The Great War: Economic Disintegration (PDF)

The Great War The Disintegration of the International Economy Major socio-economic changes normally occur over long periods of time: Changes in demography, availability of resources, and technology can spread over years, decades, or even centuries. Political changes can be abrupt, leading to sudden and unexpected economic changes. World War I (the Great War) destroyed the intricate, (but fragile) international economic and trade system that had gradually developed during the 19th century because of globalisation and the first industrial revolution. It marked the end of the 'first globalization.' A lot of trade ships were destroyed World War I ○ The first global war, fought globally by soldiers of all nationalities. ○ The first modern war from an economic and technological perspective. ○ Marked the beginning of state planning in the economic field. A war economy, huge decrease in available resources. All the production process needs to be converted. ○ Brought about major geopolitical changes: End of the Old Empires (Austria-Hungary and Ottoman Empire). Definitive rise of new non-European powers: the United States and Japan. ○ Marked the start of the communist experiment. ○ Led to the rise of strong nationalism. ○ Had a significant cultural impact. ○ Less involved in the production process WWI: The Origins of the Conflict From a diplomatic perspective, the Great War broke out due to the Sarajevo bombing on June 28, 1914: ○ A Serbian student assassinated Franz Ferdinand, the Crown Prince of the Habsburg Empire. Austria-Hungary declared war on Serbia, a traditional ally of Russia. Soon, all of continental Europe, bound by pacts and alliances, was drawn into the conflict. The Complex Origins of World War I It is virtually impossible to pinpoint a single cause for the outbreak of the First World War. ○ The war emerged from a process that began in the mid-19th century, as European powers sought to conquer and divide significant parts of the world.---> the more i can control —> the more resources—> power ○ Among the possible causes, historian Fritz Fischer highlights Germany’s desire to gain more territory in Eastern Europe. ○ The Balkans became a region of intense conflict, where the quest for dominance among European powers collided with the rising nationalisms of emerging nation-states (Serbia, Romania, Bulgaria). Macro Categories of Factors Contributing to WWI The breakdown of the old alliance system New nationalistic demands → increase sense of belonging to a nation→ nationalism was therefore needed to contribute to the growth of economic and political success of a country New geopolitical demands Economic competition→ mkt integration→ higher competition Culture and ideology The role of science and technology The last 2 are connected, ref to Keynes and living conditions in England, much easier to spread ideologies across people. There was a j Consequences of the Great War The Great War had profound political and economic consequences: ○ Economic (industrial) mobilization ○ Strong state intervention ○ Massive economic losses ○ The beginning of an age of insecurity→ no help between nations, gold standard The war marked the end of the first phase of globalization by breaking down its main pillars: ○ Trade and foreign investment ○ The gold standard ○ Mass migration ○ Integration of financial markets A Technological Conflict The war prompted a substantial reallocation of resources from civilian goods production to military use. ○ Labor, capital, and raw materials were redirected to meet wartime demands. ○ These resources were primarily absorbed by industries such as metallurgy, shipbuilding, chemicals, machinery, and armaments. For the first time war was fought in trenches, leading to mental health problems. WWI: A Taxonomy of the Conflict and Beyond Industrial conversion Women at work: part of the conflict, could change the destiny of the country a. Red Cross b. Drivers c. Munitions d. Agriculture WWI: A Taxonomy of the Conflict — State Intervention The pressures of the war led governments in involved countries to take unprecedented actions: ○ To supply the armies ○ To address issues faced by civilian populations Main areas of intervention included: ○ Supply of raw materials ○ Food rationing ○ Industrial production ○ Management of finance State Intervention During WWI To meet the vast demands of war, governments established departments and offices focused on industrial mobilization and expanding war production. ○ In Germany, the Hindenburg Plan led to the creation of the Kriegsamt (Supreme War Office) with goals to: Double industrial production Mobilize all available workers, including prisoners of war Eliminate industrial inefficiencies State Intervention During WWI The government’s role in the economy expanded significantly: ○ Became the main purchaser of goods and services ○ Imposed controls on various sectors, including trade, transport, prices, production, and supplies of raw materials and food This demonstrated that the state could take on extensive responsibilities in coordinating economic activities, both in Europe (including liberal England) and in America. After the war, many controls were lifted, but the liberal principle of laissez-faire was profoundly shaken, we go back to protectionism and an overall control. State Intervention During WWI The state financed public spending through: ○ Increased taxation, which depressed household consumption ○ Domestic and foreign borrowing—> US who overcome ○ An increase in the money supply through the printing of banknotes The total public debt of the countries involved in the conflict rose from $26 billion before the war to $225 billion by 1920. The contribution of different financing sources varied by country, as did the levels of inflation, which were determined by the increase in circulating money. This created a heavy legacy to manage after the war. DEBT INCREASED The percentage of GDP, look at the proportion WWI: A Taxonomy of the Conflict — Economic Consequences The economic losses were considerable and included: ○ Material destruction ○ Disruption of economic relations ○ Disruption of foreign trade ○ Loss of foreign markets ○ Loss of profits from foreign investments→ financial investments abroad were totally blocked ○ New global agricultural balances Even when war is going to end, investments are needed to restart production Economic Consequences of WWI In terms of material destruction, the situation at the end of the conflict was dramatic: ○ The total cost of the war, including estimated losses and actual expenditures, amounted to approximately $400 billion (in 1914 purchasing power). ○ The destruction included buildings, plants, industrial machinery, mines, agricultural machinery, livestock, and transport and communication infrastructure. Economic Consequences of WWI In the long run, the disruption and disorganization of normal economic relations between countries proved even more harmful to the economy: ○ The negative effects did not cease at the end of the conflict but persisted into the 1920s and 1930s. During the war, the governments of belligerent states (and even neutral ones) imposed direct controls on prices, production, and workforce distribution: ○ These controls artificially stimulated certain sectors while depressing others. Although these controls were lifted after the war, pre-war economic relations did not quickly or easily return to normal. Economic Consequences of WWI A significant problem was the disruption of foreign trade and various forms of economic warfare, particularly between Germany and Britain, involving submarine warfare. This conflict led the United States to intervene in 1917. Another issue was the loss of foreign markets: ○ With Europe blockaded, many overseas countries opted to produce goods independently or to source them from non-European countries instead of importing from Europe. ○ Latin American and Asian countries established their own manufacturing industries. ○ The United States and Japan seized new markets that had previously been under European control. LATIN AMERICA, ASIA, USA managed to grow OVERALL PRODUCTION increased leading to overproduction and a decrease in prices, stagnation in the economy. WWI: A Taxonomy of the Conflict — Economic Consequences In the agricultural sector, the war stimulated production in economically established countries like the United States and in "virgin" territories such as Latin America. ○ In the 1920s, this led to overproduction and a collapse of prices. In the maritime transport sector, England lost its primacy to the United States, which benefited from its neutrality during the war. USA were the one benefiting the most Japan could respond to the demand of EU countries after the Mejii restauration. WWI: A Taxonomy of the Conflict — Economic Consequences On the front of foreign investments: ○ Britain and France had to divest a portion of their investments to finance the purchase of war materials. ○ German investments were confiscated and later used as reparations. The most serious consequence of the conflict was the loss of lives: ○ Approximately 10 million soldiers were killed, with another 20 million maimed and disabled. ○ Additionally, there were 6 million civilian casualties and a birth deficit estimated at 13 million. The losses from the war, combined with those caused by the Spanish flu epidemic in the winter of 1918-1919, resulted in serious consequences for labor supply. The percentage of people—>eastern europe People never came back, in the production of their countries WWI: A Taxonomy of the Conflict, and Beyond Post-War Industrial Reconversion ○ After the war, there was an urgent need to reconvert industrial production from military to civilian goods. ○ A widespread fear existed that failure to meet the growing demand for consumer goods could lead to inflation, as scarcity would drive up prices. Challenges in the Reconversion Process ○ Return of Soldiers: The demobilization of soldiers returning from the front led to a sharp rise in unemployment as they re-entered the workforce. ○ Labor Strikes: Economic instability and dissatisfaction with wages and working conditions led to waves of strikes across Europe, further complicating the industrial transition and increasing social tensions. unEmployment rate is high, demand is lower, decrease in consumption WWI: The Consequences of Peace Impact of American Intervention ○ The entry of the United States into the war shifted its course, leading to an Allied victory. ○ By November 1918, Austria-Hungary and Germany had signed the armistice, effectively ending hostilities. The Treaty of Versailles (1919) ○ Officially concluded the war following a