Interwar World Economy PDF

INTERWAR WORLD ECONOMY The long 19th century: 1789 to 1913 century of modernisation and globalisation —> political rev, industrial rev, transport rev, communication rev + global trade btw core and periphery, global capital ows and mass migration, international gold standar...

INTERWAR WORLD ECONOMY The long 19th century: 1789 to 1913 century of modernisation and globalisation —> political rev, industrial rev, transport rev, communication rev + global trade btw core and periphery, global capital ows and mass migration, international gold standard, liberal international order 20th century was primary of con icts. Churchill de ned it as the “2nd 30 Years War” ○ WWI and WWII, European civil war (1917-1949), Cold War (1949-1989) 20th was also a century of calamities: wars, revolutions, econ. crises, global pandemic During 20th century, there was also the de-globalisation and de-colonisation (no more empires) WWI (1914-1918) was a global armed con ict, but fought primarily on eu soil + colonies. Biggest war ever made before. It was the end of the “long” 19th century, so a watershed in human history with global repercussions on economy, politic, society and culture ○ Economic consequences: human casualties, disruption of global trade, crisis of global nance, peace settlements with borders redrawn and war reparations Very important to consider the Spanish u (1918-1920)—> pandemic caused by H1N1 A virus, 500 mln infected in 3 worldwide waves with 30 to 100 mln deaths ○ Called Spanish Flu bcs Spain was the only nation that could talk about that for the censorship during WWI ○ Contagion spread by allied armies and naval forces ○ Mass mobilisation, however, increased state capacity GLOBALISATION BACKSLASH= even though transport and communication continued to improve, born hostile international relations that Outweighed technological progress (tariffs and non tariff barriers + immigration limitation, collapse of gold standard in 1930s) —> decline of global trade, US dominant in econ [no more Europe], end of mass migration and large capital ows WWI put end to migration, but also restrictive immigration policies. The remaining migration was usually forced: eeing wars or authoritarian regimes or ethnic minorities US was the rst to shut out migrants: rst Asians, then introduced literacy test, then introduced quotas on national origin from 1920s (S-E EU) After US, reduction of immigrants spread elsewhere [Argentina, Australia…] fi fi fl fl fl fl fi fl fl fi  Mass unemployment was largely unknown before 1914: before WWI was of shorter duration and cyclical —> then, sustained level in 1920s and very high in 1930s Why was so high? ○ Classical view: labour markets are exible, unemployment mostly voluntary and so Fiscal Policy isn’t needed to create employment ◆ wages and prices are exible ◆ Supply and demand of labour determine the eq price of labour and qty supplied ◆ Everyone is looking for a job paid at eq wage gets one ◆ Unemployed are who nd eq wage is too low ○ Keynesian view: “sticky wages” (downward wage adjustment is dif cult when prices fall -> workers have more political power through also labour Unions), unemployment is involuntary, gov needs to boost aggregate demand Historical evidence makes dif cult to reconcile the theory of voluntary unemployment NEO-LIBERAL EXPLANATION= some countries had unemployment bene ts (UK the Unemp Insurance of 1920 covered 11 mln people) —> Voluntary Army enjoyed bene ts while being unemployed 1925 UK returned to Gold Standard at pre-war parity (exchange rate was not adjusted for wartime in ation) + US reinstated pre-war parity but after less wartime in ation + other countries returned to gold after devaluation KEYNES= the overvalued sterling made British goods more expensive ○ British industry less competitive -> rise imports + fall exports ○ Fall in aggregate demand (C+I+G-IM+EX) -> fall domestic prices (de ation) ○ Wages could not adjust enough to falling prices DEFLATION -> HIGHER REAL WAGES -> LOWER DEMAND FOR LABOUR Productivity of those who worked continued to increase (improv human capital and tech.) Growth after 1900 brought by new ind technologies -> more capital and knowledge intensive -> industrialised countries rich in capital and human capital grew faster “No longer London, not yet Washington” Lack of leadership led to situa where consensus could not be reached. No country willing to restabilise the global monetary environment. Lack of leadership was compounded by absence of international coop btw US UK FR GER -> central problem for the entire period + unwillingness of CBs to operate the GS Inability described by the World Monetary Conference in 1933 in London, after US abbaondoned GS Io fl