Collapse of the international economy during the interwar years

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The virtual collapse of the international economy during the interwar years can be attributed to the actions or inactions of the United States. The First World War was a major turning point in the economic history of the 0th century. Any victorious supremacy of Britain over Germany and the rest of the world was short lived and superficial. The belief that Britain could recover the enormous and devastating costs of the war through German reparations was quickly extinguished. Consequently, Britain was clearly no longer the leader of the international economy. Who would thus fill the void left by the former economic power? Who would provide the foreign investment to rebuild economies, who would stimulate trade through open markets and who would maintain international stability in trade, capital and labour movements? The obvious choice seemed to be the United States. But, it ignored the international economy in pursuit of its own self interest. Thus, no one filled the void left by Britain and the effects were devastating. From its failure to assume the role of world economic leader to the establishment of excessive trade barriers to the disorganized banking system, the Americans not only brought about their own demise but severely threatened the viability of the entire international economy.

The change in the economy of the United States after WWI was quite dramatic. It entered the war as the world's leading debtor and came out as the leading creditor and strongest economic power. It was in an ideal position to take over as world leader and reestablish the stability needed to recover and rebuild following the war. The level of government expenditure during the war was enormous. In fact, it totalled about $80 billion which was more than 6 times the world debt from 1800 to the onset of the war. By the end of the war, the world owed $11.8 billion to the US. Most of this debt came from allies such as Britain, France and Italy. How the US handled this repayment had direct consequences on the world economy. Britain recognized that repayment was difficult if not impossible and cancelled the debts owed to it. However, the US insisted on being paid in full and would not accept the transfer of debt as a method of payment. Furthermore, in 1 the United States enacted the Fordney - McCumber Tariff raising American tariffs to their highest level in history. These high tariffs restricted the ability of the debtor nations to earn dollars from which to make the interest payments on their American loans. Unable to earn enough through export expansion, these countries had to find short term solutions through further borrowing. The situation could not be prolonged for long and it soon became obvious that repayment was impossible. In response, the US cancelled about half a billion off the book debt. Even then only Britain could make the new payment. France and Italy were unwilling since they could not collect reparations from Germany. The insistence by the US that debt be repaid in full eventually led to an environment of bitterness and contributed to the breakdown of the international economy.

Besides starving the world of much needed capital, the US trade policies also had severe consequences on the level of world trade in the interwar years. Following the war, the US entered an era of protectionism. In 10, the effective tariff rate was a modest 6%. By 1, it had reached 15% with the Fordney - McCumber Tariff. But it was the imposition of the Smoot - Hawley Act in 10 that had the most damaging effects. The Act increased all duties but was especially high for agricultural products and manufactured goods. As a result, the effective tariff rate reached 0% by 1. The primary producing countries were already in a state of crisis because of the collapse of agricultural and raw materials prices. The Smoot - Hawley Act further reduced the purchases of exports and served to prolong and deepen the already existing depression. The concentration of duties on manufactured goods also had severe effects on may European countries, especially Germany. As they were already in default of new loans from the US, Europe needed to earn dollar surpluses to repay the loans. It could not export to the US, and third countries, who were in serious trouble themselves, responded to the US tariffs with their own tariffs on manufactures. Indirectly, the Smoot - Hawley Act made the situation of the European countries much worse through impeding demand for their exports. The US market represented a large share of world trade. In 11, North America had 11.5% of world imports. By 18, it had 15.%. Europe on the other hand had 65.1% in 11 but only 56.% in 18. The imposition of huge tariff rates thwarted the demand for agricultural products and manufactured goods and made the crisis more severe in many European and primary producing countries.

The weaknesses in the American banking system was also a significant factor in the decline of the international economy. As New York became a major international financial centre, international clearing became more complex and inefficient and foreign owned funds moved unpredictably. As well, New York was very inexperienced in distributing international securities to investors. Its money market was not responsive enough to changes in the balance of payments. These weaknesses were only fully realized when the American economy began to seriously decline in 1. Industrial production, prices and personal income from August to October decreased at annual rates of 0, 7.5 and 5 per cent, respectively. The ultimate result was the stock market crash in October. The numerous, small, weak banking units that were so popular in the US were unable to cope with the falling stock market values. The outcome was three surges of bank failures from 10 to 1 hat shook the entire economy. Over the three year period 8,81 banks failed. The actions of the Federal Reserve Banks during this period only exacerbated the crisis. They failed to use their money making powers and pursued completely inappropriate monetary policies. Thus, as the depression in the US deepened, literally all lending was eliminated and world trade dramatically declined. The result was a prolonged economic stagnation that reached all ends of the earth.

Even though a direct cause effect relationship between the actions of the United States and the Great Depression cannot be established, there is no doubt that the US set the stage for such an event and helped to prolong and deepen its severity. Through its insistence and pressure on allied countries to repay massive war debts, its refusal to provide any adequate amount of investment, its imposition of unbearable tariffs and the major structural flaws of its banking system, the United States failed miserably in acting as an international leader in any capacity. Beyond this, the movement towards protectionism and international withdrawl served only to facilitate and lengthen the Great Depression.

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