lengthy and complex peace process. ○ Imposed severe punitive measures and reparations on Germany( had to pay twice its national income), aiming to hold it accountable for the conflict. ○ The representant of england left because of Germany too strict punishments. Problems Arising from the Peace Treaty ○ Economic Nationalism: The treaty fostered a rise in economic nationalism as countries turned inward, prioritizing their economies and protecting local industries. Wr to the 19th century it was easier to spread ideas ○ Monetary and Financial Instability: The reparations imposed on Germany and disrupted trade led to widespread financial and currency instability in Europe. The US was the financial leader, granting loans to GBR and Italy, that were expected to be paid by Germany The gold standard ended with WWI, States went back to paper money One of the tools to control monetary policy is public spending. WWI: The Age of Insecurity Rise of the United States as a World Power ○ The United States emerged as a dominant global power after WWI. ○ Despite their economic supremacy, the U.S. was reluctant to take on full international responsibilities associated with their new status. ○ The U.S. chose not to join the League of Nations, reducing its role in maintaining postwar global order. Severe Conditions Imposed on Germany ○ Germany faced some of the heaviest penalties under the peace terms: Territorial Losses: Germany was stripped of parts of its national and colonial territories. (Alsace, LORAINE) Disarmament: Required to surrender its navy, weaponry, ammunition, and even essential resources like locomotives.---> no war power,army to prevent The ‘War Guilt Clause’ (Article 231): This clause, which held Germany responsible for the war, was seen as deeply humiliating by Germans, fueling resentment and instability. WWI: The Age of Insecurity Economic Impact on Nations ○ The war left deep economic scars on many countries, with widespread damage and financial strain. SELF SUFFICIENCY (need in war) VS AUTARCHY (decide to be because you want to boost your production) Newly Formed States from the Habsburg Empire ○ The countries that emerged from the breakup of the Habsburg Empire prioritized economic self-sufficiency, emphasizing national identity through independent economies. Rise of Economic Nationalism ○ Countries like Russia, England, and others in the West turned toward protectionism, decrease in capital mobility: Tariffs: Many wartime tariffs were maintained rather than removed, supporting domestic industries at the expense of open trade. Bilateral Treaties: Several countries signed bilateral trade agreements, abandoning the principle of the Most Favored Nation (MFN) clause, which had previously encouraged equal trade terms. Austerity Policies ○ Many governments adopted austerity measures to restore economic balance and control inflation. ○ However, austerity made postwar reconstruction even harder, leading some to believe that a return to the gold standard could stabilize the global economy. ○ GBR: Over Evaluation approach: a. Cut public spending b. Wages decrease→ unemployment, strikes ○ France: WWI: The End of Monetary Stability Germany was required to pay reparations totaling $33 billion, more than twice its GDP at the time. These reparations involved prohibitive annual installments that placed extreme financial pressure on Germany. Persistent Demands from Allies Despite Germany's struggles with payments, France and England continued to insist on full indemnity payments to cover their own war debts. Key Events in the Reparations Crisis 1. 1922: Germany suspended reparation payments due to economic strain. 2. 1923: In response, French and Belgian forces occupied the Ruhr region—Germany’s industrial heartland—to secure reparations by force, further destabilizing the German economy and worsening the postwar monetary crisis. Hyperinflation Crisis in Germany As Germany struggled to meet its reparation obligations and cope with the economic instability caused by the Ruhr occupation, it began issuing more money to pay off debts and manage internal turmoil. This excessive printing of money led to hyperinflation, with the German mark plummeting to just 0.02% of its pre-war value, effectively rendering the currency nearly worthless and plunging the economy into chaos. Lower-middle class were the most affected, whose wages were not adaptated to inflation, losing all their savings, becoming poor. Reconstruction of the Payment System Solution: Return to the gold standard? Global Issue: Monetary and financial imbalances on both sides of the Atlantic needed resolution. US Involvement: ○ The US needed to grant credit to stabilize both its own and many other national currencies. Reasons for US Support to Europe: ○ Fear of total economic and monetary collapse.---> US needed money back from previous granted loans ○ Fear of potential Soviet-style revolutions. The Dawes Plan Context: The German inflation crisis led the Allied powers to relax the conditions set at the Treaty of Versailles. Key Events: ○ In 1923, French troops withdrew from the Ruhr. ○ In 1924, an international commission launched the Dawes Plan. Objectives of the Dawes Plan: ○ Redefine terms of payment for war reparations. ○ Link reparations to Germany's economic development. ○ Reorganize the operations of the Reichsbank. ○ Set up a loan in favor of Germany. Impact: ○ The American loan allowed Germany to resume reparations payments and return to gold convertibility. ○ The Dawes Plan enabled Germany to restart its economic reconstruction process. Germany and Europe’s Economic Recovery Germany's Recovery: ○ Gradually emerged from its economic difficulties. General European Recovery: ○ Most European countries returned to a path of economic growth, though some never fully recovered. Britain’s Return to the Gold Standard (1925): ○ Returned with an exchange rate equal to the pre-1914 rate. Consequences of the Return to the Gold Standard: ○ Led to a reduction in credit, causing: Economic recession. Miners' strike (1926) and rise in unemployment. Reduction in exports, increase in imports, and a trade balance crisis due to the overvalued currency. ○ The overvalued pound gave an advantage to the US dollar. Overevaluation—> goods are relative more expensive—>exports are going to decrease→ trade balance is at risk To limit rise in prices of goods due to overevaluation you need to decrease cost—> Labour cost decrease→ wages decrease—> demand decrease→ firms are gonna fail→ unemployement—> phase of economic recession The english goverment decided to increase interest rates→ credit costs increase and invest decrease GBR was a non inflationary country, decreasing prices meant to be more attractive for exports, being able to payback loans asked during the war France went for devaluation→ goods are more competitive→ economic stimulation Post-War Monetary Policy France's Decision: ○ Chose to restore the gold standard at a lower parity than pre-war levels. Reasons for France’s Choice: ○ The unstable French government wanted to avoid austerity policies required for stabilization. ○ Therefore, France opted for devaluation. Key Actions: ○ The franc became convertible to gold at 20% of the pre-war parity. ○ This policy stimulated exports and helped boost economic recovery. Economic Effects: ○ Capital flowed into France. ○ Expectations of revaluation were nurtured by financial operators. Tax Policy: ○ Focus shifted from direct taxes to taxes on property. The Roaring Twenties While Europe was struggling, America had Economic Recovery (1925 onwards): ○ Western national economies recovered, but there were significant differences between Europe and North America. European Recovery (1925-1928): ○ European industrial production increased by 20%. ○ Key sectors driving growth: Electricity, Automotive, Chemical industries (Second Industrial Revolution). US Economic Advantages: ○ Brief involvement in WWI. ○ Territory not devastated by the war. ○ The US did not go into debt but instead granted loans to Europe. Advantaged in terms of economic growth due to exports, financial supremacxy, they joined war much later The Flying USA Economic Prosperity: ○ Economic growth in the US led to significant prosperity and expansion in the housing market and industry. Wealth Distribution: ○ Wealth was redistributed to American families, allowing them to enjoy a high material standard of living. Living Standards by the End of the 1920s: ○ 1 car for every 5 inhabitants. ○ 50% of the population owned an iron. ○ 15% of the population owned household appliances (e.g., washing machines, toasters). Cultural and Entertainment Growth: ○ The standard of living increased significantly. ○ Various forms of entertainment flourished, including: Cinema,--> Hollywood, cartoons Dancing, Sports, Music. The Flying USA (Continued) The Myth of the American Way of Life in Europe: ○ In Europe, the myth of the American way of life was created. ○ This myth represented a standard of living filled with comforts that were unthinkable for the average European citizen at the time. Starting from 1918 US was much higher than GBR until 1931. WWI RECAP Demography: loss of lives loss of human capital loss of labour force this all led to : economic loss absence of growth Therefore Variation of Economic Background END OF THE FIRST GLOB Stop of international trade International mkt disintegration Gold standard Protectionism International trade Self-sufficiency —> Disintegration of fin mkts STATE INTERVENTION: a. Rationing b. Public debt c. Reconversion to civil production d. Taxation e. Inflation The end of monetary stability Bilateral Agreements Austerity policies (to contain inflation) Monetary policies related to the Gold Standard France→ devaluation (-20%)—> exports increase GB—-> over evaluation—> exports decrease NEW POLITICAL EQUILIBRIUM USA —> Dawes Plan→ financial aid to help Germany in repaying loans and restart its economy JPN—> CHANGE IN CULTURE AND IDEOLOGY Creation of nationalistic political parties→ growth,defense of the country LECTURE 13 THE CRISIS OF CAPITALISM The Background… In the United States, the signs of the impending outbreak of an economic crisis were evident in 1928: the government was well aware of the bubble in which was the fin market despite clear signs: Prices began to fall (indicating the existence of overproduction problems in many industries)-->before they needed to produce both for them and the EU market, an increase in production capacity that continued even after the reconversion at the civilian level, leading to overproduction Agriculture came to a standstill, it was also affected The construction sector slowed down—>Saturation(everybody owned everything)→ crisis they decided to not