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Major changes in economic structure after WW1 

1. in the composition of production
2. in the operation of labor markets
3. in the international monetary system
4. in the pattern of international settlements 

first 2 mainly limited to US


Composition of production changes 

Consumer durables

  • rise of ‘new industries’ and consumer durables purchased on credit since it was costly => magnify cyclical instabilities
  • demand of consumer durables notoriously sensitive to cyclical conditions 
  • boom in production of foodstuffs outside Europe and other kinds of raw materials
  • crisis of overproduction => reason for deflation of prices
    • e.g. farmers found themselves saddled with low output prices and heavy mortgage debt after increased interest rates in 1920 (east Europe)
  • increased production and consumption (owing to credit) heightened sensitivity to cyclical fluctuations (US) 
  • Before the industrial revolution, crises were generally related to the lack of supply due to contingent reasons, such as the weather effecting crop yields, and structural reasons, such as the Malthusian trap.
  • After the industrial revolution, these problems of mere subsistence become easy to overcome but a new problem of overproduction surfaces


Operation of labor markets

  • high unemployment = characteristic of 20s
  • unionization and collective bargaining which restricted downward flexibility of wages 
    • unionization reached unprecedented level
    • employers forced to raise wage to ward off threat to org
  • (in US) rise of personnel departments and internal labor markets dominated by large enterprises 
    • workers and firms agreed to implicit contracts covering sequence of wage bargains => reduced cyclical sensitivity of wages
    • Herbert Hoover pressed employers to forswear wage cuts for stable labour income to sustain demand
    • Firms however responded with laying off costly workers and limiting work hours
  • (alleged) distortion produced by unemployment benefits 
    • excessive generous insurance benefits 
    • unclear whether insurance schemes should have reduced cyclicial sensitivity of wages 

=> low labour flexibility and adaptability of labour markets


International monetary system

Gold Exchange Standard 

  • Britain's return to gold in 1925 and France's de facto stabilisation in 1926 => re-establishment of intl' gold standard
  • Factors limited gold standard system's to accomodate BOP and increased vulnerability:
  1. loss of confidence in sterling and dollar => liquidation/rise of foreign exchange reserves => applied BOP pressure to UK and US (principal reserve currency countries)
    • US lost reserves following devaluation of sterling => Fed's free gold fell => decline in money supply
    • Flandin gov policies budget deficit financed by short term debt was discounted by Bank of France
    • Laval gov then resumed predecessor's policy of deficit spending financed by central bank discounts of Treasury of bills => another crisis of franc
  2. weak credibility: violations of the ‘rules of the game’ (sterilization)
    • policymakers prevented domestic credit from rising and falling with international reserves 
  3. limited international cooperation 
    • domestic political constraints - US and France (surplus countries) raised interest rates and restricted domestic credit to obtain gold reserves
    • intl' political disputes - war debts and reparations
    • incompatible conceptual framework stemmed from pursuing national interests => no common ground for understanding
      • France: pre-1927 experience shaped mindset that expansionary policies were associated with inflation, finanical and political chaos 
      • Britain: slump attributed to inadequate provision of money and credit under depressed business conditions
      • If central bank intervenes when prices are falling to more realistic level, this might threaten another round of speculation
  4. A Wall Street slump grew to huge dimensions and was followed by Great Britain's decision to go off gold and, an other two years later, by a similar move on the part of the United States.

  5. The gold standard was at least temporarily put out of action by its Anglo-Saxon creators; under the guise of default, foreign debts were repudiated; capital markets and world trade dwindled away.

  • => The political and the economic system of the planet disintegrated conjointly. 


Pattern of international settlements

  • deterioration of European balance of trade
    • reason why England decided to return to gold standard at an overvalued exch. rate
    • Europe merchandise exports to Latin America curtailed in 1914 
  • US net creditor and recipient of positive interest transfers
    • marketing and distribution networks
    • war debts and reparations
  • reinvestment of US surpluses in the periphery (Germany) 
    • in principle, temporary deterioration => finance deficit if not adjust (decline in wages and cut in domestic spending)
    • reparations, however, were long lived => too much financing and too little adjusting => should have recognised G unable to sustain rising burden of debts
    • G consumed significantly less than it produced and US = reckless lender

=> new BOP disequilibria


Causes of Depression

  1. monetary contraction in major industrial economies, US in particular, which spread influence to rest of the world
  2. autonomous fall in consumption and inv expenditure
  3. prior depression in agriculture
  4. extreme dependence of 3rd world countries on unstable mkt for primary products 
  5. shortage and misallocation of world's stock of gold 


