How Did the International Economy Recover From WWII?
From a geopolitical and socioeconomic perspective, the end of WWII marked a beginning of a new era in which the international community showed great resolve to work together in restoring the international economy. This is evident through international institutions that developed over the period 1944 to 1947 with broad goals of reconstruction in Europe, removal of barriers to trade, and exchange rate stability. These initiatives had varying levels of success, but were all effective in one outstanding regard: instilling overarching faith and reliance in the market system.
Negotiations between Britain and the U.S. were in progress during the war. The immediate result was the Mutual Aid Agreement in 1941, which dealt with lend-loan agreements and an exchange of ideas for collaborating among nations when peace was restored to rebuild a properly functioning economy.
In April 1944, delegates from 44 nations met to draw economic policies to meet this goal in Bretton Woods, NH. Two international institutions were developed, in turn: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) - now the World Trade Organization (WTO).
The purpose of this meeting of delegates of the world's leading economies at the time was to provide stable monetary policy by fixing the exchange rates of member nations in terms of either gold or dollars. It also sought to provide loans for reconstruction in Europe and, later, for economic growth initiatives in developing countries. In doing so, an economic standard was created that today is historically referred to as the "Bretton Woods System."
Two other international institutions were developed in 1947 to stimulate world trade and investment: the General Agreement on Tariffs and Trade (GATT) and the European Recovery Aid (ERA). Twenty-three nations met in Geneva, Switzerland to devise GATT - now the World Trade Organization as of 1995 - and negotiated the reduction of tariffs on over 45,000 items, which represented nearly 50% of world trade. In 1949, GATT had 34 members, representing 80% of world trade. Inroads were made to move closer to a free trade system through the reinforcement of the Most-Favored Nation (MFN) clause, first seen under the Gold Standard of the late 19th century.
The ERA was directed under the initiative of the Marshall Plan in which over $13 billion was extended to war-torn regions throughout Europe in the form of aid. Although limited in its resources and representing only 5% of recipient GNP at the time, the aid was quite effective. Primary products, such as foodstuffs and industrial equipment, represented approximately 60% of the funds, contributing to labor productivity and investment as consumer confidence began to be restored.
The period of 1950 to 1973, classified by many economic historians as the "Golden Years," were nothing short of spectacular for Europe. Labor productivity averaged 4.5% per annum, while real GDP grew at a brisk 4.8% across the top 16 OECD countries. It took merely four years for reconstruction to occur and for the economic performance in Europe to catch up with that of its U.S. peers. These years market a terrific feat, indeed, considering the following: France, the Netherlands, and former Axis countries all had GDP levels in 1944 that hovered at late 19th century levels; that 40 million Europeans died in war or by starvation; and capital destruction was much more widespread in Europe following WWII than in WWI.
A strong resolve of the international community and the formation of international institutions to support market processes played an important role in this recovery from WWII. However, policymakers did not foresee the dollar gap that occurred in the mid-1940s, caused by the running of trade surpluses by the U.S. and the resulting difficulty for Europe to export its goods, as well as challenges in coming up with the dollars to purchase U.S. imports.
The IMF was essentially useless in its first few years because the economic crisis in individual nations prevented this supranational organization from fixing exchange rates within specific par values to the dollar or gold. Nonetheless, one modest success was its role in allowing 19 countries in Europe to devalue their currency in 1949 by approximately 30% to restore their balance of trade and improve its international competitiveness.
The success of GATT was limited, as well. After 1949, there were no further meetings for another five years due in large part to disagreements by the U.S. stemming from the idea that Europe was allegedly reaping substantially more of the benefits from trade agreements.
Economic reconstruction occurred rapidly in Europe following WWII and led toe the Golden Age era in Europe. This remarkable period of rapid growth and productivity is attributable, in part, to the formation of international institutions that focused on stable monetary and trade policy. High levels of investment, full employment, and low inflation due to Keynesian policies instilled in these supranational institutions also played a predominant role in the economic recovery. Technological spill-overs from trade boosted labor productivity and, hence, real incomes throughout Western Europe.