intervene But at the very same time: Profits continued to grow Access to credit was not expensive→ people who didn’t have lot of collaterals could have it Much of the financial wealth took the path of speculative investments Speculative investments abounded on the stock market, didn’t have a strict regulation Wealth was before linked to land, then industrial, now financial wealth, resulting from the mkt integration we observed during the first phase of globalisation The Bubble… The crash was the result of a structural weakness in the US credit system. The US banking system was characterized by the presence of many credit institutions (who gave loans to anyone) that were not controlled by the Fed (= Federal Reserve = US Central Bank). The stock market system was constantly expanding due to: Speculation by large operators High appetite for risk (easy credit)---> idea that American economy was going to grow Investment trusts (born in London) operating with few rules and little transparency: These trusts sold shares , that were used as collateral→ even small savers could use the expertise of professional people to invest their money Price fluctuation was based on just expectation The vitality of the stock market had spread the perception that the economy was healthy, but in reality, the value of share prices was not linked to the ability of companies to produce profits… Wall Street Crash of 1929 and Great Depression To avoid the worst, the Fed raised interest rates to bring stock market speculation under control, but the result was: The attraction of new capitals to New York Weakening the gold stock on European countries On 24 October and 29 October 1929, two waves of selling on the Wall Street stock market brought the system to its knees. The Dow Jones index (Pa) decreased from 381 to 196 (base 100 in 1926) A lot of capital was flowing from european to us mkt, a loss of gold stock to the american ones, problem for the commercial balance that had to be positive→if X Banks do not have enough liquidity, it become impossible to invest in production→ industry fail→ unemployment→ demand falls Inventories declined, and at the same time, production collapsed dramatically. In the automobile industry, for instance, it went from 440,000 units in August 1929 to 92,500 in December of the same year. General Motors reacted with diversification, managing to survive Visible effects were also seen in the property sector. People who gave houses as collateral, but given the houses’depreciation 1929, huge collapse of the industrial production, not just in the US but also in other EU countries, since if the USA enters in a crisis, people demand less, industry fail or produce less, lower wages, less consumption, production decrease, reinforcing mechanism→ therefore prices were going down in US and also in Eu Wall Street Crash of 1929 and Great Depression The immediate consequences were: The fall of American prices The stop of international trade → reduced by 70% → The crisis reached Europe Commercial balance was at risk: Introduction of new tariffs → protectionism Reduction of production What is the consequence? Growth rates of GDP decreased om 1919-1939 then increase if we isolate we can’t even see the crisis negative gdp per capita Particularly Pernicious was Deflation Deflation, or the protracted decline in prices, had several harmful effects: In industrial countries, it discouraged investment and postponed consumption. In primary goods-producing countries, it caused export revenues to plummet and made it more difficult to pay foreign debt. (EX France and the US) More generally, deflation weakened the ability of debtors to repay debt, causing problems for creditors and the banking system. In the relatively interdependent world of the 1920s, the slowdown of one economy affected the others in a downward spiral. Wall Street Crash of 1929 and Great Depression: Reaction In the months following the crash, the gold standard forced central banks to pursue restrictive monetary policies.--> reduce capital circulating economy Pre War we have Gold Standard After WWI we have the Gold Exchange Standard not just on the stock of gold but also stock of currencies( $,£) that were converted after into gold. No one thought of implementing expansionary monetary policies; instead, everyone preferred to adopt spending review measures.(no incentive to infrastructures, innovation) The government didn’t intervene with respect to the crisis , also idea of a free mkt that regulates itself, according to the principle of”laissez-faire” in the US. These defensive strategies produced liquidity crises and multiple bank failures (especially in the USA). The tight control on capital flows had negative effects on international trade. Wall Street Crash of 1929 and Great Depression: Reaction In Europe, the crisis became particularly intense in 1931. Financial panic spread following the bankruptcy of the Austrian Credit Anstalt( big bank with many German investments) and the German currency crisis. The reaction to the crisis was uncoordinated and disjointed, with each government making decisions unilaterally, without considering the potential repercussions on others. In September 1931, Great Britain abandoned the gold standard to implement independent monetary policy.--> LACK of freedom → monetary policy→ fixed rates In 1932, it abandoned free trade by adopting the so-called "imperial preference" at the Ottawa Conference. The protectionist spiral contributed to the collapse of world trade and pushed many countries towards forms of autarky. Wall Street Crash of 1929 and Great Depression: Reaction But why protectionism? Bilateral Clearing agreements were used to control the commercial balance and to prevent currency from leaving the country. no anymore confidence in the financial system Wall Street Crash of 1929 and Great Depression: Effects F.D. Roosevelt, then governor of New York, realized the scale of poverty and increased taxation on the highest incomes. Other initiatives were taken by local administrators, but there was a risk of bankruptcy. Subsides to people in difficulty Only in 1931 did President Hoover realize how alarming the Depression was in Central Europe, he decided not to intervene and to not be the leading Economy: Moratorium(a temporary prohibition of an activity.)(s on debts (including Germany’s war reparations). Golden Gate Bridge construction began, a paradox since people were suffering a lot because of poverty, and it costed a lot However, confidence in the financial system was no longer present, even for people who were re acquiring wealth, they didn’t invest anymore Wall Street Crash of 1929 and Great Depression: Effects Unemployment was certainly the most serious problem: 26% unemployed, with only 20% of them receiving aid. 20% of schoolchildren were malnourished. Insecurity and unemployment translated into a risk for democracy. Safe rate unemployment (4-8%) President Hoover's Response to the Great Depression President Hoover, initially convinced that the government should not intervene with countercyclical policies, was forced to reconsider due to rising unemployment numbers, though the outcomes were not positive. In 1932, he created the Reconstruction Finance Corporation to establish a federal fund for the largest banks, which were supposed to support smaller banks. However, resources were inadequate, and large banks allowed smaller ones to fail. The Fed decided to lower the discount rate(interest that the fed charged commercial banks and other institutions, which are gonna ask for a credit line,to expand credit, but banks used the liquidity to shore up their own accounts rather than granting credit. Hoover also aimed for a balanced budget(when we expect that total revenues= total cost) which required reducing service expenses or increasing taxes—both options would further depress the economy. International Response to the Great Depression Attempts to provide a common response to the crisis were weak: In 1931, Hoover's moratorium suspended inter-allied and reparations payments for a year. In 1932, the Lausanne Conference resulted in the abolition of German reparations to restart its economic machine In 1933, the London Economic and Monetary Conference saw a failed attempt to stabilize major currencies, including the dollar, pound sterling, and the French franc. Chancellor Bruning of Germany (1930-32): In 1931, effectively suspended the gold standard by imposing strict controls on currency and capital movements, but chose not to use monetary policy to stimulate the economy, instead reducing public spending and salaries. Other Related Events: The tax increase implemented by U.S. President Herbert Hoover in 1932 to balance the budget. France's steadfast adherence to the gold standard at the London Monetary Conference in 1933. The ideology of the gold standard (financial orthodoxy), which led decision-makers to adopt counterproductive policies, was widely supported by the public. Hoover who increased taxation (making the poorer more) total opposite approach to Roosevelt who taxed the rich to redistribute wealth The Beginning of the Welfare State The Crisis of 1929 revealed imperfections in the functioning of market mechanisms. State intervention proved indispensable to correct market failures, giving rise to the concept of the welfare state. According to the vision of John Maynard Keynes, states should adopt countercyclical policies: Governments would make public spending the engine of economic recovery, with wages, consumption, and profits supporting each other (Keynesian multiplier). theory The demand driven economy who is going to define supply In particular, Keynes criticized Say's Law, which posits that "supply creates its own demand," as he believed it did not function in a crisis context. → the idea of Hoover we don’t have to intervene on demand which is going to be responsive to supply all these interventions did not work to restore equilibrium RECAP CRISIS 1929 roaring 20s Prices decrease—-------------------------------> profits>0 sustained demand easy access to credit —--->investments increase share prices increase→ absence of regulation→ speculation increases and also investment trusts operation—> only action from the state was to increase interest rates Overproduction in these sectors: industrial agricultural construction sector related to speculation, investment trusts from oct24- crash→ share prices started to decrease→ sell share (liquidity race, bank problem) -> share prices continue to go down Credit not allowed based on capacity to have profits>0 prob to repay debts—-> liquidity and credit decrease→ therefore production decrease International trade decrease but prices continued to go down WHY? 