A Bird’s-Eye View
The past century was extreme and turbulent. It was extreme in its destructive brutality: two World Wars, many civil wars, and historically unprecedented oppression in the Soviet Union and China in which millions of people were killed and entire cities, infrastructures, and transport systems were destroyed. The past century was also turbulent from an economic perspective. Europe—in particular the United Kingdom and runner-up Germany—called the shots until 1914. Since then, the United States of America eclipsed the UK as the world’s new economic hegemon.
Other fundamental shifts in the world economy took place. The October Revolution of 1917 in Russia ushered in an entirely new central-planning model under autocratic rule. The Soviet Union evolved into a formidable political opponent of the ‘free world’ until the Soviet Empire imploded in 1991. Meanwhile, the free world, in particular high-income countries, became affluent. In the East, Japan had started its stunning economic ascent after the Meji Restoration in 1867. The Four Asian Tigers (South Korea, Taiwan, Singapore, and Hong Kong) experienced rapid economic growth after World War II (WWII), followed by China and India towards the end of the past century. After a period of relative economic stability, the Great Recession broke out in 2008. It took the biblical 7 years before solid signs of recuperation emerged.
The Great War and the Great Depression
When the Great War (1914–1918) broke out, the gold standard was suspended. The belle époque, a long period of free international trade and prosperity, came to an abrupt end and Europe’s economic decline began. World War I (WWI) also marked the breakdown of nineteenth-century western civilisation. Winston Churchill captured in My Early Life (1930) what was to be lost for Britain:
I was a child of the Victorian era, when the structure of our country seemed firmly set, when its position in trade and on the seas was unrivalled, and when the realisation of the greatness of our Empire and of our duty to preserve it was ever growing stronger. In those days the dominant forces in Great Britain were very sure of themselves and of their doctrines. They thought they could teach the world the art of government, and the science of economics.1
The Treaty of Versailles, which was concluded on 28 June 1919, did not particularly reverse Europe’s political and economic fate; on the contrary. John Maynard Keynes, who participated in the Treaty’s negotiations as a member of the British delegation, had warned in The Economic Consequences of Peace (1919) that what the victorious Allies demanded from defeated Germany in the form of an enormous amount of war reparations (132 billion goldmarks), loss of coal and iron ore-rich territory and overseas possessions, would lead to political instability and economic collapse. Keynes was right, and ill-conceived monetary policies, such as the return to the gold standard after the end of the war, combined with protectionist trade policies contributed to a dramatic drop in international trade which led to the Great Depression.
The Roaring Twenties
After a brief post-WWI recession, a period of progress followed, particularly in America: the Roaring Twenties. Pent-up demand triggered a spectacular increase in the production of consumer goods. Cars, radios and electrical household appliances found their way to millions of consumers. Charlie Chaplin’s movie Modern Times was a humorous critique of business progressivism, emphasising production efficiency, as practised by, for example, Henry Ford’s assembly lines pouring out millions of Model T Fords.
Art Deco, jazz, surrealism, new dances and women’s fashion flourished and underscored the upbeat mood. New York became a hotbed of artistic innovation: the Harlem Renaissance catapulted Duke Ellington and his orchestra to fame. The mood was optimistic. More and more Americans speculated on the soaring stock market. Credit was cheap, thanks to the Federal Reserve System’s (Fed) expanding credit policy.
The Gross Domestic Products of the USA, Australia, Canada, the Netherlands, Sweden and the UK registered robust economic growth, as Table 1.1 shows.
Table 1.1
GDP levels, 1921–1927
Country | USA | UK | Australia | Canada | The Netherlands | Sweden |
|---|---|---|---|---|---|---|
Year | ||||||
1921 | 579,986 | 195,642 | 26,818 | 30,307 | 30,670 | 15,854 |
1922 | 612,064 | 205,750 | 28,225 | 34,741 | 32,342 | 17,351 |
1923 | 692,776 | 212,264 | 29,579 | 36,801 | 33,140 | 18,273 |
1924 | 713,989 | 221,024 | 31,524 | 37,360 | 35,561 | 18,847 |
1925 | 730,545 | 231,806 | 33,002 | 41,445 | 37,058 | 19,544 |
1926 | 778,144 | 223,270 | 33,792 | 43,680 | 40,028 | 20,640 |
1927 | 785,905 | 241,240 | 34,305 | 48,010 | 41,700 | 21,284 |
The Great Depression
The booming 1920s—a period of innovation, creativity and prosperity—abruptly ended with the Wall Street crash on 29 October 1929, when the stocks at the New York Stock Exchange took a nosedive. Black Tuesday came as a shock; $14 billion in share prices was lost. Few expected the collapse. Two weeks before the crash, Irving Fisher, one of America’s foremost economists, declared that ‘stock prices had reached what looked like a permanently high plateau’.