Although the catch-up period was generally a Western European phenomenon and significant parts of Eastern Europe was under Soviet rule, the state of the international economy after WWII ended was good overall. Japan had approximately 8% real GDP growth and Africa, 2.5%. Worth noting is also the fact that the IMF, the IBRD (World Bank), and GATT (WTO) all continue to play an important role in economic development today.
Negotiations between Britain and the U.S. were in progress during the war. The immediate result was the Mutual Aid Agreement in 1941, which dealt with lend-loan agreements and an exchange of ideas for collaborating among nations when peace was restored to rebuild a properly functioning economy.
In April 1944, delegates from 44 nations met to draw economic policies to meet this goal in Bretton Woods, NH. Two international institutions were developed, in turn: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) - now the World Trade Organization (WTO).
The purpose of this meeting of delegates of the world's leading economies at the time was to provide stable monetary policy by fixing the exchange rates of member nations in terms of either gold or dollars. It also sought to provide loans for reconstruction in Europe and, later, for economic growth initiatives in developing countries. In doing so, an economic standard was created that today is historically referred to as the "Bretton Woods System."
Two other international institutions were developed in 1947 to stimulate world trade and investment: the General Agreement on Tariffs and Trade (GATT) and the European Recovery Aid (ERA). Twenty-three nations met in Geneva, Switzerland to devise GATT - now the World Trade Organization as of 1995 - and negotiated the reduction of tariffs on over 45,000 items, which represented nearly 50% of world trade. In 1949, GATT had 34 members, representing 80% of world trade. Inroads were made to move closer to a free trade system through the reinforcement of the Most-Favored Nation (MFN) clause, first seen under the Gold Standard of the late 19th century.
The ERA was directed under the initiative of the Marshall Plan in which over $13 billion was extended to war-torn regions throughout Europe in the form of aid. Although limited in its resources and representing only 5% of recipient GNP at the time, the aid was quite effective. Primary products, such as foodstuffs and industrial equipment, represented approximately 60% of the funds, contributing to labor productivity and investment as consumer confidence began to be restored.
The period of 1950 to 1973, classified by many economic historians as the "Golden Years," were nothing short of spectacular for Europe. Labor productivity averaged 4.5% per annum, while real GDP grew at a brisk 4.8% across the top 16 OECD countries. It took merely four years for reconstruction to occur and for the economic performance in Europe to catch up with that of its U.S. peers. These years market a terrific feat, indeed, considering the following: France, the Netherlands, and former Axis countries all had GDP levels in 1944 that hovered at late 19th century levels; that 40 million Europeans died in war or by starvation; and capital destruction was much more widespread in Europe following WWII than in WWI.
A strong resolve of the international community and the formation of international institutions to support market processes played an important role in this recovery from WWII. However, policymakers did not foresee the dollar gap that occurred in the mid-1940s, caused by the running of trade surpluses by the U.S. and the resulting difficulty for Europe to export its goods, as well as challenges in coming up with the dollars to purchase U.S. imports.
The IMF was essentially useless in its first few years because the economic crisis in individual nations prevented this supranational organization from fixing exchange rates within specific par values to the dollar or gold. Nonetheless, one modest success was its role in allowing 19 countries in Europe to devalue their currency in 1949 by approximately 30% to restore their balance of trade and improve its international competitiveness.
The success of GATT was limited, as well. After 1949, there were no further meetings for another five years due in large part to disagreements by the U.S. stemming from the idea that Europe was allegedly reaping substantially more of the benefits from trade agreements.
Economic reconstruction occurred rapidly in Europe following WWII and led toe the Golden Age era in Europe. This remarkable period of rapid growth and productivity is attributable, in part, to the formation of international institutions that focused on stable monetary and trade policy. High levels of investment, full employment, and low inflation due to Keynesian policies instilled in these supranational institutions also played a predominant role in the economic recovery. Technological spill-overs from trade boosted labor productivity and, hence, real incomes throughout Western Europe.
Although the catch-up period was generally a Western European phenomenon and significant parts of Eastern Europe was under Soviet rule, the state of the international economy after WWII ended was good overall. Japan had approximately 8% real GDP growth and Africa, 2.5%. Worth noting is also the fact that the IMF, the IBRD (World Bank), and GATT (WTO) all continue to play an important role in economic development today.
David Stone, MBA is a recent business school graduate with sell-side equity research experience
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