fi fl fi fl  EUROPE AFTER WWI The Great War was a “war of attrition”: manpower still mattered for military outcomes but industrial potential and transport capacity mattered more Divided btw the front of Battle eld and the Home Front (economy was mobilised for war) Even if US entered the war in 1917, had always sustained Europe with materials —> GDP of US increased btw 1914 and 1919 (also debt increased by 30%, but is not that big if compared to European debt of FR GB and IT) Gov controlled allocation of supplies, labour, investment Gov did that bcs of the Home Front: reimagine the econ ○ Germany created “War Raw Material Of ce” under The Economist Rathenau to control supplies ○ Italy had joint councils of industrial/militar leaders ○ UK “Ministry of Munitions under Lloyd George Economic impact of WW can be easily understood through The study of reallocation of resources: ○ Labour transferred into armed forces and in munitions industries (mining, chem…) -> chosen very young males that were not really employed (from farms, light manufacturing or on industries not fundamental), which led to a high labour shortage. The shortage brought more work to women and even children (some restraints were abolished temporarily over minor labour) ○ Capital was directed towards war effort: Big nations borrowed from themselves, more money where printed, borrowings from consumers, war bonds (no dividends during war but after ONLY in case of victory) ○ Reorganisation of industries: mass production in large factories at expense of smalls ○ Acceleration of technical progress in chemicals and machinery With WWI, there were two exogenous shocks: 1. MOBILISATION= from civilian to war production 2. DEMOBILISATION= from war to peacetime economy (very dif cult) There was also persistent effects like gov regulation as before WWI dif cult to restore and international nance based on the gold standard almost impossible to recreate Markets, at least, were controlled by the government fi fi fi  Gov directly controlled prices, production, labour allocation —> some persisted even after WWI fortunately, but misallocation of resources creates vested interest in keeping the big ow of resources in that sector ECONOMIC WARFARE= limit economic potential of the rival (GB with naval block of GER) (submarine war) —> in WWI led to collapse of international trade War caused disruption even in independent nations of the periphery ○ Periphery used to import manufacture, but Core started to produce for war and stopped the export -> needed a new industry in periphery and, after WWI, they wanted to protect the new manufacturing industry ○ Huge export of food stimulated the over production in primary goods. But when Europeans after war returned home, export decreased -> agricultural crisis 1920s ○ Collapse of foreign investment -> need state intervention STRUCTURAL IMBALANCES= after WWI, the big new capacity brought by war became super uous -> overproduction of capital goods, shortage of consumer goods A consequence of the structural imbalances was the high rate of unemployment, since labourers were not needed anymore in such a quantity Government intervention + in ation (extensive borrowing and huge note issue) + fragile international monetary system (delayed return to Gold Standard) Through gov intervention, for the Phillips Curve [negative relation btw in ation and employment], in ation could have been adjusted without worrying about unemployment —> in reality it was very dif cult bcs gov itself was feeding in ation Dif cult to return to peacetime governance, since during WWI almost 30-50% of nation’s GDP was controlled by the state VESTED INTEREST= rms and unions resisted demobilisation of labour in world industries + demobilisation would reduce state bureaucracy and curb its power Social unrest due to deep recession btw 1920-21 (unemployment + in ation brought savings to become worthless) and the rise of working class (Russian revolution) The Peace Treaties had 2 consequences: ○ Disintegration of states with the redrawn of political map of central and eastern EU ○ Destabilisation bcs treaties required enormous reparation burden to GER —> primary cause of antagonism and economic discord fl fl fi fl fi fi fl  Creation of new nations with nationalist ideology disrupted production networks and limited the market access —> new borders determined by national self-determination, not by economics ○ quest for ethno-linguistic homogeneity disrupted trade networks ○ New borders were imperfect: large ethnic minorities were left behind new borders All of that brought to Separatism and Revisionism Creation of new currencies, tariffs to protect national industries and independent scal and monetary policies. However, no