ECONOMIC CAUSES and

EFFECTS
of WORLD WAR I
World War I 1914 - 1918

• The Allies (The Entente) vs.

Central Powers; the Entente
won the war.
• Immediate cause: the
Serbian terrorist Gavrilo
Princip assassinated the heir
of the throne of Austria-
Hungary in Sarajievo (28.06.
1914).
• Austria-Hungary declared
war on Serbia.
 WWI – A Map of Participants
Green – The Entente; Central Powers – Orange; Neutral -
Grey
The Industrial Warfare

The industrialization
brought many changes to
warfare:
• WWI as the first mass
global war – large and
powerful armies; millions
under arms.
• New deadly weapons:
tanks, planes, U-boats,
poison gas etc.
 Economic Causes
Neomercantilism and
Imperialism
• The governments
believed that there is a set
of wealth in the world
and in order to increase
your wealth you need to
take someone else’s.
• Fight for colonies and
disregard of the benefits
of free trade.
Militarism
• A rise in military
expenditures.
• Arms races between the
major powers in Europe.
• Arms races were
stimulated by the interests
of new military/industrial
complex which had an
enormous influence over
the governments.
 The Economic Aftermath of the World War I
• Military casualties -10 million;direct civilian casualties -
10 million.
• “Spanish” flu pandemic 1918-1919 killed more than 20
million.
“The war literally and metaphorically blew up the
achievements of a century of economic advance”
(N. Ferguson)
The Economic Aftermath of the World War I
• The total direct cost - $260
billion; indirect – more than
$150 billion.
• The governments abandoned
the gold standard and
resorted to deficit financing
– inflation.
• Collapse of the old empires
– Austria-Hungary, Russia,
Germany, and Ottoman
empire. New borders, new
tariffs and currencies
affected heavily the
international trade.
 Long-Term Effects

• The old economic doctrines of laissez-faire and free

trade were replaced by alternative economic systems –
protectionism, state interventionism and a regulated
market system.
• Europe’s position in world economy began to decline.
Many formerly dependent countries had become
industrially more self-sufficient by the end of the war to
the detriment of the European exporting nations.
• Structural problems. Overproduction in agriculture;
industry – excess capacity.
 Key Trends in the World Economy
1919-1939
• Primary production (agriculture and mining) –
modernization; new sources of supply appeared; supply
exceeded demand and there was an appreciable fall in
prices of agricultural products.
• Population growth and migration - the rate of growth
of the Europe’s population slowed down; the population
outflow from Europe fell heavily.
• Industry - WWI stimulated the spread of
industrialization. In the course of war industry developed
rapidly in a number of overseas countries because they
were cut off from European sources of supply;
remarkable advances in the efficiency of already familiar
techniques .
BRITISH ECONOMY
1919-1939
British Economy During WWI

• Industry and agriculture

were harnessed for the
needs of the powerful
military machine.
• The government got
control of the coal mines,
railways, agriculture etc.
• Taxation covered just 10.
7 % of the total cost of the
war.
• In 1916 conscription was
introduced in the UK.
 Aftermath
Britain was among the great powers, which were least
affected by wartime economic dislocation.

• 740 000 Britons lost their lives; 1 600 000 wounded.

• 45 % of the British mercantile marine was lost.
• From a world creditor before the war, UK became a
debtor country.
Long-term problems:
• Britain lost foreign markets and foreign investments.
• Great dependence on industries that were becoming
obsolete.
• Excess capacity in heavy industries such as shipbuilding,
iron and steel, and engineering.
Post-WWI Boom and Recession

• From April 1919 to May 1920

the external market for British
industry expanded, which led
to an increase in foreign trade
by 38, 1 %.
In the second half of 1920 the
post war recession set in.
• Export dropped 44, 6%.
• Import - 40%.
• The unemployment rate
reached 23% .
 Problems and Moderate Revival

