International economy during 1920s Flashcards
What was the agenda of the Brussels International Fianncial Conference os 1920?
- cut government spending and balance the budget
- reduce publc debt
- greater independece of CB, no more monetization of debt
- reduce inflation and remove exchange rates controls
- free trade by removing tariffs set up during the war
What were the main problems governments faced after the war?
Social issues: veterans, orphans struggled to find a job and needed government assistance
Reconstruction: increase government spending, also to relocate production resources as the were before the conflict, had financial and social costs
Bank failures needed government financial support, coming from higher taxation or printing banknotes.
Political instability coming from universal suffrage, more social classes involved in the political life and formation of unstable coalitions.
Why didn’t the agenda objectives work out? What were the contradictions?
Social issues, political instability and reconstruction, all needed government financing, which made it difficult to cut public soending, hence reduce debt and reduce inflation, because States continued to rely on printing of new banknotes and on monetization of debt by the CBs.
Moreover, conflicts on the nature of taxation divided the left political wing (property taxes) and the right (indirct taxation): distributional conflicts created more instability.
What were the trends in GDP and international trade during the 1920s decade?
GDP groowth rate was the lowest since the fist wave of globalization, arounf 0.91 world average.
A general deterioration of international trade lowered the volume of export; in Europe, stagnation at about 0.21 growth rate, below world average.
How did the International Business Cycle work between the two wars?
In 1919, private consumtion and investment exploded, increasing aggregate demand; however, after controls on the exchange rate were abolished, shock and contraction.
During the recostruction, growth with great instability until 1925, when the resumed convenìrtibility of currecies to gold boosted international trade. In 1929, the peak and then the Great Depression, until recovery in 1933.
What was the role of international political relations in the economic trends during 1920s?
Peace treaties worsened the economic situation: new-born States in Eastern Europe adopted protectionist measures, making trade within Europe more difficult; in fact, higher tariffs meant higher prices on imported goods due to custom duties, and less convenient exports.
Also, reparations imposed on Germany were humiliating and out of proportion ( like lost sovereignity on colonies) making international cooperation suffer.
Which were the four main sources of instability during 1920s?
- financial distress
- monetary chaos
- international trade
- international settlements
they caused uncertainty, bad for firms, investment thus leading to general poor economic performance.
What were the reasons for financial distress, leading to instability?
During the war, governments had increased public debt through debt monetization, which now must be reduced: increasing taxation of cutting spending, meaning for example financial benefits to victims of the war, increased social conflict (distrubutional conflicts).
What are the reasons of monetary chaos after the end of the war?
The printing of banknotes continued after the war, eventually leading to hyper-inflation: currencies were again convertible to gold, however the amount of metals present in some currencies was just a fraction of what used to be prior to the war (depretiation of paper money, in particular in Germant, Eastern Europe, Greece Austria and Poland). The consequence was a masisve redistribution of income and wealth, hurting the middle class in particular and causing resentment.
What happened to exchange rates after the war and how did the States react?
After exchange-rate control was removed, exchange-rate fluctuations became wild, since some currencies depreciated a lot with respect to others (for example, Lira againts Dollar exchange rate increased by three times; american consumers were better-off, and so were italian exporting firms who saw competitiveness increase, but italian consumers were harmed).
As a consequence to increased volatility, countries imposed tariffs, mostly to extract concessions through negotiations with trading parters. Bilateral trade treaties took more time, further increasing instability.
Finally, as a response to instability, cartels of firms coordinated internationally.
What were the dinamics of inter-allied debt?
Inter-allied debt increased by a lot, and European countries saw their international accounts weaken; the main capital creditor was the US, and the main receiver of capital flows was Germany, who used funds for the reconstruction.
What was the trend of unemployment during 1920s?
The unemployment rate increased during the decade; for the first time in history, it was considered a social and political issue and date were collected to monitor it.
How did the countries try to solve the issue of re-establishing currency convertibility to gold, to achieve stabilization?
Inflation was very high in some countries, and some currencies depreciated a lot with respect to before WWI.
Countries reacted by:
- reducing prices by cutting wages, and so labor costs (deflation).
- establishing a different parity ratio of currency to gold, wihtout the need to reduce prices (depreciation); this option hurted big savings but affected less the majority of the population.
Which countries were successful in re-establishing the convertibility to gold of their currency, and so in stabilizing it?
Belgium was successful; Italy should have done a bigger devaluation; France devaluated its currency by 20%, it was a good choice and its exports and economy boomed; the UK pound was overpriced, so non effective.
Why were the pound and the dollar less effective means of exchange than gold, during 1920s?
All three were used as a mean of exchange, but the currencies were rumored to lose their convertibility: even if this system was more flexible, it was also more fragile.