effective coordination and regional division of labour + small markets undermined the overall industrial progress Most controversial issue in the peace with GER was Reparations! Reparation because with Versailles Treaty GER was held responsible for war -> GER was supposed to cover all war-related material damage Reparations were the key to political and economic crisis of interwar period Keynes condemned reparations bcs economically illogical and political unwise: Eu welfare was based on GER + dif cult transfer real resources btw countries for the uncertainty in the international market GER stripped of gold reserves, most of merchant navy and large stock of transport equipment GER failure to deliver reparation: Allies occupied border cities in 1921, then occupation of Ruhr in 1923, where workers activated a passive resistance (general strike) —> economic collapse and hyperin ation During WWI, US became main creditor. In 1919, recalled war debts: Eu countries could only repay them if GER delivered the reparations, but GER depended on ability to generate export and thus obtain gold -> restrictions imposed by allies on GER diminished GER export and industrial potential = CIRCLE OF DEBT Dawes Plan in 1924 solved the reparations dilemma, with US giving initial kick-start 1925-1929 GER managed to pay, BUT not because of Dawes Plan but because borrowed from US capital markets (alimented the circle of debt) Wartime in ation + immediately after armistice some commodities price fell, but in ation resumed soon afterwards 3 trends: hyperin ation (GER) / high persistent in ation (FR) / high in ation eventually controlled (UK and neutrals) fl fl fl fi fl  GREAT DEPRESSION Most severe economic downturn of the modern era Not caused by a huge event like WW or a pandemic and was responsible for great deal in political aspect btw nations Nowadays markets are based on the study of the errors of the GD Began with a stock market crash in NY Global Contraction (1929-1932): huge drop in industrial production, steep decline in prices (de ation), unprecedented lvl of unemployment (disruption of the Phillips Curve theory), collapse of internal trade 24 October and 29 October 1929 were the two crashes of stocks —> Black Tuesday was the most important and impacting ○ There was a bubble on stocks that caused then the fall of it. However, when fall reached the value of stocks before the bubble, it had a small period of increase During Global Contraction, world manufacturing production fell by 36% [severe in US and GER, while milder in JAP, SCAND and UK] In US depression was deeper and longer than in elsewhere. The domestic nancial crisis led to industrial depression —> some nations in EU were hit hard by the ind depr of US, since US was very important in their economy (GER, AUS, BEL) Industrial depression led to banking and currency crises In other countries in EU the recession was more moderate but still important. However, the banking system remained relatively stable The periphery was hit by the huge decrease in export prices, creating currency crises and balance of payment problems US Banking Crisis: ○ Stock market crash of 1929 reduced investors’ con dence, real estate market collapsed in the large cities and banks most active in mortgage lending failed (Bank of US in dec 1930 and Chicago and NY banks in 1931/2) ○ Run at the banks: withdrawal of deposits reduced money supply + banks failures raised the cost of nancial intermediation but decreased prices (bcs fall of supply) ◆ If money supply falls, less purchasing power, less demand and investment ○ Macroeconomic shocks fl fi fi  MONETARIST VIEW= their theory was that large variations in money stock have large effect on prices and output ○ Friedman Rule: CBs should target a (small) constant rate of growth in the money supply ○ FED deviated from the Friedman rule during Depression: tightened money supply when it should have raised liquidity —> supply fall by 30% btw 1929-33 Termin in 1976 said that monetary forces was not the main cause of the GD. The decline in the money stock was a consequence, not a cause, of GD. ○ [M0= coin + notes + CB credit - M1= M0 + commercial bank deposit … usually the money supply ALWAYS refers to M1] ○ During a crisis, money are moved from M1 to safer assets: withdraw from banks and put somewhere else ○ Fall in output -> lower demand for money -> decline money stock ○ Banks did not fail bcs they were illiquid but bcs they were insolvent (bad loans, especially mortgages from 20s) [enough liquidity but liabilities too high wrt assets] ◆ providing liquidity would not have helped However, Friedman missed the international POV: very important in the GD In Central Europe, there was a “twin crisis” -> failure