Two years later the Great Depression hit Britain and continental Europe in full force. In the autumn of 1931 one of Austria’s largest banks, Kreditanstalt, collapsed. This started a financial crisis. European investors, who had their money deposited in London-based banks, withdrew their sterling deposits in a frantic attempt to cash them. The pound devalued, and Britain—which had returned to the gold standard in 1925—ended the pound–gold convertibility in September 1931.
Mainstream economics had no adequate response to the crisis; in fact, traditional economic recipes deepened the crisis. Bank runs and a scramble for gold led to declines in national money supplies. Many Marxists viewed the depression as the final crisis of capitalism. After all, had not Marx written in the Communist Manifesto that commercial crises, by their periodical return, put the existence of the entire bourgeois society on trial? Great Depression expert and former Fed chairman Ben Bernanke quoted in his Essays on the Great Depression (2000) Barry Eichengreen’s analysis of the depression’s causes:
Monetary contractions in turn were strongly associated with falling prices, output and employment. Effective international cooperation could in principle have permitted a worldwide monetary expansion despite gold standard constraints, but disputes over World War I reparations and war debts, and the insularity and inexperience of the Federal Reserve, among other factors, prevented this outcome. As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and other gold bloc countries finally left gold in 1936.2
Germany had to pay back their citizens who had invested in German war bonds, as well as large amounts of war reparations to the Allies. The German Reichsbank printed more and more money. The result was hyperinflation. Frederick Taylor’s The Downfall of Money (2013) presented the spectacular plunge of the mark–dollar exchange rate from 4.19 marks to the dollar (August 1914) to approximately 2.5 trillion marks to the dollar (December 1923).3
Sebastian Haffner, the son of a Berlin-based senior civil servant, described the consequences of inflation for his family in Geschichte Eines Deutschen (2000):
On the 31st or the first of the month, my father received his monthly salary, which represented all we had to live on—bank deposits and savings certificates had long since become worthless … In any case, my father would try to acquire a monthly season ticket for the underground railway as fast as he could, so that during the next month he could at least travel to work and back … Then cheques were written for the rent and school fees, and in the afternoon the whole family would go to the hairdresser. What money remained was handed over to my mother—and the next day the entire family, even the housemaid, though not my father, got up at four or five a.m., and took a taxi to the central market. There a big shopping session was organised, and in the course of an hour the monthly salary of a Senior Government Councillor was spent on non-perishable food … At around eight o’clock, just before school time, we would return home, more or less supplied with enough to see us through a month’s siege. And that was not the end. For another month there was no more money.4
In fact, Germany’s hyperinflation was preceded by inflation in Austria immediately after the end of the Great War. Austria had lost its empire status, the country was broke, there was a shortage of almost everything, and government’s coffers were empty. Austrian author Stefan Zweig describes the desperate situation in The World of Yesterday (1945). Despite all the misery, he also observed a rather ironical phenomenon at the time resulting from the fact that the Austrian krone had then lost heavily against the German mark:
Bavarians from neighbouring villages and cities poured into the little town by hundreds and by thousands. They patronised the tailor, they had their cars repaired, they consulted physicians and bought their drugs … Then, a border control was established to stop Germans from buying their supplies in Salzburg … One article, however, that could not be confiscated remained free of duty: the beer in one’s stomach … No more superb enticement could be imagined and so they would come in hordes with their wives and children … to enjoy the luxury of gulping down as much beer as belly and stomach would hold. Every night the railway station was a veritable pandemonium of drunken, bawling, belching humanity; some of them, helpless from overindulgence, had to be carried to the train on hand-trucks and then, with bacchanalian yelling and singing, they were transported back to their home country.5
There was one economist who shook up the economic conventional wisdom. He demonstrated that the economy’s self-correcting mechanism, as prescribed by the neoclassical theory, didn’t work. He argued that government had to ac...