1. Demand was also declining→ unemployment increased 2. Financial mkt was already collapsed, no one was willing to invest in the industrial sector CONSEQUENCE Protectionism policies ALL OF THIS CAUSED Propagation of the crisis to the EU leading to: 1. Banks failure 2. Stop of international trade 3. Problem of solvency\ In the short tern the mkt is not going to adjust, but just in long term. The problem is that at a certain point we are going to reach the same point as before, but how are these resources going to be redistributed? ALLOCATION OF RESOURCES WELFARE STATE= A state that intervenes in redistribution of resources to make poor people better off LECTURE 14 The Great Crash (1929) Consequences of the Wall Street Crash: ○ Global financial and economic crisis. ○ Reduction of American loans. ○ Massive contraction in world trade. ○ Adoption of restrictive monetary policies, leading to deflation. ○ Increased customs barriers and tighter control over capital flows. ○ Sharp rise in unemployment rates. Policy Responses: ○ Increase in taxes. ○ Commitment to remaining under the gold standard. ○ Emphasis on maintaining a balanced budget. Outcome: ○ Efforts to find solutions often yielded poor results, exacerbating the economic crisis. English approach during the 20th century The Father of the Welfare State: John Maynard Keynes Background: ○ Initially studied mathematics before transitioning to economics. ○ Influenced by economists Alfred Marshall and Arthur Cecil Pigou. Key Works: ○ 1919: The Economic Consequences of the Peace ○ 1921: Treatise on Probability ○ 1925: The Economic Consequences of Mr. Churchill ○ 1936: The General Theory of Employment, Interest, and Money ○ 1944: Led the British delegation at the Bretton Woods Conference. Different states started to use monetary policies to resolve problems The Birth of the Welfare State (READ ARTICLE) ey Highlights from "Banks and the Collapse of Money Values" by John Maynard Keynes: 1. Banking Crisis and Collapse of Money Values: The core issue of the 1931 financial crisis was not just the fall in industrial profits, but the collapse of money values, particularly affecting banks that had extensive loan portfolios. This caused widespread financial instability. 2. Impact of the Gold Standard: The gold standard exacerbated the crisis. As countries remained on the gold standard, the value of gold-based currency changed, making the burden of debt heavier and destabilizing the banking system. The German crisis in 1931, triggered by these conditions, spread globally. 3. Banks and Their Role: Banks had interposed themselves between wealth owners and borrowers, facilitating loans based on the value of real assets. As asset values collapsed, the "margins" of security on loans were wiped out, creating systemic risk. 4. Decline in Real Assets: The value of key assets—such as commodities, shares, and real estate—fell drastically, creating huge liabilities for banks that had financed these assets. In the U.S., real estate, especially farm values, saw significant losses, exacerbating the problem. 5. Effect on New Lending and Enterprise: As banks recognized the rising risk in their loan portfolios, they became more cautious and unwilling to finance new business ventures, freezing capital and exacerbating economic stagnation. 6. Bank Failures and Insolvencies: With the collapse in asset values, banks faced insolvency. The situation was worsened by banks’ failure to anticipate or manage the risks of drastic deflation, leaving them vulnerable to a crisis of liquidity. 7. Inadequate Solutions: Despite some attempts (such as President Hoover's plan to make banks' better assets more liquid), no solution could fully address the banks’ precarious positions without a broader economic recovery. 8. Call for Price Recovery: Keynes argued that only a recovery in prices and money values could save the financial system. Without such a recovery, widespread defaults and insolvencies were inevitable, leading to the collapse of the financial structure. 9. Criticism of Bankers: Keynes criticized bankers for their lack of foresight and adherence to orthodox economic policies that failed to anticipate the crisis. They had not prepared for the possibility of extreme deflation, which put their institutions at risk. 10. Choice Facing Capitalism: Keynes concluded that modern capitalism was faced with a stark choice: increase money values and avoid financial collapse, or suffer a reorganization of wealth and social disruption, with a possible reset of the financial system. These highlights reflect Keynes' critique of the banking system and the need for a fundamental shift in economic policy to address the financial instability of the time State Intervention: ○ Proved indispensable for correcting market failures. ○ Led to the establishment of the Welfare State. Keynesian Vision: ○ According to John Maynard Keynes, states should adopt counter-cyclical policies to manage economic fluctuations. Goodbye Economic Orthodoxy Disengagement from Gold (1930s): ○ More and more countries decided to detach their currency from the gold standard. ○ This gave central banks the freedom to: Lower interest rates. Print money to stimulate consumption, investment, and employment. WHAT DOES THIS MEAN? The amount of money circulating in the economy is not related anymore to reserves of gold Challenge to Economic Orthodoxy: ○ The Great Crisis challenged the idea of market self-regulation, which was central to economic orthodoxy. ○ The abandonment of the gold standard was more driven by necessity than by conviction. Shift in Monetary Policy: ○ Monetary policy began to be influenced by domestic policy objectives, rather than adhering strictly to gold-based rules. A new political approach where the state has to intervene in the economic crises CRISIS → PRICES DECREASE → EMPLOYMENT DECREASE→ ECONOMY DOES NOT RESTART→ EXTRACTION OF RESOURCES DIFFICULT—-> 2 APPROACHES: 1.CYCLICAL APPROACH; INCREASE TAXES; DECREASE CONSUMPTION; 2. COUNTER-CYCLICAL; GOVERMENT SPENDING INCREASE→ EMPLOY INCREASE→ CONS INCREASE→ PRICES INCREASE Negative relation between excgange rate and industrial production Gold Standard and the Great Depression Refusal to Provide Liquidity: ○ The refusal to provide liquidity to banks in order to protect fixed exchange rates led to more bank failures than would have otherwise occurred. Countries That Devalued Their Currency: ○ UK (1931), USA (1933), Scandinavia: Devaluation led to price and wage adjustments, helping to reabsorb unemployment and stimulate economic growth. ○ X Increase; increase in P but not too much, still need to be competitive ○ IM decrease; Internal resources/raw materials not enough → production costs increase Impact on the 'Gold Bloc': ○ The intransigent "gold bloc" (France, Italy, Belgium, and the Netherlands) maintained the gold standard until 1935-36. ○ These countries experienced persistent stagnation and high unemployment. color when they abandoned Gold Standard industrial production over time, starting from 1931 there was a decreasing trend, change in the way to use monetary policy, to obtain their own spot in the mkt whatever is above 100 means they were producing more than before the crisis germany exited the gs before GER was spending lots of money in order to rearm USA: FDR and the New Deal Presidential Election of 1932: ○ Herbert Hoover (outgoing Republican president) was accused of mishandling the Great Depression crisis and was defeated. ○ Franklin Delano Roosevelt (Democrat) was elected as the new president. during the financial crisis a lot of people lost everything USA: FDR and the New Deal Who Was F.D. Roosevelt? Education: ○ Graduated in law from Harvard and Columbia University. Political Career: ○ 1910: Elected to the New York State Assembly. ○ 1913: Appointed Assistant Secretary of the Navy. ○ 1922: stop of his political career; paralysis due to polio ○ 1928–1930: Served as Governor of New York. Presidency: ○ 1932: Elected as President of the United States. ○ 1933–1945: Served as President throughout the Great Depression and much of World War II. won 4 times ○ agreed to LEAgue of nations The First 100 Days of FDR's Presidency: PUSH ON THE STATE INTERVENTION Objective: Address the 1929 crisis with reforms focusing on the 3 Rs: 1. Relief: ○ Support the unemployed and poor. 2. Recovery: ○ Restore the economy to pre-crisis levels. ○ National Industrial Recovery Act (NIRA): Promoted industrial recovery by establishing fair competition codes and wage increases. ○ ○ 3. Reform: ○ Reform the financial and economic system to prevent new recessions. According to Keynes we are going to be, we need to give people a job, restore physicological approach we can’t cover 100% of people who are in need but it is a starting point Political success thanks to recreating positive expectations with respect to the future; in opposition to Hoover’s approach, who was not trying to intervene against the cyclical approach Outcome: Aimed to provide immediate relief, stimulate recovery, and implement long-term reforms to prevent future economic disasters. The Brain Trust Creation of Empirical Evidence: The Brain Trust, a group of academic experts, focused on developing evidence-based solutions to address the economic crisis, relying on research and analysis to shape policy decisions, to fight the reinforcement mechanism Abandoning of Mainstream Approaches: FDR's advisors rejected traditional economic theories(economic orthodoxy) and conservative approaches, instead adopting new, more experimental and progressive methods to tackle the Great Depression, such as government intervention in the economy. t v authority boost economies in places wpa give work to people limit the production of agricultural products to set a specif mkt price→ limitation of the mkt freedom→ lim of private initiative, a control of the economy they managed to reach this stabilized supply thanks to subsidies given to farmers THE SAME for Industrial Production, stabilize supply therefore mkt ptice also IMPORTANT PWA USA: FDR and the New Deal Two Phases of the New Deal: ○ 1933-1935: Focus on economic recovery. ○ 1935-1938: Focus on social policies. Objective: Inject liquidity into the economy. ○ Bank Holiday: A one-week suspension of banking activities was declared to evaluate the solvency of banks. Only financially sound banks were reopened with government support. → assess health of banks ○ Reconstruction Finance Corporation (RFC): A government fund used to purchase shares and bonds of banks to stabilize the financial sector. ○ Abandoning the Gold Standard (1933): The U.S. moved to abandon the gold standard, which helped restore confidence in the banking and financial systems, as well as stimulate domestic