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ECN 220 (8)
Lecture

Lecture

7 Pages
198 Views

Department
Economics
Course Code
ECN 220
Professor
Michael Jolly

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ECN 220 EVOLUTION OF THE GLOBAL ECONOMY II
Study Guide For Sections 1-3 of the Course Outline
In studying the period between the two wars the emphasis is on the Great Depression and
the characteristics of the international economy which made an economic collapse possible.
THE INTERNATIONAL ECONOMY OF THE 1920s
The starting point is the effect of World War I on the international economy and the
failure during the 1920s to deal effectively with the legacies of the war. We consider, firstly,
problems related to international trade and, secondly, problems connected to the international
financial system.
International Trade
1. Disrupted Trade Patterns : The war resulted in the permanent loss of markets by European
countries to the United States and Japan. They faced difficulties in adjusting to this situation
throughout the 1920s.
2. Overproduction of Some Primary Products : This was due to :
(1) Increased production of food during the war by countries that had previously been large
importers. Once the war was over their higher levels of production continued.
(2) Increased agricultural productivity as new technology was more widely adopted.
(3) A shift in consumption away from cereals (e.g. wheat) and toward more income elastic
foodstuffs (e.g. dairy products).
The result was falling prices for many agricultural industries.
3. Overproduction of Some Manufactures : The problem was not so much one of overproduction
in general as overproduction in certain industries (e.g textiles, iron and steel). This was partly a
result of primary exporting countries building up manufacturing industries during World War I
and partly the result of the adoption of new technology, which created problems of structural
adjustment.
4. Protectionism : Restrictions on trade grew during the period for the following reasons:
(1) As a result of the factors indicated above most countries experienced slow growth throughout
the interwar period, which led governments to adopt protectionist policies to protect jobs.
(2) New countries had come into existence or been recreated (e.g. Czechoslovakia, Hungary,
Poland), so there were now more national boundaries.
(3)Primary producers wanted to protect the new manufacturing industries they had created
during the war.
(4) Industrialized countries wanted to protect the agricultural industries which had grown during
1
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the war.
Protectionist policies caused problems because
(1) They ignored the principle of comparative advantage and therefore reduced world income.
(2) US protectionism caused special problems since the United States was now the world’s
leading creditor nation. When it made it difficult for its debtors to sell products they found it hard
to obtain US dollars to service their debts. This problem relates to the international financial
system and is covered below under that heading.
International Financial System
It was taken for granted after the First World War that the only feasible system of
multilateral payments was the gold standard (in spite of the fact that this system had only really
operated for two decades before 1913). For most countries it was assumed that the pre-war
exchange rates should be adopted. They failed to take account of changes which had taken place
since 1913:
(1) Inflation rates had differed between countries. For example inflation after 1918 was
considerably higher in the United Kingdom than in the United States but Britain went on to gold
at the pre-war exchange rate (£1 = $4.20), which meant that British goods were relatively more
expensive than before in terms of US dollars. Unless prices came down in Britain or rose in the
United States the United Kingdom would have difficulty exporting its goods (and so it proved).
(2) There were new problems associated with high levels of foreign debt arising out of
borrowing from the United States by its allies and the reparations bill imposed on Germany after
the war.
(3) There had been a change in the pattern of international investment.
(4) There was no longer a single dominant world financial centre.
(5) Many countries were short of gold reserves.
Each of these factors is discussed below.
1. Inflation : Inflation occurred in every major industrial country in the years following the war
but the rate varied from country to country. Some countries experienced hyperinflation (e.g.
Russia, Hungary). The most famous example and the most important from the point of view of
the international economy was the German hyperinflation of 1922/23. At one point prices were
increasing in Germany at a rate of 300 % per day.
The major cause of the hyperinflation was government budget deficits financed by money
creation but reparations payments have also been blamed. The argument was that because of
reparations payments the value of the mark fell, which meant that the price of imported good (in
terms of marks) rose and this triggered the inflation. Another view is that the German
government deliberately caused hyperinflation to strengthen its argument that Germany could
not afford to pay reparations.
In 1924 the hyperinflation was ended when a new mark was introduced (1 new mark = 1
trillion old marks) and strict controls were placed on the right of the Reichsbank (Germany’s
central bank at that time) to create new money. At the same time the Dawes Plan rescheduled
Germany’s reparation payments (i.e. gave Germany more time to pay them).
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Description
ECN 220 EVOLUTION OF THE GLOBAL ECONOMY II Study Guide For Sections 1-3 of the Course Outline In studying the period between the two wars the emphasis is on the Great Depression and the characteristics of the international economy which made an economic collapse possible. THE INTERNATIONAL ECONOMY OF THE 1920s The starting point is the effect of World War I on the international economy and the failure during the 1920s to deal effectively with the legacies of the war. We consider, firstly, problems related to international trade and, secondly, problems connected to the international financial system. International Trade 1. Disrupted Trade Patterns : The war resulted in the permanent loss of markets by European countries to the United States and Japan. They faced difficulties in adjusting to this situation throughout the 1920s. 2. Overproduction of Some Primary Products : This was due to : (1) Increased production of food during the war by countries that had previously been large importers. Once the war was over their higher levels of production continued. (2) Increased agricultural productivity as new technology was more widely adopted. (3) A shift in consumption away from cereals (e.g. wheat) and toward more income elastic foodstuffs (e.g. dairy products). The result was falling prices for many agricultural industries. 3. Overproduction of Some Manufactures : The problem was not so much one of overproduction in general as overproduction in certain industries (e.g textiles, iron and steel). This was partly a result of primary exporting countries building up manufacturing industries during World War I and partly the result of the adoption of new technology, which created problems of structural adjustment. 4. Protectionism : Restrictions on trade grew during the period for the following reasons: (1) As a result of the factors indicated above most countries experienced slow growth throughout the interwar period, which led governments to adopt protectionist policies to protect jobs. (2) New countries had come into existence or been recreated (e.g. Czechoslovakia, Hungary, Poland), so there were now more national boundaries. (3)Primary producers wanted to protect the new manufacturing industries they had created during the war. (4) Industrialized countries wanted to protect the agricultural industries which had grown during 1 www.notesolution.comthe war. Protectionist policies caused problems because (1) They ignored the principle of comparative advantage and therefore reduced world income. (2) US protectionism caused special problems since the United States was now the worlds leading creditor nation. When it made it difficult for its debtors to sell products they found it hard to obtain US dollars to service their debts. This problem relates to the international financial system and is covered below under that heading. International Financial System It was taken for granted after the First World War that the only feasible system of multilateral payments was the gold standard (in spite of the fact that this system had only really operated for two decades before 1913). For most countries it was assumed that the pre-war exchange rates should be adopted. They failed to take account of changes which had taken place since 1913: (1) Inflation rates had differed between countries. For example inflation after 1918 was considerably higher in the United Kingdom than in the United States but Britain went on to gold at the pre-war exchange rate (1 = $4.20), which meant that British goods were relatively more expensive than before in terms of US dollars. Unless prices came down in Britain or rose in the United States the United Kingdom would have difficulty exporting its goods (and so it proved). (2) There were new problems associated with high levels of foreign debt arising out of borrowing from the United States by its allies and the reparations bill imposed on German
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