Ch.11 EH

The United States rose to the rank of a new world power:

  • they did not want to fully assume the international responsibilities of their economic supremacy and they did not join the League of Nations


The heaviest conditions were imposed on Germany:

  • it was deprived of part of its national and colonial territory

  • it had to surrender its navy, arms and munitions, locomotives, etc.

  • The most ‘humiliating’ aspect was Article 231 by which Germany was made responsible for the war and had to pay reparations.


The states that emerged from the dismemberment of the Habsburg Empire

  • national character - > economic self-sufficiency.


Economic nationalism -> Russia and other western countries, including England:

  • tariffs introduced during the war were not removed

  • several bilateral treaties were signed abandoning the principle of the MFN clause


Many governments decided to adopt austerity policies

  • restore balance and contain inflation.


This made reconstruction even more difficult, and many became convinced that a return to the gold standard would be sufficient to resolve this unstable situation.


The issue of German reparations remained open, which amounted to 33 billion dollars (more than twice the German GDP) with prohibitive annual installments.


Despite the German difficulty in coping with payments:

  1. France and England insisted on indemnity payments as well

  2. In 1922, Germany suspended payments

  3.  In 1923 French and Belgian troops occupied the Ruhr taking control of the mines and railways


The result was hyperinflation, as Germany continued issuing money to pay its debts and to try to manage the economic turmoil still present in its territory - > German mark collapsed to 0.02% of its pre-war value

  • New currency, Rentenmark -> guaranteed by an international loan secured by real assets: land, buildings and factories


Return to the gold standard?


Global monetary and financial imbalances on both sides of the Atlantic to solve.  It was essential for the US to grant credit to stabilize both its own and many other national currencies.


Gold standard -> not created pre-war stability -> functioned due to the economic and social conditions


Two ways to restore convertibility to gold: 1. simple return to pre-war parity or 2. realignment to the new conditions. The countries returning most rapidly to convertibility were those like Germany whose own monetary systems had been destroyed.


Gold exchange standard: Introduced to address gold scarcity, allowing reserves in dollars or sterling instead of gold. Added instability, especially for Britain.


Lack of international cooperation:

  • Governments prioritize national interests over collective stability.

  • High interest rates and restricted credit preserved gold reserves but caused deflation.


US investments:

  • Provided critical short-term capital to debtor nations.

  • Uneven and intermittent; stopped after the 1929 Wall Street Crash, collapsing the system.


The US was convinced to help Europe because:

  • they feared total economic and monetary collapse

  • they feared possible Soviet-style revolutions


The Dawes Plan

The German inflation crisis induced the Allied powers to relax the conditions set at Versailles. 1923 the French troops withdrew from the Ruhr and in 1924 an international commission launched the Dawes plan:

  • redefine the terms of payment of war reparations

    • linking them to the economic development of the country

  • reorganize the operations of the Reichbank

  • set up a loan in favor of Germany


The American loan enabled Germany to resume payment of reparations and return to gold convertibility. Overall, the Dawes Plan enabled Germany to restart its economic reconstruction process


Post-war monetary policy: what to do?


Germany emerged from its difficulties and gradually all European countries were able to return to a path of economic growth (even if, sometimes, a full economic recovery was never realized).


Britain returned to the gold standard in 1925 with an exchange rate equal to the pre-1914 rate. This led to a reduction in credit that led to:

  • economic recession 

  • Weak currency and small gold reserves.

  • Vulnerable to demands for gold conversion.

  • miners’ strike (1926) and rise in unemployment

  • reduction in exports, increase in imports, and a trade balance crisis due to overvalued currency

  • The overvalued pound left the field open to the dollar and the US.


Instead, France decided to restore the gold standard with a parity lower than pre-war levels. -> The highly unstable French government wanted to avoid resorting the austerity policies

necessary for stabilization and therefore chose to go the devaluation route.


The franc became convertible with gold at 20% of the pre-war parity

  • This stimulated exports.