demand, freedom to use monetary policy. USA: FDR and the New Deal Public Works Program: ○ Objectives: Provide income for the unemployed and stimulate demand. Improve the country's infrastructure. IDEA= i go to the farmers, industry and i decide supply and price; in the exchange i give you infrastructure to respond to change in prices Welfare and Labour Market Regulations (1935): ○ Social Security Act: Introduced old-age pensions, disability and unemployment insurance, and allowances for widows and children. ○ National Labour Relations Act: Required companies to recognize trade unions. Established collective wage bargaining. ○ USA: FDR and the New Deal (continued) Supreme Court Challenges (1935-1936): ○ The Supreme Court ruled that several acts (e.g., NIRA and AAA) were unconstitutional, as they violated economic freedom—> everything was planned by the state and was creating cartels in the economy ○ Many of these acts were abandoned or amended to avoid further sanctions. ○ In FDR’s second term, some of these measures were reintroduced. HE managed to get elected many senators (life ) Impact of New Deal Measures: ○ Despite the symbolic importance of many measures, their economic impact was relatively limited in scope. ○ Economic recovery was also driven by policies like currency devaluation. increase in gdp per capita effect on unemployment quite controversy, not in terms of amount, the real output is the effect on the expectations regarding the future, more optimistic, consume more, invest more, restarting the economy machine LECTURE 15 Meantime, in Europe… Some European states opted for a solution other than the social democratic one: ○ Complete abandonment of economic internationalism ○ Closure of their markets ○ Strong state intervention in the economy ○ Extensive public works campaigns The first country to move in this direction was Nazi Germany, followed by many other central and southern European countries, including fascist Italy and the Soviet Union. ITALY AND GERMANY HAD MORE AN AUTHARCHIC APPROACH Germany: Nazi Economics and Economy Post-War Struggles: ○ Germany faced severe post-war problems, including: Huge foreign debt Reliance on orthodox economic policies Capital Controls: ○ Introduced in 1931, allowing for the potential expansion of domestic monetary policy. ○ However, politicians chose to continue a policy of austerity. Economic Impact: ○ Failure to use monetary policies to stimulate the economy worsened the crisis.--> public spending was not used ○ The German economy suffered severely: Deteriorating living conditions Dramatic rise in unemployment rates Political Consequences: ○ Nazism capitalized on widespread discontent, leading to its rise to power. Key Political Milestones: ○ 1932: National Socialists won the elections. ○ 1933: Adolf Hitler became Chancellor. he gained lots of votes in ten years ○ Later in 1933, elections confirmed Hitler as Führer.--> given to right to administer the country ○ 3 economic crisis in 10 decades→ the government of the Weimar Republic was not enough ○ The idea was to associate jews as capitalists, against communism and socialism. At some point he changed his political approach, by stopping advocating against capitalism to control industrial sector. Political and Economic Measures: ○ Suppression of political parties and trade unions. ○ Focus on reducing unemployment:--> rearm the country Initiatives to incentivize marriages.--> already used by fascists to increase industrial prod, in preparation for the war ○ Implementation of the Four-Year Plan: Significant reduction in unemployment. Economic preparations for war (Four-Year Plan 2). Fire blame the communists→ he asked for an emergency state→ gained all powers to even change the constiturion Key Figure: ○ Hjalmar Schacht was the main architect of Nazi Germany’s economic recovery. ○ Held key positions: President of the Reichsbank (1933–1939) Minister of Economics (1934–1937) Schacht’s Economic Programme: ○ Aimed to restart industry by injecting liquidity. ○ However, an expansionary policy risked collapsing the balance of payments. FROM 1933 TO 1939 Spending money→ Rearmament but Germany was forbidden to spend money on military resources OFFICIALLY→ they went UNOFFICIAL→ using CASH→ ME.FO→ State budget The ME.FO Solution Overview: ○ The Metallurgische Forschungsgesellschaft (ME.FO) was a fictitious company created to facilitate secret rearmament. Mechanism: ○ ME.FO issued bonds to state suppliers. ○ These bonds: Were exchangeable. Could only be spent within national borders. Interest rate was 4% the highest possible initial expiration after 6 months, then extended to 5 years Effects: ○ Enabled monetary expansion through an alternative "national" currency. ○ Avoided burdening the state budget or causing inflation. System Confidence: ○ Guarantees provided by the central bank. ○ Major companies accepted ME.FO bonds as a valid means of payment. Financing: Largely funded by public spending. The deficit of the state was 19 billion→ impossible to see 12 billion ME.FO in the state budget (they should have been summed up) Key Objectives: Reducing unemployment.--> invest in the war industry Construction of public works.---> building structures→ how do you present urself to other countries→ appear as strong and powerful as possible Support for indebted farmers and small businesses. Promoting economic self-sufficiency (autarky). (the latter 3 ones are needed to be self-sufficient) Military rearmament. International Trade Policy: Brought under state control. Creation of an extensive trade area encompassing Central and Eastern European countries. German Economic Policies (1936 and Beyond) Full Employment Achieved: ○ By 1936, the German economy reached full employment. ○ Subsequently, the labour supply became tight. Economic Planning Approach: ○ Relied on cooperation with the business community. ○ Featured strong collaboration between the state and business, organized along cartel lines.--> germany had a strong increase ○ Trust of people increased ○ Not a free environment→ already a situation of control INCREASE IN GDP THEN COLLAPSE DUE TO WW2, BUT ALSO THE CLAIM BACK OF MONEY AFTER THE METO BILLS MATURIES EXPIRED The recovery of Germany was huge, after WWI despite its loss USA was the dominant economy, GDP per capita > GB’s one Italy and Autarchy Phases of Fascist Economic Policy: ○ Liberal phase (1922-1925): Initial period of free-market policies. ○ Dirigist phase (1925-1936): Increased state intervention. ○ Autarkic phase (1936-1940): Shift to self-sufficiency. Factors Leading to Autarchy: b ○ 1929 Crisis: Close ties between mixed banks and industries risked collapse after the stock market crash. ○ Sanctions by the League of Nations (1935): Imposed following Italy's invasion of Ethiopia. Launch of Autarchy: ○ Initiated in 1936. ○ Formalized in the "Regulatory Plan for the Italian economy in the coming fascist era." Fascist Economy: Key Points Dirigism and Protectionism ○ Economic policies aimed at strengthening the Italian economy in line with Fascist ideology. Grain Battle ○ A campaign to increase domestic grain production and reduce reliance on imports. Quota 90 Policy ○ Objective: Adjust the exchange rate between the lira and the sterling from 145 to 90 ○ Consequences: Restricted access to credit. Reduction in lira circulation. Overvaluation of the currency led to deflation.--> X decrease; IM increase–(lower cost in importing raw materials, benefit in the heavy industry since the state was buying we had positive profit Artificial salary reductions to align with deflationary trends. You don’t need any more this high salaries, but due to the overvaluation their purchase power decreased so proletarians were worse off, while middle class benefited thanks to the growth of their financial investments Heavy Industry ○ Relied on importing raw materials and selling finished goods to the state. Impact of the 1929 Crisis ○ Increased public spending. ○ Financial support provided to industries and banks. ○ Large-scale land reclamation projects initiated to boost agriculture and employment. Battaglia delle nascite Tax unmarried man (tassa sul celibato) 50 % were working in the industrial sector→ still depending on the importation of wheat Together with the Grain Battle Institute for Industrial Reconstruction (IRI) Establishment and Evolution ○ Founded in 1933 as a temporary body to rescue and demobilize failing businesses. ○ Became a permanent organization in 1937 to manage state shareholdings in the commercial, industrial, and credit sectors. Economic Impact ○ Controlled approximately 40% of the total equity capital of Italian companies. ○ Financed its activities through bond issuance on the market. Management and Organization ○ Introduced sector-specific financial entities to streamline operations and improve efficiency. ○ Aimed to balance public interest with private sector efficiency, making it a unique hybrid model. THE STATE become the owner of major companies, investing a lot and to make them competitive, positive profits, then sell but it was not a good approach, since many companies failed (ex.Alitalia GERMANY VS ITALY RECAP WORLD WAR II COLLAPSE AND REBIRTH LECTURE 16 World War II vs. World War I Economic Mobilization WWI: Major economies allocated 30%-60% of their national incomes. WWII: Demanded even greater mobilization, with 50%-70% of national incomes. Human Losses WWI: Over 20 million deaths. WWII: Over 50 million deaths, marking a much larger scale of devastation. Economic Factors Economists played a central role in shaping wartime policies and management during WWII. In Great Britain: ○ WWI: Consumption expenditure dropped from 77.2% (1913) to a low of 60.2% (1917). ○ WWII: Fell from 78.8% (1938) to 51.9% (1943), showing a more significant reduction. Policy and Structural Changes Nationalization of industries to centralize control and boost efficiency. Restrictions on competition to prioritize wartime production. Improved economic management based on lessons learned from WWI, leading to better performance during WWII. Victory and Defeat in WWII: The Role of Production and Attrition Key Determinants: Success in WWII heavily relied on the production and attrition of ships and planes. The ability to replace and outproduce losses was a decisive factor in the war's outcome. Destruction of Equipment Phases: 1. Pre-production Destruction: ○ Losses or damage before equipment could be fully produced or operational. 