Monetary contraction - from boom to bust (causes)

  • monetary tightening in the US (+ stabilization of franc from capital inflows for re-construction) => domino effects in other countries since it was the creditor. Brought US foreign lending to a halt and siphoned off gold and fin. capital from the rest of the world
  • repatriation of US foreign investments
  • credit crunch in borrowing countries as CB raise discount rates to restrict provision of domestic credit to defend gold parities 
  • countries' dependence on financing debt rather than adjusting
  • decrease of commodity prices
  • contraction of US exports due to contractionary policy abroad 
  • stock market collapse > increased uncertainty as it signalled decline in income and employment, households deferred their purchases of expensitve items > maginify cyclical sensitivity to durables
  • worldwide deflation > further monetary squeeze
    • low nominal interest rates concealed high real rates that served to depress investment and consumption
    • linked by fixed exchange rates of gold standard (mainly started with US)
    • US accounted for 1/3 demand for primary products => domino effects through initial deflation
    • fall in prices accompanied by fall in output (money wages failed to keep up with falling prices)
  • bankruptcies and layoffs > fall in aggregate demand 


The Great Contraction (1929-1933)

  • October 24th, 1929: Black Thursday - wave of panic selling on stock exch caused stock prices to plummet, followed by October 29th (Black Tuesday) => forced investors to sell for whatever prices and ceased to make new investments + withdrawal of capital from Europe
  • clear struggle for liquidity - immediate cause of financial panic
  • catastrophic fall in the money value not only of commodities but of every kind of asset => no longer have a realisable value equal to the amount of the debt 
  • If each individual who succeeds in getting more liquid, (s)he forces down the price of assets in the process of getting liquid, with the result that the margins of other individuals are impaired and their courage undermined. And so the process continues 
  • => competitive struggle for liquidity has now extended beyond individuals and institutions to nations and governments 

  • Note: stock market crash did not cause depression as that had already begun in both US and Europe; more or less a clear signal  


Young Plan (1931)

  • a program for settling Germany's World War I reparations written in August 1929 and formally adopted in 1930.
  • following May 1931, Creditansalt of Vienna (largest and most important banks in central Europe) suspended payments => although froze bank assets and withdrawal of funds, panic spread to neighbouring countries where large scale withdrawal of funds took place => several bank failures 
  • replaced the Dawes Loan as method of settling reparations, Germany was obliged to make further payments 
  • reduced further payments by about 20 percent.
  • divided the annual payment into two components:
    1. one unconditional part, equal to one third of the sum
    2.  a postponable part, equal to the remaining two-thirds, which would incur interest and be financed by a consortium of American investment banks coordinated by J.P. Morgan & Co.


Further causes that deteriorate the economy

- tariffs
- import quotas
- subsidies to production and exports

- state monopoly of trade
- bilateralization of trade
- price controls
- competitive devaluations 

It was based on the belief that coordinated reflation achieved through

  1. currency depreciation
  2. trade restrictions
  • would disengage from international system; insulate BOP from effects of expansionary initiatives 
  • However, by allowing currency to depreciate, countries enhance competitiveness of exports => export of countries that abandoned gold standard recovered more quickly than those that clung to it 
  • They also provided more scope for unilateral pursuit of expansionary policies (expand money supp without worrying about BOP) => removed pressure on cutting expenditures and raise taxes in order to defend exch. rate


Principal characteristic of econ. policy decisions (1930-31)

  • suspend gold standard due to hit by decline in prices of primary products
  • impose tariffs and quota by national gov without international agreement 


Self-sufficiency vs. global trade 


  • 1930: Smoot-Hawley Tariff Bill adopted in the US 
  • => retaliations throughout Continental Europe, America, Oceania 
    • increased difficulties faced by debtor nations to finance debt through exports
    • => intensified balance of payments for debtor countries due to increasing default
  • => Decline of global trade [January 1929– March 1933 ($mio)]
  • Initial argument: by obstructing exports, trade warfare destroyed remaining sources of autonomous demand
  • Opposition: expenditure switching effects of tariffs; switches demand from imports towards domestic goods => upward pressure on prices exacerbated the scarcity of real money balances as exports experienced little growth (consequences of neomercantillism) => aggravated peace treaties => int' economic disintegration => heart of problem: reparations but it was further intensified by protectionist policies 



