It was by far the most destructive of all wars, often showing an intensification of features manifested in World War I, such as an increasing reliance on science as the basis of military technology, an extraordinary degree of regimentation and planning of the economy and society, a refined and sophisticated use of propaganda at home and abroad. But in other aspects World War II differed from all previous wars. It was a truly global war and directly or indirectly involved the population of almost every country in the world. World War I had primarily been a war of position; World War II was a war of movement on land, at sea and in the air, such as air warfare and naval operations, especially carrier-based aircraft. Science-based technology accounted for many of the special new weapons like the atomic bomb. Economic and industrial capacities of belligerents became decisive, as mere numbers of soldiers counted less than ever: the production line became as important as the firing line. The ultimate secret weapon of the victors was the enormous productive capacity of the American economy. The pecuniary costs involved the direct military expenditure of 1 trillion US$ contemporary purchasing power. This does not include the value of property damage which was certainly much larger, interest on war-induced national debt, pensions and so on. The war related deaths are estimated at approximately 15 million in Western Europe – 6 million military, 8 million civilian, around 6 million Jews murdered in the Holocaust. Russia accounted for 15 million deaths, half of them civilians, China for 2 million military and untold millions of civilian deaths, Japan for 1.5 million military and again untold millions of civilian deaths.
The property damage was far more extensive than in World War I. The US Airforce prided itself on strategic bombing of military and industrial targets, but the post-war strategic bombing survey showed that only 10 % of industrial plants had been permanently destroyed, but 40% of civilian dwellings. Some cities were virtually levelled by German and Allied bombers leaving unknown numbers of casualties, for example Hamburg, Dresden, Coventry, Rotterdam, Leningrad and many more. Transportation facilities were special targets; at the end of the war every bridge over the Loire was destroyed and all but one over the Rhine (Remagen bridgehead). All combatants resorted to economic warfare. Great Britain imposed a blockade like during the Napoleonic wars and World War I and Germany retaliated by unrestricted submarine warfare. Germany introduced so-called “ersatz commodities” such as gasoline from coal and took command over resources of occupied territories. In 1943 Germany extracted more than 36% of French national income and in 1944 30% of German industrial labour was non-German slave labour.
At the end of the war the economic outlook in Europe was extremely bleak; the industrial and agricultural outlook was half that of 1938, millions of people were uprooted, there was the danger of starvation and the institutional framework of the economy was severely damaged. Before the war Europe had imported more than it exported in foodstuffs and raw materials. It paid for the difference with the earnings of its foreign investments and shipping and financial services. After the war Europe’s merchant marines were destroyed, foreign investments liquidated and financial markets in disarray. Europe’s overseas markets had been captured by Americans, Canadians and firms in formerly underdeveloped countries. Europe faced the threat of starvation, disease, lack of clothing and shelter, victors and vanquished alike. There was urgent need for emergency relief and reconstruction. Two main channels of relief came from the US. As the Allied armies advanced across Western Europe in 1944/45 they distributed emergency rations and medical supplies to the population, enemy as well as liberated. The distribution of emergency rations for the defeated German population continued after the end of the war. Furthermore UNRRA (United Nations Relief and Rehabilitation Administration) distributed food, clothing, medical supplies, whereby the US bore 2/3 of the costs. The US made available about 4 billion $ to Europe and 3 billion $ to the rest of the world for relief.
In contrast to Europe the USA emerged from the war stronger than before, to a lesser extent Canada, the other Commonwealth nations and some Latin American countries. They were spared from direct damage and profited from the high wartime demand which permitted full use of capacity, technological modernisation and expansion. Many economists feared a depression after the war in the USA, but when wartime rationing and price controls, which held prices at artificially low levels, were removed, consumer demand for war-scarce commodities created a post-war inflation and kept the wheels of the US industry turning, which enabled the US to extend needed economic aid to Europe.
