World War II
and
Its Consequences
“Tomorrow Belongs to Me”
http://www.youtube.com/watch?v=bs5bnVoZK4Q&feature=related
http://www.youtube.com/watch?v=BSoLN77fBn8
The Great Depression
Real GDP 1913=100
France
Germany
Italy
1913 100
100
100
100 100
100
1919 101
75
72
111
112
116
1929 112
134
121
131 177
163
1933 109
123
108
127 164
115
1939 134
139
183
162 195
165
UK
Neth.
USA
If real growth rate 2% or 3%, then potential GDP was
112 or 119 in 1919
Policy Legacy
• Problems generated by World War I were
not successfully resolved.
• Weak system hit by hard multiple shocks.
• 1930s a “lost decade”
• Failure of “laissez-faire,” “gold standard”
and “balanced budgets”
• Distrust of free market policies
• Distrust of globalization
Reaction
• Socialism and Government Intervention arises in
all countries---UK, France, Germany, Italy, US
etc.
• Government control or regulation of industries---prices, entry and production—the end of
laissez-faire.
• Deficit spending. Fiscal policy to stimulate the
economy. End of balanced budgets.
• Off the Gold Standard.
• End of Globalization. World Trade shrinks. End
of Immigration. Capital Controls—ends
international capital movements.
The German Phoenix
• Hyperinflation
• Value of all nominal liabilities and assets wiped
out---savings account to mortgages.
• New currency in November 1923: Rentenmark
• Germany goes back on gold on a new parity
where $1 = RM 4.2
• Strengthened by Dawes loan of US$800 million
to finance Reparations.
• Economy Recovery and Growth 1924-1929,
• But many impoverished by the war and
hyperinflation, over 1 million war dead and many
injured
Germany’s Depression Experience in Perspective
The Depression in Germany
Index of
German
Real GDP
1913 100
1919 72
1929 121
1933 108
1939 183
• Per capita income is
even a bigger drop—
over 30%
• Only the U.S. has a
depression as severe
as Germany but the
U.S. had a very
prosperous decade of
the 1920s and it was a
victor not the
vanquished in World
War I
• Germany has lower p.c
income than U.S.
The Depression in Germany
• 1928-1929: U.S. Capital leaves Germany accelerating
recession, yet Germany continues to pay reparations.
• 1929: Recession means tax receipts fall, causing a
budget deficit
• 1929-1931: To make payments and control the deficit,
the government begins a deflationary policy---raises
taxes and cuts expenditures.
• To keep capital, especially short-term capital in
Germany, Reichsbank has a high discount rate: 7.5% in
1929, though lowered it is higher than U.S., U.K. or
France.
• Germany falls deeper into recession.
• Election of 1930, Nazis increase seats in Reichstag from
12 to 107.
The Depression in Germany
• 1931 Banking and Currency Crisis. Dilemma: Interest
rate changes can’t solve both Germany abandons gold
standard and imposes capital controls, but still wants to
return to gold. Continues its deflationary policies.
• International Conference 1932 in Lausanne effectively
ends reparations for all countries in World War I--relieves Germany of the burden of payment.
• Unemployment reaches 30%
• New government tries some limited expansionary
policies—tax credits and government expenditure—little
effect.
• 1932 Election, Nazis get 37% of vote and 230 seats.
• Second elections of 1932, Nazis
share drops to 33% of the vote and
196 seats.
• The conservative government in the
Reichstag is a minority government--Hitler is invited into a coalition.
The old elites believe that he will be
their “drummer boy”
• January 1933, Hitler appointed
Chancellor. Old general van
Hindenberg remains president, but
eventually Hitler assumes the
presidency and become in this dual
role the Führer.
• Nazis promise a new political and
economic regime.
• They obliterate all democratic
institutions, the courts, the
universities---all are leveled and
subservient
The Nazi
Seizure of
Power
The Nazi (National Socialist) Economy
• They abandon globalization entirely. They reinforce
capital controls and impose controls on imports and
exports. They negotiate when possible trade
agreements with countries that prevent the use of any
gold or foreign reserves---force other countries—
Hungary, Romania, Yugoslavia to run trade
deficits=transfer of resources. They head towards
autarky within their sphere of influence.