Methods taken to overcome crisis

  • Fiscal expansion
    • public works and subsidies (welfare)
    • rearmament (warfare)
  • Monetary expansion – lower interest rates
    • higher money supply
  • Global financial expansion
    • abandonment of gold standard
    • increase of international capital movements 
  • Note: LOLR only encouraged liquidation of deposits and capital flights => suspending gold convertibility was precondition for effective intervention


World Monetary Conference (Geneva, 1933)

  • last major effort to secure int' cooperation
  • agreements to restore gold standard, reduce tariff and import quotas
  • The Europeans believed that "the settlement should relieve the world" of the crushing debt burdens. However, most of these debts were owed to the US, which was reluctant to write them off
  • Roosevelt: wanted to prioritise domestic prosperity => could not enter international commitments that would interfere (denounced currency stabilisation) => no meaningful action => int cooperation failed


Counter measures adopted in the USA 

  • As a result of overproduction (composition of production changes), the crisis of the interwar period caused poverty in the midst of plenty: people in the most advanced industrial nations found themselves in poverty.
  • The 1930s are also characterized by an increase in state intervention in the economy.
    • e.g. eight day bank holiday issued by Roosevelt to allow banking system time to re-organise
  • After the stock market crash, the mackmillan committee is assembled who proposed government intervention:
    • financial regulation (Federal Deposit Insurance Corp.; Glass-Steagall Act: distinction between commercial banks and investment banks)
    • National Recovery Administration
    • public works (Civilian Conservation Corps, Tennessee Valley Authority)
    • subsidies (Agricultural Adjustment Administration, Federal Emergency Relief Administration)
    • protectionism
    • devaluation (1933) 
  • => shown through migration policy, trade policy, monetary and unwillingness towards int' cooperation


The New Deal

  • between 1933 and 1939
  •  administration of U.S. President Franklin D. Roosevelt took action to bring about immediate economic relief as well as reforms in industry, agriculture, finance, waterpower, labour, and housing, vastly increasing the scope of the federal government’s activitie
  • Opposed to the traditional American political philosophy of laissez-faire, the New Deal generally embraced the concept of a government-regulated economy aimed at achieving a balance between conflicting economic interests.
  • Consisted of:
    • The Agricultural Adjustment Administration (AAA) brought relief to farmers by paying them to curtail production, reducing surpluses, and raising prices for agricultural products.
    • The Public Works Administration (PWA) reduced unemployment by hiring the unemployed to build new public buildings, roads, bridges, and subways.
    • The Civilian Conservation Corps (CCC) employed hundreds of thousands of young men in reforestation and flood-control work.
    • The National Recovery Administration (NRA) established codes to eliminate unfair practices, establish minimum wages and maximum hours, and guarantee the right of collective bargaining.
    • The Tennessee Valley Authority (TVA) brought cheap electricity to people in seven states.
    • The Home Owners’ Refinancing Act provided mortgage relief to the unemployed.
    • The Securities Act of 1933 provided government oversight of stock trading.
    • The Federal Deposit Insurance Corporation (FDIC) protected depositors’ bank accounts.
    • Later programs included the Social Security Act, the Works Progress Administration (WPA), and the National Labor Relations Act.


National Recovery Administration (NRA)

  • supervise the preparation of "codes of fair competition" for each industry
  • turned out to be like trade association movement that Hoover promoted in the 1920s
  • more like wartime economic administration
  • striking similarities to fascist system of industrial org in Italy - private economic planning:
    • protect public interest
    • guarantee right of labor to organise and bargain collectively


Tripartite Monetary Agreement (1936)

gov of France, Britain and US undertook agreement to stabilise the exchange rates among their respective currencies to avoid competitive devaluations and to contribute to restoration of international economy 


Soviet Russia during Great Depression

  • The Russian Revolution brings in its wake a series of nationalization where the state becomes the owner.
  • Under Lenin in the first years of the Soviet Union, there still exists certain amount of private property and some degree of freedom.
    • Nationalizations and repudiation of public debt
    • NEP (new economic policy): private ownership and enterprise where agriculture was strengthened
  • However, with the succession of Stalin to Lenin, there is dramatic reversal.
    • The kulaks are liquidated as a social class entirely and the Soviet Union heavily moves towards industrialization.
    • Five year plans were response to this intention using centralized planning to produce a forced industrialization; emphasis supposed to be on consumer goods yet continued to devote to capital goods and military equipment 
      • 1st (1929): output skyrocketed but most industries failed to make quotas since target set unrealistically high; high human cost
      • 2nd (1933 - inauguration, 1936-37 - in effect): the Great Purge where thousand of individuals (workers and military leaders) were placed on trial for alleged crimes ranging from sabotage to espionage and treason => effect on output
      • 3rd (1938): 4 years interrupted by German invasion in 1941
    • The purpose of these actions is for Soviet Russia to compete with the west.