Planning for the Post-war Economy
The most urgent tasks in Europe were restoring normal law and order and public administration. In Germany and its satellites Allied military governments assumed these functions. Most victims of Nazi aggression had formed exile governments in London during the war and these returned to their countries in the wake of Allied armies and resumed control. Memories of the economic distress of the 1930s and the war prevailed and no one wanted a repetition of these experiences. The leadership of the underground opposition to Nazi Germany, the comradeship of these movements, where Socialists and Communists had figured prominently, played a large role in overcoming pre-war class antagonisms. In Great Britain the participation of Labour in Churchill’s wartime coalition added to its prestige and influence, which led to the first Labour election victory after the end of the war. The magnitude of the task of reconstruction demanded a much larger role for the state in economic and social life than before.
As a consequence in all of Europe widespread public demand for political, social and economic reforms was heard. The nationalisation of key sectors of the economy, such as transportation, power production, parts of the banking system and the extension of social security and social services, such as retirement pensions, family allowances, free or subsidised medical care, improved education opportunities, were crucial. A greater responsibility of governments for a satisfactory economic performance was demanded.
At the international level planning for the time after the war had begun as early as August 1941 on board a battleship in the North Atlantic. Roosevelt and Churchill signed the Atlantic Charter which pledged to undertake the restoration of a multilateral world trading system in place of the bilateral system of the 1930s. It was a statement of good intentions. In 1944 at an international conference at the New Hampshire resort of Bretton Woods, where American and British delegates played a decisive role, the bases were laid for two major international institutions, the IMF (International Monetary Fund), whose responsibility was the managing of the structure of exchange rates among the various world currencies and the financing of short-term imbalances of payments among countries, and the IBRD (International Bank for Reconstruction and Development) or World Bank, whichgranted long-term loans for reconstruction of war-devastated economies and eventually for the development of poorer nations. These two institutions became operational in 1946, but were not very effective for several years. Nevertheless, it was a start towards rebuilding the world economy. Bretton Woods also envisaged the creation of an International Trade Organisation (ITO) to formulate rules for fair trade among nations. In 1947 a limited General Agreement on Tariffs and Trade (GATT) was signed in Geneva, whereby its signatories pledged to extend most-favoured-nation treatment to the others, meaning not to discriminate in trade, and to seek to reduce tariffs, to remove and not to resort to quantitative restrictions, such as quotas, and to consult each other before making major policy changes. This was much less than the plans for ITO had envisaged. But membership in GATT grew and trade barriers were removed. Eventually in 1994 a World Trade Organisation (WTO) replaced GATT.
The Marshall Plan and Economic Miracles
By 1947 most countries in Western Europe except Germany had regained pre-war levels of industrial production, which had not been satisfactory anyway. The severe winter of 1946/47 was followed by a long drought, which resulted in the worst agricultural harvest in Europe in the 20th century in 1947. During the monetary and financial chaos of the 1930s nearly all European countries had adopted exchange controls, so that their currencies were not convertible into others except with a license issued by the monetary authorities. Its counterpart was the bilateral balancing of commodity trade, which was a major cause for the greatly reduced volume of trade. These controls plus others were continued during the war. After the war shortages of all kinds continued these controls. The remedy for the shortages was found in North and South America, but US dollars were required for the purchase and in Europe the greatest shortage was of dollars. American relief and rehabilitation grants helped ease the “dollar shortage”in the first two years. The US and Canada granted Great Britain a loan of 5 billion $ which helped not only Great Britain, but through its expenditures also the continent. Much of the loan was used to redeem the sterling balances accumulated during the war by Great Britain’s trading partners in the sterling area. Nevertheless, in spring 1947 post-war recovery was in serious danger. The growing Cold War between US and USSR and the role of Communist parties in Western Europe were a serious concern for American politicians. In June 1947 General George C. Marshall, who had been named US Secretary of State by President Truman, announced at Harvard University that if the nations of Europe presented a unified and coherent request for assistance, the US government would respond sympathetically, which was the origin of the “Marshall Plan”. Marshal had specifically included the Soviet Union and the other countries of Eastern Europe in his proposal, but the Soviets refused to cooperate with the other European countries in Paris, where 16 European countries met. Finland and Czechoslovakia were called back by the USSR, so no Eastern European country could participate. General Franco’s Spain was not invited and Germany had no government yet to represent it. American
people and Congress had to be persuaded that further assistance to Europe was in their own interest. The Truman administration started a strong lobbying programme and finally in 1948 Congress passed the Foreign Assistance Act, which created the European Recovery Programme (ERP). Furthermore some European countries had their particular concerns; for example Great Britain had hoped for bilateral help from the US and France was worried about the role of Germany. All in all, the ERP funnelled 13 bill $ in the form of loans and grants from the US to Europe from 1948 until 1952. This enabled the OEEC countries, namely the members of the Organisation of European Economic Cooperation, to obtain imports of scarce commodities from the dollar zone, for instance 1/3 food, feed, fertilizer in 1948. After the first year the priority shifted to capital goods, raw materials and fuel to enable European industries to rebuild and export.
