International Anarchy and the Ambitions of Germany and Japan (HSC SSCE Modern History): Revision Notes
📚Revision Notes
International Anarchy and the Ambitions of Germany and Japan
Economic dysfunction in the 1920s
The post-war economic fragmentation of Europe
The peace settlement at the end of World War I, combined with economic nationalism throughout the 1920s, created a seriously flawed international economic system. The peace treaties redrew the borders of Europe and in the process created many smaller nations. This fragmentation had significant economic consequences.
The number of economic units in Europe increased dramatically from 20 in 1914 to 27 in 1920. This meant that many traditional market trade routes across Europe were disrupted. As a result, much of Europe no longer benefited from economies of scale - the efficiency gains that come from large-scale production and trade across wider markets.
Note
Understanding Economies of Scale
Economies of scale refers to the cost advantages that businesses and nations gain when production and trade occur on a larger scale. When Europe fragmented into more economic units after WWI, these crucial advantages were lost, making production more expensive and trade less efficient across the continent.
Economic nationalism inhibits trade
To make matters worse, most European nations adopted policies of economic nationalism. This meant that national leaders sought to protect and develop new domestic industries through:
- Tariffs (taxes on imported goods)
- Import quotas (limits on quantities of foreign goods)
- Government subsidies (financial support for domestic industries)
While these policies aimed to nurture infant industries, they had the effect of significantly inhibiting European-wide trading and commerce after the war. International cooperation in trade was replaced by national self-interest.
Important
All trade with Russia ceased when the Bolshevik government disengaged from the capitalist economies of the West. This removed another major trading partner from the European economic system, further weakening international commerce.
Global commercial crisis
On a global scale, this trend was repeated as a commercial crisis severely disrupted the world economy in the first half of the 1920s. The nature of global trade was changing fundamentally.
Many countries now had highly developed industrial sectors and could produce goods in direct competition with traditional European exporters. These included:
- Japan
- India
- Canada
- Australia
- Countries in Latin America
European nations had great difficulty breaking back into global markets. There was a significant shift in trade surpluses away from Europe toward the United States and Japan. Europe gradually lost its dominant position in world trade - a position it had held throughout the 19th century.
The USA's contradictory economic role
After World War I, the United States retreated into political isolation. The USA rejected the 1919 peace settlement and refused to join many international organisations in the 1920s that were designed to enforce these treaties and preserve collective security (international cooperation to maintain peace and stability).
This political isolation had economic consequences. It reduced the USA's effectiveness in coordinating its economic policies with those of other major industrial nations. Despite this lack of coordination, the USA's banking and commerce expanded dramatically, making it the world's undisputed financial and commercial powerhouse.
However, the economic decisions made by the USA ultimately damaged and destabilised the global economic order. This occurred because:
- The USA gave large loans to European countries whose exports directly competed with American products
- This made it difficult for these European countries to earn enough foreign-exchange (foreign currency) to pay their debts to US bankers
- Domestically, the USA was not interested in receiving large quantities of war materials or industrial products from abroad
- Foreign trade accounted for less than 10% of gross national product in 1929
Important
The Fundamental Economic Contradiction
The US government responded to domestic pressures by protecting US domestic markets from foreign competition while simultaneously expanding the volume of American exports. International historian William Keylor noted that this combination of import protectionism and export expansionism violated a fundamental principle of international economics - you cannot successfully pursue both policies at once.
This contradiction was economically unsound because it prevented trading partners from earning the currency needed to buy American exports, ultimately destabilizing the entire global economic system.
Note
Exam Tip: Understanding the US Economic Contradiction
Be able to explain why the USA's economic policy was contradictory and economically unsound. The combination of import protectionism (keeping foreign goods out) and export expansionism (selling American goods abroad) violated basic economic principles because it prevented trading partners from earning the currency needed to buy American exports.
Wall Street replaces London
During this period, Wall Street replaced London as the banking centre of the world, fundamentally transforming foreign investment. However, US loans often went to unproductive long-term projects in Europe rather than investments that would generate economic growth and returns.
The hard-nosed American attitude toward Allied debts from World War I contributed significantly to the global financial dysfunction in the 1920s. The Allied governments found themselves in a similar position to Germany - struggling to pay their debts.
The reparations controversy
The Allied governments used similar arguments to those the German government employed when protesting their inability to pay reparations. Interestingly, some recent historical studies have shown that the economic impact of reparations on Germany was not as severe as the Germans argued at the time. However, the political impact was enormous.
According to historian William Keylor, the political tensions that the reparations issue created on all sides played a major role in undermining the structure of European security that had been established at the Paris peace conference. The reparations issue poisoned political relationships across Europe.
Important
The French Occupation of the Ruhr (1923)
The French occupation of the Ruhr industrial region in 1923 further damaged the political atmosphere in Europe. France occupied this German territory in an attempt to force Germany to make reparations payments, but this action increased German resentment and destabilized the European political system.
The Dawes Plan of 1924
The Dawes Plan of 1924 made a fundamental change to the reparations system. It worked as follows:
Example
How the Dawes Plan System Operated
The Dawes Plan created an interconnected financial system:
- Private American investors would loan billions of dollars to Germany
- These loans would assist Germany's economic recovery
- In return, Germany would make all required reparations payments to the Allied nations
- The Allied nations could then use these payments to repay their war debts to the USA
The Critical Dependency: This arrangement meant that the economic recovery of Europe became directly dependent on American banks continuing the flow of private funds to Germany.
At the time, this arrangement greatly assisted European economic recovery, and a period of relative prosperity was enjoyed from 1924 to 1929. However, this prosperity rested on a very fragile foundation.
The fragility of 1920s prosperity
This prosperity was extremely fragile and, as Keylor described it, created only an "illusion of Western prosperity". Several factors undermined this apparent economic stability:
Important
Underlying Weaknesses of the 1920s Boom
Falling agricultural prices: A global fall in prices for agricultural products made it increasingly difficult for the industrialised nations of Western Europe to sell their agricultural products profitably. Farmers struggled to earn sufficient income.
Falling resource prices: The price of key resources also dropped significantly. For example, the price of silver fell dramatically. Since silver was used by nations such as China and India to back their currency (similar to the gold standard), falling silver prices forced them to cease trading with other nations to protect their currency values.
Collapse of international trade: These global falls in demand for agricultural products and key resources led to the collapse of international trading and ultimately the global economy. The interconnected nature of the world economy meant that problems in one sector quickly spread to others.
Summary
Key Points to Remember:
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The post-WWI peace settlement fragmented Europe from 20 to 27 economic units, disrupting trade routes and eliminating economies of scale.
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Economic nationalism through tariffs, quotas and subsidies inhibited international commerce and worsened economic dysfunction.
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The USA became the world's financial powerhouse but pursued contradictory policies of import protectionism and export expansionism, which violated fundamental economic principles.
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The Dawes Plan of 1924 created a fragile prosperity (1924-29) by making European recovery dependent on continued American private investment in Germany.
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The apparent prosperity of the 1920s was an illusion, undermined by falling prices for agricultural products and resources, which led to the collapse of international trade and the global economy.