Interwar economy – What it is, definition and concept | 2023

The economy between the wars was marked by the effects of the First World War, a prosperous 1920s in the United States and the devastating consequences of the crash of 1929.

At the end of World War I, the United States succeeded Great Britain as the leading economic power, and Wall Street became the world’s largest financial center. In turn, only the dollar was convertible into gold and was the only currency capable of sustaining long-term loans.

For its part, the Treaty of Versailles was an economic fiasco, since an international economic order was not designed. At the same time, Germany, a fundamental country in the European economy, was subjected to economic sanctions that were impossible to pay. Keynes himself argued unsuccessfully that Germany should be allowed to recover economically to enable its reconstruction and integration into Europe.

Europe after the war

The loss of economic hegemony led the British into economic stagnation, as the City of London was no longer the great financial center. The United Kingdom failed in its attempt to compete with the dollar. Exports fell drastically and a deflationary policy was adopted which led to an increase in unemployment. In fact, the struggle between the US dollar and the pound sterling was a source of instability between the wars.

Do you find Economipedia useful?

If you often use our simple definitions we have good news for you.

Now you can learn through our online courses economy, investment and finance. The section we have created to help you advance professionally, in an effective and entertaining way.

France suffered the consequences of the war with special rigor, its currency was unstable and, contrary to what the French expected, the payments for war reparations that it should receive from Germany were not the factor that boosted its economy and its reconstruction.

See also  Inflation protection without interest - 4 tips to keep in mind

For Germany, the payment of war reparations was a humiliation, while sowing resentment in German society. When Germany was unable to cope with economic sanctions in 1923, French troops occupied the industrial Ruhr region. Meanwhile, the country suffered the devastating effects of hyperinflation. Thus, if in 1918 one dollar was equivalent to 14 marks, in November 1923, one dollar corresponded to 4.2 trillion German marks.

Thanks in part to the Dawes Plan, a bargain was established, at the same time that it was possible to tackle German hyperinflation. On the other hand, the payment of the sanctions imposed after the war continued and a financial circuit led by the United States was created. Thus, thanks to American loans, Germany was able to meet the cost of the reparations that it had to pay to the French and British. In turn, Great Britain and France used the war reparations received to repay the American loans they had received during the war.

Around 1926 Germany advanced towards the path of economic reactivation hand in hand with the arrival of its new currency, the reichmark.

Meanwhile, at the level of international trade, Great Britain and the United States implemented protectionist measures. Proof of this was the Fordney-McCumber tariff of 1922, when the United States established the highest tariffs in its history. Thus, the high tariffs hindered European exports and made it difficult to repay the loans granted by the United States.

Faced with the difficulty of exporting surpluses, stocks accumulated, giving rise to overproduction. In fact, the agricultural overproduction of the United States was one of the factors that negatively influenced the great crisis unleashed in 1929.

The happy 20s and the crack of 29

The 1920s only brought economic prosperity to the United States. The dollar became the dominant currency and exports flowed to Europe. Investment came to account for 20% of the Gross National Product of the United States and the construction, automotive and electrical sectors were buoyant economic activities.

See also  Sound marketing - What is it, definition and concept

But around 1925 a problem began to take shape that would bring painful consequences for the US economy. Credit increased uncontrollably and speculation proliferated, since more money was allocated to speculate on the stock market than to productive investments.

By October 1929, the United States economy reached a fateful point. The stock market collapsed, plunging the country into a long stage of economic depression. Despite such a financial disaster, the US authorities reacted too late.

Between October 24 and 29, panic broke out on the New York Stock Exchange and investors wanted to part with their shares. Faced with this collapse of the stock market, many banks were dragged into bankruptcy. The debacle of the financial system also led to the bankruptcy of a large number of industrial and commercial companies. Likewise, the excessive accumulation of inventories caused a drastic fall in prices, while unemployment rose to alarming levels.

The American depression spilled over into Europe, as the United States repatriated capital while European exports to North America collapsed. In fact, in 1931, the repatriation of US capital caused bankruptcies of banks in Germany and Austria. While all this was happening, pessimism and distrust took hold of the European economy and society.

Measures against the Great Depression

Initially, the US authorities opted for deflationary-type measures, without intervening in the markets. It was intended that supply and demand, by themselves, would adjust that serious imbalance.

However, all this changed with the arrival of Franklin Delano Roosevelt to the presidency in 1933. His economic and social program, baptized as the New Deal, included a large public works program, the establishment of a minimum wage and the reduction of working hours. labor. On the other hand, the Roosevelt administration also tried to recover agricultural income, limiting production that had been excessive and encouraging exports.

See also  Flight cancellation compensation | 2022

The New Deal, by itself, did not completely solve the Great Depression, but it did provide a major boost to the American economy.

France also opted for interventionist and social measures to respond to the economic depression of the 1930s. The government of the socialist León Blum increased wages, while leaving the working day at 40 hours a week. The franc was devalued to stimulate exports and the agricultural sector was intervened with price regulations, while trying to avoid the feared overproduction.

In 1931, the pound sterling was withdrawn from the gold standard, while in 1932 heavy import tariffs were established and the British market with its colonies was protected. There is no doubt that Great Britain’s exports to its colonies helped boost its economy, returning it to the production figures and wage levels of 1929.

Meanwhile, in Germany a terrible threat to world peace loomed. In 1933 Hitler rose to power. Germany was devastated by deflationary policies and by the bank failures of 1931.

Thus, Hitler, at the head of the Nazi Party, opted for an autarkic economy, while stressing the need to carry out important public works and rearm Germany.

To do this, the German state borrowed heavily. Industry became a growing sector, as it was a key piece in rearming the army. By 1939, Germany had practically reached full employment, although this policy proved highly risky, as the German state was so indebted that, in the long run, it could have collapsed.

Leave a Comment