2. Direct Production Destruction: ○ Targeted attacks on production facilities and infrastructure (e.g., factories, shipyards). ○ Final goods destroyed by bombs 3. Deployment Losses: ○ Equipment destroyed during deployment or active combat. This systematic destruction created immense pressure on wartime economies to sustain production capacity and innovation. he Role of the State During WWII State's Crucial Role in Conflict Management: ○ Tight control of supplies, financial sectors, and workforce. ○ Forced levies to meet war demands. ○ Direct interventions to prioritize war industries' needs. Raw Material Demand: ○ High need for materials like rubber, steel, and oil. ○ Search for alternatives, e.g., synthetic rubber.-- > needed for tires ○ Stimulus for technological innovation driven by scarcity. Impact of Pre-War Policies: ○ Planning and autarkic policies implemented pre-war proved valuable for sustaining wartime economies. ○ Enabled better adaptation during the war and provided foundations for post-war recovery. Economic Development & Outcomes: ○ Victorious nations generally had the highest pre-war development levels (e.g., GDP per capita, infrastructure). The Role of Science in WWII Significance of Science in War: ○ The Los Alamos National Laboratory serves as a key example of science's role in wartime innovation. ○ Scientific advancements were crucial for developing more effective combat methods. ○ Lots of scientists, everything was secret, also the italian Enrico Fermo, construction of atomic bomb Post-War Technological Spin-Offs: ○ Innovations during the war laid the foundation for growth in various industries: Aerospace industry Chemical and pharmaceutical sectors Energy sector Information and Communication Technology (ITC) Legacy of Wartime Science: ○ Technological progress driven by wartime needs spurred the creation and expansion of new industrial sectors in the post-war era. EFFECT ON GDP GNP increased by 95%, then more than 200%, unemployment decreased a lot, forces If we look at these indicators can we say people were living better wr to WWI? It is true that GDP per capita was increasing, but it was not distributed among people, but used for war expenditure not in better living conditions USA leading country, UK, GERM, France, this graph permits comparisons international dollars, collapse when war ended apart for USA, UK The American Plan Planning for a New International Economic Order: ○ Efforts began before the US entered WWII in 1941 to avoid the mistakes made after WWI. ○ Focus on establishing a stable and cooperative global economic framework post-war. Economic Management During the War: ○ Achieved full employment post-1940 through massive war mobilization and industrial production. ○ Introduction of macroeconomic data collection around 1945, originally intended for wartime planning. Financing the War Effort: ○ Increased Taxes: To support government spending on the war. ○ War Bonds: Issued to citizens as a means of financing military expenditures while promoting national unity.--> CITIZENS WERE ASKED TO PARTICIPATE ACTIVELY IN THE WAR ECONOMY WWII and its Economic Impact on the US Defense Spending: Increased from 1.4% of GDP (1940) to 37% (1945). GDP Growth: Real GDP per person peaked, rising 67% above 1940 levels during wartime. Military Workforce: 10% of the workforce was conscripted into military service. War Goods Production: Over 36% of GDP was allocated to producing war-related goods. Resource Allocation & Rationing: Military demand prioritized over civilian needs, resulting in rationing of essentials: ○ Meat, gasoline, fuel oil, kerosene ○ Nylon, silk, shoes, sugar, coffee ○ Processed foods, cheese, milk Question of Welfare: Americans saw significant economic shifts and growth during the war, but the stringent rationing and sacrifices raise the question of whether living standards truly improved compared to pre-war times. Economic and Social Changes During WWII in the US Lower Consumption: ○ Per capita consumption was lower than in 1940, despite economic growth, reflecting the wartime shift in resources. Increased Labor Effort: ○ Longer and harder work hours were required. ○ Labor force disruptions: Teenagers left school for work. Women entered the workforce in large numbers. Elderly returned from retirement. Taxation: ○ Top income tax rates reached 90%. ○ Households paying income taxes increased sixfold. ○ Even impoverished families began contributing to income taxes. These changes underscore the societal sacrifices made to support the war effort, despite economic indicators of growth. → Similar to what was happening in Europe, Italy( donation of their weeding rings) Not leave freedom of initiative to countries, the Atlantic chart, the foundation of post US Financial and Political Role During WWII Lend-Lease Program: ○ The US lent $50 billion to Allied nations. ○ Even without repayment, it established significant political leverage for post-war diplomacy. Atlantic Charter (1941): Agreement between the US and Great Britain, outlining principles for the post-war world: (Churchill, Roosevelt) ○ Self-determination: Respect for nations' sovereignty and independence. ○ No territorial gains: Commitment to avoiding conquest. ○ International cooperation: Focus on global peace and security. ○ Free trade: Advocating open markets and economic liberalization.-> no protectionism ○ Gold Standard restoration: Plans for monetary stability.--> instrument to solve international population These initiatives reflected the US's strategic positioning as a leading global power and planner of the post-war order. Some terms have a lower percentage according to when they joined the war Post-WWII Reconstruction Lower Starting Point: ○ Reconstruction in 1945 began at a lower level compared to 1918 due to the widespread devastation of WWII. ○ However, the post-war approach was more visionary and politically planned, notably with the US playing a decisive role. Enhanced International Cooperation: ○ The post-WWII period saw more intense international cooperation compared to the aftermath of WWI, which helped foster global rebuilding. ○ Despite this, the world was divided into two ideological blocs (capitalist West vs. communist East), shaping the geopolitical landscape. Post-WWII Reconstruction Pillars 1. Bretton Woods System: ○ Established a new international monetary system, creating institutions like the International Monetary Fund (IMF) and the World Bank to ensure financial stability and promote economic cooperation. 2. International Trade: ○ Efforts were made to restore and expand international trade through the reduction of tariffs and barriers, aimed at fostering economic growth and peace. 3. Marshall Plan: ○ The Marshall Plan provided economic aid to rebuild Europe, with the US contributing over $12 billion to help restore war-torn European economies and prevent the spread of communism. 4. European Integration: ○ European integration became a cornerstone of recovery, leading to the creation of organizations such as the European Coal and Steel Community and eventually the European Economic Community (EEC), which promoted economic cooperation and peace. 5. Economic Miracles: ○ Many countries, particularly in Western Europe and Japan, experienced economic miracles — rapid growth and recovery, driven by aid, investment, and the establishment of stable economic systems. Bretton Woods Conference (July 1944) Objective: The main goal of the conference was to reorganize the global economic system, addressing the balance of payments imbalances of participating countries (44 in total), while avoiding a return to protectionism. Two Proposals: 1. The White Plan Named after Harry Dexter White, the senior US Treasury official. Focused on creating a new monetary system where currencies would be tied to gold (fixed exchange rates), with the US dollar as the central reserve currency. Proposed the creation of the International Monetary Fund (IMF) to help countries stabilize their currencies and facilitate balance of payments. 2. The Keynes Plan Named after John Maynard Keynes, the British economist. Advocated for an international clearing union and global currency (bancor) to be used in trade, aimed at reducing global trade imbalances. Sought to create a system that would allow for more flexible exchange rates and promote cooperation between nations. Outcome: The White Plan was ultimately adopted, leading to the establishment of the Bretton Woods System, with the IMFand the World Bank as key institutions. This system stabilized the global economy for several decades and set the stage for the post-war economic recovery. Bretton Woods: US vs. UK Proposals US Proposal (H.D. White) Context: The US was an exporter and a creditor nation. Goals: ○ Ensure stable exchange rates to protect international trade. ○ Proposal: Create an International Stabilization Fund to provide loans to countries needing currency support. ○ This fund would help stabilize countries' currencies, ensuring global economic stability. UK Proposal (J.M. Keynes) Context: Britain was an importer and a debtor country. Goals: ○ Access to credit to support its recovery and international trade. ○ Proposal: Create a Clearing Union (a World Central Bank) to control international payments and facilitate loans using a new currency, called Bancor. ○ Bancor would be tied to gold, and used to settle international transactions, ensuring a more balanced global trade system. OUTCOME The American position prevailed at the Bretton Woods Conference, and the international monetary system that was adopted was a new gold exchange standard, centered on the US dollar. DISCUSSION 1 OUNCE = 35$---> Fixed exchange rate—> National currencies Reserve of gold in the USA= 65% of $ circulating → During WWII US position of credit wrt to countries All the system is based on the collaboration of international mkt in converting every currency in dollars, so the quantity of dollars will increase while the quantity of gold will not increase, defined by the international market of gold exchange. If the gold price in the gold exchange mkt is going to increase you can create some arbitrage. IT WAS ALL BASED ON CONFIDENCE Key elements: US Dollar as the Reserve Currency: The US dollar became the central currency for international trade. Gold Convertibility: The US dollar was the only currency convertible into gold, at a fixed price of $35 per ounce(28.5 grams). This system created a stable exchange rate system, where other currencies were pegged to the US dollar, which in turn was linked to gold. Bretton Woods System Overview: 1. International Monetary Stability: ○ International Monetary Fund (IMF): Created to safeguard the fixed exchange rate system (linked to the US dollar or gold), ensuring full convertibility of currencies. It has the authority to assist member countries facing temporary imbalances in their balance of payments. 