• Unions are destroyed. Wage bargaining is conducted by
a government agent. They introduce compulsory labor
service in 1935. They use tax incentives and
propaganda to convince women to leave the labor
force—jobs for men to cut unemployment.
Unemployment falls to 12% in 1935 from 30% in 1933
The Nazi (National Socialist) Economy
• The banks are nationalized and Nazi oversight is
imposed, investment is directed.
• Government spending rises---the balanced
budget is abandoned. Deficit spending is
financed by the sales of bonds. Companies are
financed by banks—loans at low rates to favored
businesses--and the capital market is reserved
for government bonds.
• Heavy government spending on housing,
roads—the autobanen, automobiles, and the
military---which only becomes dominant after
1936
• What was Hitler’s favorite car?
The Volkswagen
• The Volkswagen was a
centerpiece of Nazism's
claims to benefit ordinary
Germans.
• Hitler proposed to build a
cheap car that almost
anyone could afford. He
gave it the name "KdF
Wagen," "Kraft durch
Freude" (Strength through
Joy Car), which we know
as the Volkswagen.
• The builder was a
subsidiary of the Deutsche
Arbeitsfront (German Labor
Front).
• Hitler laid the foundation
stone for the Volkswagen
factory in Wolfsburg in
1938.
• BUT, the price was far too
high for the average
German, much less the
working class even with
time payment schemes
Military Build-Up
• How was the huge build-up achieved?
• Economy had not grown that much
• From the income side of GNP:
Y=Wages+Profits+Rents. Wages fall from 64%
to 57% of total national income between 1932
and 1938.
• From the product side of GNP: Y=C+I+G
Consumption fell from 83% to 59%, with the sum
of investment and government spending rising
from 18% to 41%.
Persecution of Jews, Opponents
and Minorities
• Very costly—driven by ideology
• Huge flight of human capital to U.K. and
U.S.
• Distributional effects---some Germans
gain jobs, houses or property for cheap--attaches them to the regime.
Mobilizing for War
• By 1940, military accounted for 36% of GDP and
rising
• Problem in Germany is it is resource
constrained, it lacks many basic raw materials—
oil and other goods that were imported.
• Hitler was aware that he would have to defeat
the British and the French quickly---the British
could rapidly build up, especially if backed by
the U.S. The result was a policy of Blitzkrieg--lightening war.
Combat Munitions Produced
(in 1944 U.S. munitions prices, billions $)
1933-39
1940 1941 1942 1943 1944
U.S.
1.5
1.5
4.5
20
38
42
U.K.
2.5
3.5
6.5
9
11
11
U.S.S.R.
8
5
8.5
12
14
16
Germany
12
6
6
8.5
14
17
Japan
2
1
2
3
4.5
6
War Devastation
• Costs in human life and resources far exceeds World
War I.
• World War I ends in an armistice---World War II ends
with unconditional surrender of the Axis.
• But even in countries conquered by Nazis the whole
governmental structure had been leveled and their
economies directed at supplying the Nazis.
• Occupied France delivered 37% of its GDP to Germany
in 1941 and 1942, and over 50% in 1943----plus 10% of
its labor force was sent to work in Germany. Total cost of
four years occupation is equal to over 60% of
consumption.
• All of continental Europe is prostrate at the end of the
war.
The Result of World War II
UK
France
Germany
Italy
Neth.
USA
1913
100
100
100
100
100
100
1939
134
139
183
162
195
165
1945
155
71
145
92
100
313
Eastern Europe: The Iron Curtain
• Stalin desires a postwar buffer area against
Germany.
• At Allied Potsdam Conference (1945): Soviet
Union assigned parts of Poland, Finland,
Germany and the Balkans for occupation.
• Winston Churchill: Sinews of Peace” speech at
Westminster College in Fulton, Missouri:
– “From Stettin the Baltic to Trieste in the Adriatic an
"iron curtain" has descended across the Continent.
Behind that line lie all the capitals of the ancient
states of Central and Eastern Europe. Warsaw, Berlin,
Prague, Vienna, Budapest, Belgrade, Bucharest and
Sofia; all these famous cities and the populations
around them lie in what I must call the Soviet sphere,
and all are subject, in one form or another, not only to
Soviet influence but to a very high and in some cases
increasing measure of control from Moscow.”