Nazi Germany during Great Depression

  • 1923: occupation of the Ruhr and hyperinflation
    • When Germany fails its reparation efforts, France occupies the Ruhr - one of the wealthiest and most industrial parts of Germany
    • Hyperinflation is the result of these as the Germans begin to print money to maintain public expenditure
  • 1923-29: “golden twenties”
    • Government efforts through a new monetary system resolves this issue which ushers into the “golden twenties
  • 1930: electoral success of Nazis
  • 1931: banking crisis
    • the price and employment situation gets worse with banking crisis of 1931 reducing the credit power of the German economy.
    • resorted to exchange controls to prevent capital flight
    • negotiated trade agreements with Balkans for raw materials => avoid use of gold or scarce foreign currencies 
  • 1933: Hitler nominated chancellor
    • only alleviates of the rise to power of Hitler due to his expansionary monetary and fiscal policy and government intervention in many areas and war economy. 
  • 1936: Olympic games in Berlin and war economy
  • 1938: Anschluss 
  • 1939: more jobs than workers to fill them; developed modern highway system and expanded its industries => advantage in WWII

strong emphasis on self-sufficiency after WWI since they wished to be immune to such difficulties => directed scientists to develop commodities, consume goods and military supplies from raw materials 


Fascist Italy during Great Depression

  • 1922: March on Rome
  • 1927: revaluation (“quota novanta”)
  • 1928: “battle for grain”
  • 1933: IRI (Istituto per la Ricostruzione Industriale)
  • 1935: autarchy and war economy 

Mussolini brought forth the corporate state = most publicised and unsuccessful innovations of his regime

  • permitted private ownership of property
  • interests of both owners and workers were subordinated to higher interests of society as a whole
  • => antithesis of both capitalism and socialism 
  • => corporations only act in their own interests (profitability) 

The fascists were brought to power mainly due to social unrest, catering to the interests of the industrialists. In this era, Italy returns to the gold standard with and even stronger currency (Lira), increasing Italy’s purchasing power abroad, but proving detrimental to the national economy. Fascist Italy embraces autarchy and war economy. 


Distinctive features of fascism

• Single party
• Cult of the leader
• Propaganda
• Secret police
• Armed forces
• Centrally planned economy 


End of laissez faire

  • Russia turned to socialism under dictatorial forms.
  • Liberal capitalism disappeared in the countries preparing for war like Germany, Japan, and Italy, and, to a lesser extent, also in the United States and Great Britain.
  • But the emerging regimes of fascism, socialism, and the New Deal were similar only in discarding laissez-faire principles. 
  • quoted Karl Polanyi


Karl Polanyi and self-regulating market and gov intevention


  • He holds that the outbreak of the crisis and the great depression were not a coincidence or a mere accident.
  • The immediate causes may be difficult to detect. This is a clear failure at an attempt to return to prewar conditions.
  • "It disintegrated as the result of an entirely different set of causes: the measures which society adopted in order not to be, in its turn, annihilated by the action of the self-regulating market."

  • Many of the countries preparing for war would let go of liberal capitalism.
  • the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends. 
  • "The congenital weakness of nineteenth-century society was not that it was industrial but that it was a market society. "
  • argued that the emergence of market-based societies in modern Europe was not inevitable but historically contingent => originator of substantivism, a cultural approach to economics, which emphasized the way economies are embedded in society and culture


Braudel: capitalism vs. market economy 

  • Capitalism and the market economy generally stand opposed to the state.
  • Braudel however, possibly the father of modern economic history, sees capitalism alongside the state, both standing opposed to the free market economy.
  • One of the main distinctions between capitalism and free market is that in a free market, we have a free market for goods, however, in capitalism, this expands out of the components of markets and moves into production as well. 
  • sees capitalism as being absolutely dependent for its emergence and expansion on state power and as constituting the antithesis of the market economy (the anti- market)”.