2. Trade Liberalization: ○ General Agreement on Tariffs and Trade (GATT): Established as a foundation for successive rounds of trade negotiations, aiming to reduce tariffs and encourage global trade. The GATT was later replaced by the World Trade Organization (WTO) in 1995, which oversees international trade and includes 164 member countries. 3. Reconstruction and Investment: ○ International Bank for Reconstruction and Development (IBRD, now the World Bank): Founded to help reconstruct countries affected by the war and to promote international investment, focusing on development projects and long-term economic stability. Bretton Woods System Key Features: Stable Exchange Rates: The system aimed to ensure stable exchange rates, which were crucial for promoting international trade and investment. Monetary Policy Freedom: Countries retained the freedom to pursue independent monetary policies, including the ability to combat issues like unemployment, without being constrained by fixed exchange rates. Fixed Exchange Rate Regime: The system operated on fixed exchange rates, where currencies were pegged to the US dollar (which was convertible to gold at $35 per ounce). However, these exchange rates were not rigid and could be adjusted with IMF approval in the event of structural balance of payments imbalances. This approach balanced the need for stability in international trade and investment with the flexibility for countries to manage their domestic economies. You can change your fixed rate + or minus 1% GATT and International Trade The International Trade Organisation (ITO) was initially proposed as part of the Bretton Woods agreements, but it failed to gain approval from the U.S. Congress. This led to the creation of the General Agreement on Tariffs and Trade (GATT) in 1947, which sought to promote free trade by reducing tariffs and other barriers. Key principles of GATT: 1. National Treatment Principle: This principle mandates that international goods and services from member countries must be treated the same as domestic goods and services (Article 3). This ensures that foreign goods are not discriminated against in favor of domestic products. 2. Most Favoured Nation (MFN) Principle: If one member state receives favorable treatment, this treatment must be extended to all other GATT member states (Article 1). This ensures that countries enjoy equal treatment in trade matters. These principles laid the foundation for promoting international trade by reducing trade barriers and ensuring equal treatment for all member countries. 2 base years 1918/1946 You can’t compare the 2 lines they have different starting points in real terms what you can compare is the growth rate, the real output was much larger in the world war II, in light of the fact that the destruction was way bigger than wwi The effects in terms of international trade were really positive, growing from 0 tp 6 %; up until 1970 last gold standard crisis, overall growing over timeF 1. USA learned there was an interconnect with Europe’s economy; 2. Rise of Soviet union and Communism so The Marshall Plan In the post-war period, the USA and its European allies supported a market economy and political democracy, while the USSR, with its satellite states in Europe and Asia, maintained a commitment to a planned and state-controlled economy, under a framework of Communist Party dictatorship. To finance the reconstruction of European economies, the IMF and World Bank were replaced by direct US intervention via the European Recovery Program (ERP), also known as the Marshall Plan. The plan was pivotal in rebuilding Western Europe after the devastation of World War II, offering economic aid and promoting political stability while preventing the spread of communism. it was available to each country engaged in the war even the soviet ones How the Marshall Plan Worked: 1. Development Plans: European countries submitted their four-year development plans, detailing the necessary goods they required for reconstruction (such as raw materials, foodstuffs, coal, oil, machinery, and transport) of their economic machine. 2. Procurement and Delivery: The US government, through the Economic Cooperation Administration (ECA), would then purchase the requested goods either within the US or abroad and deliver them to European nations. These goods were paid for in devalued local currency by the European countries. 3. Sales and Counterpart Fund: The European governments would sell these goods on their domestic markets. The proceeds from these sales were placed into a counterpart fund, which they could only use with US consent. 4. Fund Use: The counterpart fund could be used for productive investments or, in some cases, to reduce public debt, though the latter was rare. Germany and France used it to restart the economic process This system facilitated the recovery of war-torn Europe while also ensuring that the US retained control over how the funds were used, aligning with its broader political and economic interests. The Marshall Plan played a critical role in the economic recovery of Western Europe post-World War II. Key features include: Aid Providers: The majority of the aid came from the United States (69%), with smaller contributions from Canada (12%), Latin America (8%), and other nations (11%). Eligibility: The plan was open to any European country that wished to join, including Italy and Germany, though the USSR and its communist satellite states did not participate.---> there was another plan Major Beneficiaries (1948-1952): ○ France and the UK: Together, they received approximately 45% of the total aid. ○ Italy and Germany: These two countries received around 23% of the funds. The Marshall Plan was a vital tool for rebuilding economies, establishing market economies, and containing the spread of communism in Europe during the early Cold War. In relation to population and production capability of the different countries, r European integration was significantly influenced by the Marshall Plan, leading to the establishment of the OECE(European Organisation for Economic Cooperation) in 1948. This development followed an earlier attempt in 1947 by France and Britain to control aid distribution and create a Commission for Economic Cooperation. However, under U.S. guidance, the OECE was formed with 16 member states, and its primary role was to manage and distribute the Marshall Plan aid among European nations. In 1961, the OECE transformed into the OECD (Organisation for Economic Cooperation and Development) as its membership expanded to include countries like the USA, Canada, and Japan. This evolution played a key role in shaping post-war European cooperation and the economic policies that would later lead to further integration across the continent. The European Coal and Steel Community (ECSC) was established in 1951 during the Korean War, when the demand for steel surged. To take advantage of this opportunity, France and Germany proposed creating a common market for coal and steel to promote economic cooperation and stability. The goal was to reduce duties and harmonize production and wages across the member states. In addition to France and Germany, other countries soon joined, including Belgium, the Netherlands, Luxembourg, and Italy. The ECSC's market opened on 18 February 1953 for coal, followed by steel on 1 May 1953. This was a key step in the integration of European economies and laid the groundwork for further economic and political cooperation in Europe. Schuman Declaration (April 1950): Robert Schuman emphasized the pooling of coal and steel production as a first step towards European federation, transforming regions historically involved in war production. Political Unification Goal: The ECSC's creation marked a significant step toward political unification, as member countries expressed a clear pro-European intention. Post-WWII Economic Growth: Exceptional growth rates, averaging over 4% èàannually, with even higher rates for countries in more underdeveloped conditions. "Economic Miracle": The term often used, but growth was driven by solid foundations and strong technological advancements. These factors contributed significantly to the post-World War II economic growth, often referred to as the "economic miracle" in several countries. Here's a breakdown: Raw Materials at Low Prices: Countries like the USA benefited from access to raw materials at relatively low prices, which supported industrial growth and manufacturing. -Penicillin, antibiotics, vaccines Dietitian habits improved Technological Innovations: Advances in technology, driven by wartime research and development, were key to enhancing productivity and creating new industries, such as the medical sector THANKS TO R&D WITH THE MARSHALL PLAN Fordism and Taylorism: The principles of mass production and efficiency, popularized by Henry Ford and Frederick Taylor, played a major role in industrial expansion. These methods increased production output and reduced costs, leading to higher wages and more affordable goods. Increasing Savings: A rise in household savings, partly due to stable employment and low inflation, enabled greater investment in education for their children and infrastructure, fueling further economic growth, SECOND PHASE OF THE ECONOMIC TRANSITION, DECLINE IN FERTILITY RATES Since mortality was decreasing, there was a high probability that children were going to survive. Increasing Consumption: As the middle class expanded, consumption of goods and services increased, which further stimulated production and economic expansion. Keynesian Economy: Governments applied Keynesian economic policies, focusing on full employment, government spending, and social welfare programs to stimulate demand and ensure economic stability.--> INVESTMENT IN PUBLIC SCHOOLS International Trade: The liberalization of trade, partly through the GATT and later the WTO, opened up global markets, allowing countries to specialize and benefit from comparative advantage. This facilitated economic growth and integration. THE OEEC, THE ECSC These factors combined to create a period of rapid economic recovery and growth in Europe, the U.S., and other parts of the world. 5. Economic Miracles (1952–1973) Generalized Growth: ○ Rapid per capita GDP growth in the Western world. ○ Transformation of economies with a shift away from the primary sector (agriculture) to industrial and service sectors. Growth in Consumption: ○ Significant increase in consumer spending. ○ Shift in consumption patterns towards more diverse and modern goods and services. Economic Convergence: ○ Western European and Japanese economies began catching up with the United States in terms of productivity, income levels, and industrial output. Persistent Global Divisions: ○ Despite progress in the West, the world remained divided: Second World: Communist bloc countries under state-controlled economies. Third World: Developing nations facing economic and social challenges. 