Capital flowed into France

  • Expectations of revaluation nurtured by financial operators

  • Indirect taxes vs tax on property


Economic reforms (1926, under Poincaré) -> Abandoned wealth tax projects, Reduced public spending and raised indirect taxes, Stabilized the franc, attracting capital back to France, Returning to the gold standard at 1/5 of the 1913 franc value, stimulating exports.


The Roaring Twenties


From 1925 onwards, Western national economies recovered but there were considerable

differences between Europe and North America. Between 1925 and 1928, European industrial production increased by 20%. Uneven progress: US, Japan, and British Dominions thrived, while Central/Eastern Europe lagged. The driving sectors were those of the Second Industrial Revolution, in particular electricity, automotive and chemical.


The US were even more favored-> 1. Their involvement in the war had been brief, 2. Their territory had not been devastated and 3. They had not gone into debt but had granted loans to Europe.


World Economic Recovery (1921–1929):


Technological Innovation:


Key drivers: electricity, automobiles, and chemicals.

Industries grew (fuels, metals, pharmaceuticals, rubber).

Vertically integrated multinational companies expanded, avoiding tariffs by building abroad.


Consumer Goods and Lifestyles:


Electrification: Widespread in homes; radios, gramophones, telephones, washing machines, and fridges become common.


Entertainment Industry: Cinemas flourished; US dominated (e.g., Hollywood studios like MGM, Paramount). Radio broadcast became key for communication and propaganda (e.g., Italian Fascists' Radio Balilla). Sports events became mass entertainment (e.g., boxing, horse racing).


Tourism & Travel: Foreign travel and cruises expanded, with prepaid financial tools like travelers' cheques. Technological advances (e.g., Lindbergh’s 1927 transatlantic flight) boosted aviation. Advertising & Marketing: Companies heavily promoted consumer products, driving demand.


The flying USA


Economic prosperity reverberated throughout the US and led to vigorous growth in the housing market and industry.


Wealth was also redistributed to American families, who were able to enjoy an unprecedented high material lifestyle: by the end of the 1920s, in the US there was

  • One car for every 5 inhabitants, half of the population owned an iron

  • 15% owned a washing machine, toaster and other household appliances

The standard of living of the Americans increased considerably and various forms of entertainment increased, from cinema, dancing, sports to music.


In Europe, the myth of the American way of life was created, which corresponded to a

standard of living characterized by a series of comforts unthinkable for the average European citizen.


Challenges and Weaknesses:


Europe:

Higher unemployment in traditional industries (coal, textiles, shipbuilding).

Falling agricultural prices hurt farm incomes, reducing consumption and imports.


Global Dependence on Raw Materials:

Over-reliance on single-product exports increased vulnerability to price drops.

Falling raw material prices destabilized national incomes.


Income Inequality:

Uneven income distribution impeded consumption growth.

In the US, corporate profits grew over 40% (1925–1928), while wages increased by <5%.


US Economic Saturation (1929):

Market saturation and wealth disparity slowed growth.

Agricultural sector faced debts and falling incomes.


Stock Market and Crash (1929):

Stock market bubble burst by late 1929.

Factors sustaining growth—rising productivity, consumer spending—began to decline.

Collapse ended the illusion of "permanent prosperity."



Russian Civil War and Early Soviet Economy 


Civil war ended 1920 and the aftermath of war and war communism left the Soviet in ruins. Violent requisitions by the Red Army and a 1921 famine caused millions of deaths. 


Result -> New Economy Policy (NEP) 1921. 

  • Allowed limited market reforms, including the privatization of small businesses

  • Liberalized trade, and the ability for peasants to sell surplus crops. 

This partial return to capitalism aimed to stabilize the economy and create a balance between agriculture and industry.


  • Failed to achieve pre-war production levels or solve structural inefficiencies.

  • Peasants were discouraged by low state-imposed prices. 

  • Limited investments in strategic sectors like infrastructure and arms.


The policy ended after Lenin’s death in 1924, as Stalin rose to power and shifted toward centralized planning, agricultural collectivization, and heavy industrialization in 1928. 


The NEP’s mixed results highlighted the challenges of balancing ideology with economic recovery in the early Soviet Union.