After the defeat in May 1945 the conference in Potsdam decided to prolong the occupation of Germany, but this was not intended as a permanent division, but for temporary convenience. Because of worsening relationships between US and USSR the Western Allies granted greater measures of autonomy to Germans in their zones of occupation. The Soviets responded with similar concessions in their zone, retaining strict controls via their puppets. The ultimate result was the division of Germany. The Soviets dismantled many factories in their zones of occupation and carried them to Russia as reparations, but the Western Allies, after a brief attempt to collect physical reparations, realized that the German economy would have to stay intact, not only to support the German people, but to assist economic recovery in Western Europe. They reversed their policy and facilitated the increase in German production. They started with economic reunification in their zones. Just as the Zollverein served as precursor of the German Empire in the 19th century, the economic unification of the Allies’ Western zones of occupation led to the future German Federal Republic.
To ensure the survival of the population, which was extremely under pressure due to the influx of refugees from the east, the US military government financed 2/3 of essential imports between 1945 and 1948. To stimulate German recovery the German currency was reformed in 1948, replacing the debased Reichsmark with the Deutsche Mark at a ratio 1 new for 10 old marks. The population had deserted the old currency anyway and had returned to a barter system. The response was immediate and overwhelming. Goods hoarded or traded on the black market came into the open, stores were restocked, factories restarted and Germany began its remarkable economic miracle. The Soviets were not consulted, which was against the Potsdam agreement. So they retaliated by closing off all roads and rail links to West Berlin and the Western zones. Western Allies responded with a large-scale airlift of strategic supplies to Berlin for more than a year.
In 1948 G was integrated in the ERP and in 1949 the German Federal Republic came into existence. Soon afterwards the Soviets set up the German Democratic Republic which lifted the Berlin blockade in September 1949. With Western Germany in the OEEC and the Marshall Plan economic recovery of Western Europe was complete. When the Marshall Plan came to an end in 1952, it had exceeded all expectations. Europe had recovered and exceeded pre-war levels of production. The newly created international institutions remained in place and stimulated the economy, such as the OEEC.
Another of these important institutions was the European Payments Union (EPU), which wasinaugurated in June 1950 by the OEEC nations with the help of a 500 mill $ grant from the US. This device allowed for free multilateral trade within the OEEC countries. Before the major obstacles to increased trade were shortages of foreign exchange, especially the dollar shortage and the consequent necessity for bilateral balancing of trade. Under the regime of the EPU precise accounts of all intra-European trade were kept and at the end of each month balances were struck and cancelled. Nations with deficits overall were debited on the central accounts, if their deficits were large they had to pay a portion in gold or dollars. On the other hand they received credits on the central accounts and if they were large they received a portion in gold or dollars which enabled them to import more from hard-currency areas, mostly the dollar zone. This provided incentives for OEEC countries to increase exports to each other and lessen dependence on the USA and overseas suppliers. The results were spectacular. World trade grew at an annual average rate of 8%, the highest in history apart from a few years after the trade treaties of the 1860s. Most of that growth took place in Europe. OEEC countries were able to restore free convertibility of their currencies and full multilateral trade in 1958. In 1961 the organisation changed into the Organisation for Economic Cooperation and Development (OECD), to which the US, Canada, Japan and Australia adhered. It was turned into an organisation of advanced industrialised countries to coordinate aid to developing countries and to seek agreement on macroeconomic policies.
Cameron, Rondo, & Neal, Larry, A Concise Economic History of the World, Oxford University Press 2002