Sunday, February 21, 2010

Why Did Trade Decline in the Interwar Period?

Paul Krugman theorizes that it had to do with electricity and the internal combustion engine replacing steam as the main motive powers in industry: steam was best suited for long-haul cargo transport, by rail and by ship, while electricity and the engine were most efficient in local contexts like factories and farms.

These technology explanations sound good, but I also wonder if the transition of hegemony from Great Britain to the U.S. in the the 1918 - 1945 period also played a role in retarding world trade. With no clear economic hegemon to write and enforce the rules of trade and encourage stable currencies, centrifugal forces took over and the international trade network disintegrated.

Related to this, I think, is the suddenness with which the U.S. found itself thrust into the leading position in the post-World-War-I power vacuum. It took a while, and another world war, for domestic U.S. politics to catch up with the new reality of the U.S. as a superpower. I wrote about this aspect of the story briefly here on Cheeze Blog a couple of years ago when I was doing some reading in economic history:
After 1918, the United States rather suddenly became the world’s most powerful nation. Unlike Britain, which achieved economic leadership gradually through the 17th and 18th centuries, the U.S. found international leadership thrust upon it by the devastating effects of the First World War on Great Britain and the other European powers. Having attained world leadership not so much by design as by default, the domestic economic and political characteristics that might have supported free trade in the U.S. were weak or underdeveloped compared to the characteristics supporting closure. As a result, over the course of the 1920s the U.S. turned inward, a move that cascaded throughout the international system.
Image: Modern shipping lanes. Global Map of Human Impacts to Marine Ecosystems, National Center for Ecological Analysis and Synthesis, 2008.


G of the Forest said...

Interesting hypothesis. It might be helpful to look at the gold reserves of the major powers to add some context. All international trade was done in gold back then instead of in currencies. The war debts of the European nations to the Americans caused the gold coffers of the US to swell, leading to a massive credit expansion, which ultimately led to the speculation that caused the Great Depression. So it could be that the Europeans were strapped for gold to buy goods with in the interwar period and international trade was resumed only by the Bretton Woods system after WWII. This started the dollar on the path it's current reserve currency status. The Americans, being accidently thrust into the global leadership role, didn't realize the implications of the gold imbalance and instead launched the roaring 20's.

Jake Miller said...

Could is also be that the collapsing British and other European colonial powers were responsible for much of the trade pre-WW I, and that, after their collapse, they participated in less trade? I guess that's what G's saying, but with reference to actual historical facts.

Post a Comment

HTML Tag Instructions

Bold: To make text bold, tag it as follows:

<b>text you want to appear in bold</b>

Italic: To italicize text, tag it as follows:

<i>text you want to appear in italic</i>

Links: To add clickable links, like say to a Wikipedia article on baseball, tag it as follows:

<a href="">text you want to link from</a>

Related Posts with Thumbnails