of large banks provoked a banks run + currency crisis and loss of gold reserves The largest bank in Vienna crashed in April 1931, exposing the risk of industrial lending by big German banks —> CONTAGION Germany intervened leaving effectively the gold standard in august 1931 bcs suspended the gold exchange with the other counties GER, AUS, HUN limited foreign exchange and monitored foreign loans to stop the out ow of gold STERLING CRISIS= there was further contagion, since German suspension of gold standard put pression on the £ -> insuf cient gold reserves created a run on the Bank of England and gold standard suspended on 20/09/1931 ○ Balance of payments of UK changed. Before WWI had a large current account surplus that was balanced by the capital account de cit, due to continue investment. During GD, current account de cit (due to trade de cit due to strong pound + liquidation of overseas assets during WWI) and capital account surplus fi fi fi fi  ○ Capital account surplus due to big long term liabilities offset by short term credit ◆ UK extremely dependent on world trade and growth in the periphery There was a new macroeconomic policy after 1931: expansion of liquidity through the lower interest rate + introduced General Tariffs De ation was GLOBAL -> monetary contraction in all countries But why monetary policy so similar everywhere? Gold Standard both deepened and Caused the GD —> malfunctioning of GS promoted de ation around the world + during depression, monetary and scal policy pushed for austerity instead of expanding aggregate demand. The recovery started when Uk and then US exit the GS GS before 1914: 1. Sterling “just as good as gold”, no actual exchange and shipment of gold 2. Gold production grew rapidly, mostly from UK dominions, supporting steady increase in the global money supply 3. UK huge current account but exported capital 4. Major CBs cooperated to avoid running out of reserves GS in 1920s: 1. US had huge current account surplus but sterilised it 2. Accumulation of gold reserves in US and FR caused shortage of credit in world economy -> no effective gold-exchange system 3. CBs did not cooperated to alleviate gold hunger The problem was: 1. INCORRECT EXCHANGE RATES= US returned to gold in 1919 at pre war rate despite WWI in ation -> insuf cient gold cover -> FED sterilised current account surplus. Other countries returned on gold or too high (UK) or too low (FR) parities, leading to high trade imbalance 2. MISALLOCATION ON GOLD= theorised by Bernanke and Eichengreen. FED and bank of France sterilised gold in ow to prevent in ation and were not penalised even if they broke the “rules of the game”. High US tariffs led other countries to current accounts de cits —> de cit countries had 1 solution to maintain gold parity: INFLATION fl fl fl fi fi fi fl  Fixed exchange rate systems face a trilemma. However, macroeconomic policy can include only two elements of the trinity: 1. Full capital mobility 2. Fixed exchange rate 3. Independent monetary policy First two, for example, were at the base of Gold Standard (and then eurozone) Solution to exit the trilemma was to restore independent monetary policy! ○ UK and Sterling Bloc abandoned gold in 1931 ○ GER and central EU implemented capital control ○ FR and Gold Bloc: absence of devaluation led to high tariffs Positive effects of devaluation were that: gov could boost aggregate demand, competitiveness was increased and CBs could act as “lender of last resort” BUT UK devaluation hurt other countries’ balance of payments, that had to keep their balance of payment in equilibrium —> restriction on imports increased tariffs rates and led to import quotas and exchange restrictions Gold Bloc (ITA, FR, BEL) countries increased tariffs more than others! Global protectionism prevented recovery of world trade SPAIN= it was only eu economy with exible exchange rates in 1929 + gov boosted aggregate demand during depression + CB acted as lender of last resort Portugal and Greece had mild recession and no banking crisis ITA and POL remained in GS until mid 1930s, which led to a severe depression + banks exposed to poorly performing loans to industry and agriculture + banking crises avoided by direct government intervention (both the countries had authoritarian governments) JAPAN= restored GS after impo de ation and it was unable to maintain parity during depression, left GS after 1931 ARGENTINA= rst country in depression and left GS in 1929. Recovered in 1935 and avoided default on foreign debt AFRICA/ASIA= hurt by fall of global agricultural prices, especially exporters. Newborn Industries weren’t able to develop without foreign capital and colonies couldn’t afford independent monetary policies fi fl fl