credits, their stocks would be taken away
Stocks represented the loan

The Great Depression’s origin was in the financial market

- people had an expectation of the non-stop rise on the market
- Banks and brokers financed the stocks
Comparison between the Great Depression and the Great Recession

Great depression lasted 43 months (august 1929 - march 1933)

Great Recession lasted 18 months (December 2007 - June 2009)

Capital spending slowed dramatically in many sectors of the economy, leading to a drop in industrial
production, due to the lack of investment

QUESTIONS OF THE VIDEO

1. Differences among the French, American and British approaches to the problem of Germany in the Paris
peace conference jan 1919
Clemenceau wanted revenge and reparations for the damage caused. Didn’t want the germans to go off
lightly. Wanted to damage wealth and armed forces
Wilson — lasting peace, not punishment. 14 points. New world order, protect all countries from aggression.
Not revenge but neither going off freely. They didn’t want to be involved in European affairs.
Churchill wanted to stop the spread of communism

2. Main terms of versailles treaty

Lost land in east west and north. Loraine, given right of coal
Forbidden army — station soldiers int eh Rhineland
Army reduced no airfare or submarines
Blame for the war and pay reparations

3. Was the peace treaty with Germany related to the problem of inflation?
Germany punished to pay a huge burden in the form of reparations (which weren't affordable). Germany
stopped paying in 1922, France and Belgium occupied the Ruhr, a rich region in Germany (mines located in
there). In 1923 the value of the market dropped. More amount of money needed to buy goods. More money
printed. Lost value and it cost more to pay wages to buy foods. The money was worthless.
The reparations had to be paid in the form of Gold or goods, as the allies know the money didn’t have as
much value. As the German people refused to cooperate with the French, the government compensated them
with higher wages.

4. How was the problem of hyperinflation solved?

Stresemann appointed chancellor in a time of crisis. The inflation got worse. Helped by cooling off resistance
and getting production going again. Germany would assume the payment of reparation. The worthless money
was replaced by a new currency. Scale down the reparation so Germany could afford to pay back (Dawes
plan).
Ww1 was different because it was a total war, with the objective of a full mobilization of resources

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