The UK was never again able to regain its leading

position on the foreign markets.
• The local industry quickly developed in the colonies.
• The British export of metallurgic products to France
and Italy dropped.
• The coal industry was also in a serious decline. The
mine owners, facing a slump in demand and heavy
competition from America, Germany, Poland etc. saw no
remedy other than to cut down their labor costs.
• British shipbuilding industry was depressed.
 The New Industries - Growth
• In the 1920s British companies spent less money for
scientific research compared to their American
counterparts.
• 1925 the Scottish inventor John Logie Baird gave the first
public demonstration of moving silhouette images by
television in London.
• In 1928 Alexander Fleming discovered penicillin.
1928 - Anglo-Persian company joined the concession of oil in
Iraq.
British industrialists redirected their efforts to the production
of high quality, specialized, but very expensive goods.
The industrial production index in 1929 barely reached 100, 5
% compared to 1913.
British economy couldn’t reach full employment
(unemployment - 10 % of the labor force).
1925 – Back on Gold Standard

The return to the gold standard

had a negative effect on
British industry, which was
working for the foreign
markets. The expensive
British currency diminished
the competitive power of the
British industrial goods.
In those years British
agriculture was in a weak
position.
Depression Years of 1930s
• Industrial production in
British factories fell.
• Unemployment - 20 per cent
of the active population.
• Regional differences. For
example in Newcastle the
major industry of
shipbuilding fell by 90% and
unemployment rose to 70%.
London and the south-east of
England were hurt less.
• Government revenues
contracted as national
income fell.
The Depression in the UK was relatively mild.
REASONS:
1. Britain – the world`s largest importer of food
and raw materials

Prices of food fell

Real incomes of consumers rose

Purchasing power

New investment in industry

2. There was no financial collapse

In September 1931, the national government
took Britain off the gold standard, following
panic on the world financial markets.

- This eased the pressure on exporters, and laid the

ground for a gradual economic recovery.

- British exports became more competitive on world

markets than those of countries that remained on the
gold standard.

- Going off the Gold Standard was the foundation for

Britains recovery from the Depression.
 Protectionism
and measures against competition
• A minimum 10 % duty was
imposed on all imported
goods (except those from the
countries of the British
Empire).
• The government reserved its
right to raise the duties on
certain goods.
• The Coal Mines act of 1930
made a cartel scheme
compulsory in that sector,
another act restricted
competition in road
transportation etc.
 Ottawa Conference 1932
Trade agreements between Britain and its Dominions
based on the system of limited
Imperial Preference.

Agricultural products Preferential treatment

from the Dominions of the British industrial
entered Britain goods imported in
duty-free. the Dominions.

• Trade within the British Empire increased slightly.

• Global effect – negative. British Empire reduced
its trade with the rest of the world.
 Recovery and and Rearmament
From the middle of 1932 the British economy gradually
began to recover from the Depression.
• GNP regained its 1929 level by 1934.
• Britain initiated a large naval program.
• 4/5 of the new jobs created in British industry were in
sectors directly connected with the military production
and with government orders.
 Agriculture
State intervention in Britain was most extensive in the
agricultural sector. The annual cost of agricultural subsidies
- between 30 and 40 million sterling.

Recession
In 1937 a new economic
crisis broke out.
Production volume fell
down.
Only in 1937 there was a 12
% downturn.
The WWII practically
“ended” the crisis of
1937-1938.
 All through the inter war period, British economy
advanced at a slower rate than the other Western
European economies.
• 1919-1939 average unemployment rate 10 per cent.
• Outflow of people from the UK to the USA, Canada.
Australia, and New Zealand etc.
• Huge regional differences.
World War II marked a watershed for the British economy.
The market mechanism was replaced by central planning as
all national resources were directed toward the war effort.
• Strict rationing of food
and consumer goods.
• Imports declined by 30
per cent.
• Exports fell faster and by
1943 were at only 29 per
cent of their 1938 volume.
• Massive balance of
payments deficit that was
covered by sale of
overseas assets, additional
overseas borrowing etc.
 Glossary:

Trade deficit - an economic measure of a negative balance of trade in

which a country's imports exceeds its exports.
Balance of payments - a systematic record of a nation's total payments
to foreign countries, including the price of imports and the outflow
of capital and gold, along with the total receipts from abroad,
including the price of exports and the inflow of capital and gold.
Laissez-faire - an economic doctrine that opposes governmental
regulation of or interference in commerce beyond the minimum
necessary for a free-enterprise system to operate according to its own
economic laws.
Deficit financing – a planned expenditure by a government to put more
money into the economy than it takes out by taxation.