Western Europe: Tulip-Soup
•
•
•
•
•
Europe 1944-1945---devastated and even famine emerges.
Eastern Europe seized by the Soviet Union
Lack of food and basic raw materials.
Huge trade deficits and huge budget deficits
Danger that it will be financed by money creation
War Legacy—Economic Controls
• To finance war effort, governments---both belligerents
and occupied countries--- increasingly used money
finance.
• Consequence was inflation.
• In reaction price controls were imposed, resulting in
shortages, leading to rationing. Wage controls imposed.
Graph?
• Bread, butter, meat, sugar, coffee, gasoline and many
other goods were strictly rationed.
• Controls remain in place after the war, governments fear
consequences of lifting the controls---result food and
goods become scarce. Black market grows
• Production stagnates. Workers decrease labor effort.
• Farmers refuse to bring food and livestock to market
where they receive low prices.
• In France, Parisians eat yellow bread from corn-meal.
Political Uncertainty
• Victorious allies put coalition governments in place,
consisting of all of Nazis opponents from conservative
Catholics to Communists.
• These groups cannot agree on policy---economic liberals
want decontrol while the left wants a managed economy.
• Continued inflation and end of labor repression---leads to
strikes and demands to raise wages. Industries shut
down.
• Movement to nationalize industry everywhere—Social
Democrats in Germany and Labor Party in the U.K.
• Effect is to reduce investment---people hesitate to make
decisions.
How to Solve Economic Crisis?
1. Budgets must be balanced to reduce
inflationary pressure
2. Inflation can then be reduced.
3. Prices can then be de-controlled, leading
producers to bring their goods to market.
4. Wage demands can be moderated to
relax squeeze on firms profits.
5. Economy may then grow and incomes
rise
How to Solve Economic Crisis?
• BUT, these changes are not costly.
• Who will bear the cost of balanced the
budget—labor or capital?
• Will capital be taxed or labor taxed?
• Result a “war of attrition” each side tries to
outwait the other---hope the other will
concede.
Solution: The Marshall Plan
•
•
•
Secretary of State George C.
Marshall’ address at the Harvard
University Commencement
Exercises, June 5, 1947
Our policy is directed not against any
country or doctrine but against
hunger, poverty, desperation, and
chaos. Its purpose should be the
revival of a working economy in the
world so as to permit the emergence
of political and social conditions in
which free institutions can exist.
The truth of the matter is that
Europe's requirements for the next
three or four years of foreign food
and other essential products -principally from America -- are so
much greater than her present ability
to pay that she must have substantial
additional help or face economic,
social, and political deterioration of a
very grave character.
Solution: The
Marshall Plan
1947-1951
• U.S. transferred $13 billion to
Europe.
• U.S. provided goods to the
European governments who
sold them on their domestic
markets and used the proceeds
for their budgetary expenses.
• Equal to 2.5% of countries
national incomes
• But it worked to solve the
conflicts that had presented a
solution to the political-economic
stalemate. Substantial addition
to budgets.
• U.S. sets “conditionality” aimed
at restoring the free market--keep out of Soviet grasp.
– Balanced budgets
– Stabilize exchange rates
– Decontrol prices and discourage
nationalizations.
Solution: The Marshall Plan
• 1920s and 1930s, Europe had divisive labormanagement conflicts.
• American authorities disbursing Marshall funds
urged unions and governments to focus on
raising productivity rather than current
compensation and paying out dividends. Press
for increased investment.
• In Britain the TUC cooperated with management
to moderate wage demands. In the Netherlands
and Germany unions allowed wages to lag
behind productivity so that industry can gain
profits and reinvest them.
The Marshall Plans Results
• Industrial output rose 37% between 1947
and 1951
• Agriculture recovers.
• Exports increase adding to reserves of
dollars and gold.
• The European “miracle” begins. Europe
begins to make up for the lost years 19141945.
The European Miracle
1945-1960
UK
France
Germany
Italy
Neth.
USA
1913
100
100
100
100
100
100
1939
134
139
183
162
195
165
1945
155
71
145
92
100
313
1960
213
239
347
311
381
382