5. Economic Miracles: Role of the State Crucial State Role: ○ Implementation of extensive industrial nationalization programs to manage key sectors of the economy. ○ Strong government intervention in economic and social planning to guide development. ○ Expansion and strengthening of the welfare state, ensuring broader social protection and services. Example: Italy (IRI) ○ IRI (Istituto per la Ricostruzione Industriale): Owned more than 600 subsidiaries. Employed over 526,000 workers. Generated a turnover exceeding 37,000 billion lire in 1982. Became one of the most significant industrial groups in Europe, highlighting the impact of state-led enterprises during this period. ○ betweej LECTURE 17 FROM THE WEST TO THE REST IN 1970 2 huge blocks, but it changed over the years Golden Age: Uneven Growth Western Countries: ○ Experienced strong growth, averaging a 4% rate. ○ Internal disparities persisted, such as the divide between northern and southern Italy. Global Disparities (1950–1973): ○ Africa: Modest growth at a 1.8% rate. ○ Latin America: Slightly better with a 2.4% growth rate. ○ Asia (excluding Japan): Achieved a 2.6% growth rate, highlighting slower development compared to the Western world. Average growth late way lower Golden Age: Unequal Growth and its Complexities Key Questions: ○ Is there a common growth path for all nations? ○ Is underdevelopment a byproduct of the success of more advanced countries, influenced by the dynamics between rich and poor nations? Economic Dependence: ○ Less-developed economies often depend heavily on advanced nations, creating systemic imbalances. ○ EX INDIA ( just extractory not investment) Role of the World Bank: ○ Aid focused on developed countries can hinder the growth of underdeveloped economies by diverting resources and opportunities.--> they were not left to walk on their feet, always dependent ○ also fear of joining the soviet force Competitive Advantages of Underdevelopment: ○ Some regions benefit from lower production costs(China, India) and untapped markets, presenting unique opportunities for growth. Social and Ethical Costs: ○ Unequal growth can exacerbate social inequalities and lead to ethical dilemmas, such as exploitation and environmental degradation. Decolonisation and the Changing Balance of Power at the UN 1945: ○ UN membership included 51 sovereign countries, of which: 9 Asian countries 3 African countries 1960: ○ UN membership rose to 120 sovereign states: 70 representing African and Asian countries ○ This marked a significant shift in the balance of power, giving greater representation to nations emerging from colonial rule. UNO - Beginning in 1960 Decolonisation: Diverse Processes and Chronologies A Single Word, Varied Realities: ○ "Decolonisation" often implies a uniform process, but the reality reflects diverse chronologies, causes, and forms. Regional Differences: ○ Middle East, South, and South-East Asia, and Africa experienced decolonisation differently. Post-War Decolonisation Highlights: ○ British Empire: Dissolution in India, Ceylon (Sri Lanka), and Burma during the late 1940s. (1997 Hong Kong) ○ French and Dutch Colonies: Struggles to restore control in Indo-China and the East Indies. ○ Africa: European colonialism saw a temporary revitalisation before the wave of independence movements. Decolonisation: Conflicts and Causes some peaceful→ india other less→ algeria Violent Struggles for Independence: ○ France’s attempt to regain control over Indochina ended with defeat in 1954 by Vietnam. ○ The Algerian War of Independence (1954–1962) resulted in independence after a 7-year conflict. Key Causes Behind Decolonisation: ○ Anti-Colonial Movements: Spread of independence movements during the interwar years..--> because of raw materiale ○ Weakened European Powers: Post-World War II impoverishment and loss of authority. ○ US Opposition to Colonial Empires: The USA promoted decolonisation over options like gradual decentralisation or maintaining colonial status quo. privatisazion of Suez canal by Egypt, France and GBR sent troups, USA order to take them back showed who was in power ○ Communist Ideology: Communist influence fueled many independence movements. The Legacies of the Past Shared Colonial Past, Divergent Paths ○ Many nations inherited subsistence agriculture with little or no industrial foundation, no technology apart from limited export-oriented production. ○ A few countries, such as Argentina, Brazil, Chile, and Mexico, had begun industrialisation in the 1930s, supported by emigrant flows from Europe (human capital). ○ Relied highly on aid from other countries Asia's Industrial Beginnings: ○ Industrial skills emerged through colonial legacies (European, Japanese) and American multinationals. Post-Decolonisation Development: ○ Success stories involved countries leveraging technology acquisition and devising effective state-supported development strategies. Decolonisation: Three Perspectives 1. "Balance Sheets" of European Colonial Powers: ○ Private investments and resources were extracted from colonies long before the transfer of political power. ○ This led to significant outflows of capital from colonies, weakening their economic foundations.---> resources leave countries 2. Interdependence and Integration of Western European Economies: ○ As European economic integration advanced, creating a large continental market, colonies became increasingly marginalised and vestigial to many states' economies. 3. Colonial Unintentional Transfer of Power: ○ When expatriates left the colonies, they left significant gaps in economic activities they had previously controlled. ○ Local entrepreneurs began to fill these roles, but the loss of know-how affected the transition and economic development. The Post-Colonial Divergence The economic miracles of the 1950s fostered prosperity in many Western countries but widened the gap between rich and poor nations. Former colonies struggled to keep pace with their former imperial powers due to several factors: Economic Structure: ○ Economies remained heavily reliant on the primary sector (e.g., agriculture and raw material exports) with limited industrial development. High Birth Rates: ○ Post-World War II birth rates surged in developing countries, rising from 0.8% to 2% per year, compared to 1.3% in the West. ○ These different stages of the demographic transition created increased population pressures. ○ Medical advances encouraged growth ○ Population was increasing at a high speed but at an economic structure that wasn’t able to respond, we were kind of in A MALTHUSIAN TRAP ○ BABY BOOM= WESTERN COUNTRIES AND US Low Per-Capita Income: ○ Rapid population growth combined with stagnant or slow economic growth trapped developing countries in cycles of poverty. Huge gap increasing over time from western countries to overall part of the world already starting in 1950 The Political Instability of Former Colonies Independence and Underdevelopment: Lots of medical process and industrial incentives; PROVIDING AN APPLE PER DAY BUT NOT ACTUALLY APPLE? ○ Gaining political independence did not resolve the deep-seated issues of underdevelopment. Former colonies continued to face: Poverty Illiteracy→ A cultural background was missing Dependence on international trade, often for raw materials with little diversification. NO ATTRACTION OF PRIVATE INVESTMENTS Fragility of New Ruling Classes: ○ The newly established governments often lacked experience, stability, and unity, making them prone to internal conflicts. Role of the Military and Dictatorships: ○ Political instability often led to the rise of military-backed dictatorial regimes as military leaders seized power or were supported by foreign powers. Bipolar World: ○ During the Cold War, the global order was dominated by the USA and USSR, each trying to extend their influence in former colonies. ○ These countries sought to carve out an autonomous position on the global stage, balancing between the two superpowers. Bandung Conference (1955): A significant moment in the non-aligned movement, where newly independent Asian and African nations sought to assert their independence and avoid alignment with either superpower. Recipes for Growth Autarchic and Protectionist Policies: ○ After gaining independence, many developing countries adopted autarchic (self-sufficient) and protectionist economic policies to promote industrialization and modernization. These policies were aimed at reducing dependency on foreign countries. Economic Nationalism: ○ Many countries in Latin America, Asia, and Africa pursued economic nationalism. This was driven by the belief that industrialization was the key to modernizing their economies and improving social structures. ○ The focus was often on protecting local industries from foreign competition and fostering domestic production. Industrialization as a Path to Modernization: ○ Industrialization was seen as the quickest way to move away from agricultural-based economies to more modern, urbanized economies, driving job creation and social progress. Challenges in Closing the Gap: ○ Despite efforts, most developing countries struggled to narrow the economic gap with developed nations. → they needed to rely on international trade ○ Many were unable to break free from the mechanisms of international markets, which often placed them in subordinate positions, or relied too heavily on foreign aid from superpowers, which was not always conducive to long-term growth. Import Substitution Industrialization (ISI): ○ ISI was a common strategy where countries aimed to reduce dependency on imported goods by fostering the growth of local industries to replace foreign imports. ○ This approach focused on building up domestic industries, including manufacturing, and reducing reliance on foreign products. However, ISI often faced issues like inefficient industries, lack of competition, and foreign debt. WHAT WAS THE PROBLEM TOO ADVANCED You needed human capital in order to have a managerial approach, to be competitive in the mkt, that’s why protectionism Import Substitution Industrialization (ISI) Objective of ISI: ○ The goal of Import Substitution Industrialization (ISI) is for developing countries to reduce their reliance on foreign goods by promoting domestic industries. This is achieved through high tariff barriers on imported products to protect local industries and encourage the production of goods domestically. Phases of ISI: ○ First Phase: Simple Consumer Goods In the initial stage, the focus is on manufacturing basic consumer goods

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