Martel Gordon. A Companion to Europe 1900-1945
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Chapter Seven
The Economy
Peter Wardley
The twentieth century was destined to be the American century and its first fifty years
saw a transfer of power and influence across the Atlantic. Although the nations of
Europe would experience growth after 1900 as indicated by a number of indices,
including population, output, standards of living, military capacity, cultural influence,
and even territorial scope, from then on the relative position of Europe would
diminish in the twentieth century as leadership of the world on all these counts
was achieved by the United States of America.
1
If one event has to stand to mark
this shift in power and influence from the “Old Empires” to the “New World,” it
is perhaps the defeat of Spain by an aggressive and expansionist United States of
America in 1898 which resulted in the Stars and Stripes flying victoriously over
Havana in Cuba and San Juan in Puerto Rico and Manila in the Philippines. The
European powers were rather slow to realize the significance of this transformation
and even more halting in their recognition of its causes. On at least the first of these
two counts, it could be said in their defense that those who determined American
foreign policy were also slow in accepting its implications. Many reasons can be
suggested for the Europeans’ failure to comprehend the shifting balance of world
power but, ironically, the successful economic performance of the European econo-
mies during the two decades before 1914 did little to prompt a reassessment which
would have challenged established views based on inadequate information, traditional
outlooks, outdated analysis, or even “Old World” prejudices. At Versailles in 1919,
when Europeans were compelled to engage in a radical reappraisal of their world at
the end of World War I, lingering nostalgia for a mythic Golden Age, longstanding
national rivalries and bitterness generated by the military conflagration, insufficient
foresightedness, strategy and even empathy guaranteed the emergence of severe
international difficulties within a generation. However, despite its retreat from the
European stage in the interwar years, the American achievement, simultaneously
beacon and gauntlet, provided Europeans a persistent, ever growing, manifestation
of their future. This future arrived in 1945 when, with American troops camped in
most of Europe’s capital cities, as either allies or occupiers, the ascendancy of the
United States was obvious and undeniable.
One factor, and probably the most significant, which explains both the consolida-
tion of European supremacy in the eighteenth and nineteenth centuries and the
emergence of the USA as the world’s dominant superpower in the twentieth century,
is economic performance. In this context, in providing an evaluation of one of the
most significant hinges of world history, a valid assessment of European economic
performance in the first half of the twentieth century has to be comparative, adopting
a perspective which is international as well as continental in its scope. The approach
adopted here introduces some of the concepts proposed by economic historians to
account for economic development, reviews evidence indicative of the nature and
extent of European economic growth before 1945, and uses business history to
appraise some of the sources of productivity enhancement which have been proposed
to explain relative corporate success and failure. The contemporaneous histories of
the US economy and American businesses are reviewed within this framework to
provide a comparative perspective.
European Economic Performance 1900–1945
We can begin as an assessment of economic performance within Europe between
1900 and 1945 with two obvious points which apply throughout the period: first,
there was considerable variation in the size of the European economies; and, second,
across the continent, there was considerable variability in the per capita incomes and
the levels of productivity achieved in different countries. However, even at this most
simple level, it is easy to demonstrate the instability of “Old Europe” which added
to economic uncertainty and fragmented markets, thereby curtailing economic
growth. The disintegration of the empires of central Europe added to variability of
size of economies, but although war was the most frequent catalyst here, not all these
changes were caused directly by World War I.
Czechoslovakia, Estonia, Finland, Latvia, Lithuania, Poland, and the USSR were
carved from the war-torn and truncated remnants of the Russian, German, and
Austro-Hungarian empires. At almost the same time as the boundaries of these new
states were settled, the Irish Free State, after the Anglo-Irish conflict of 1919–20,
achieved dominion status within the British Empire, adding yet another independent
European economy.
Although Hitler’s expansion of Germany, through the Anschluss with Austria, the
seizure of the Sudetenland, and the establishment of a protectorate over Bohemia
and Moravia, is the most famous example of territorial ambition before World War
II, such ambitions were not restricted to the major powers. International borders
had been redrawn after the First Balkan War of 1912 when Bulgaria, Greece, Romania,
and Serbia defeated the Ottoman Empire and almost pushed it out of Europe, leaving
only Constantinople and its hinterland as its only remaining European territory. In
1913 a Second Balkan War was fought when the victors quarreled over the territorial
settlement, and the size of Greece – in terms of both population and territory – prac-
tically doubled within two years. Borders were more certain in North America,
though Germany’s attempt to entice Mexico into World War I as its ally with promises
of territorial adjustments in its favor are a reminder that even the boundaries of the
USA were regarded as adjustable by some Europeans. Although changes in interna-
tional borders present difficulties for economic historians, who search for consistent
the economy 99
100 peter wardley
series that will allow investigation of long-run change, this has not been a major
impediment to the constructors of historical national accounts.
Underlying these vital but short-term vicissitudes there remain the dimensions and
trajectories of European “Modern Economic Growth.” This concept was proposed
by Simon Kuznets and it provides a more broadly based interpretation of economic
development than those suggested by explanations which stress an “Industrial
Revolution.” Kuznets constructed historical national income accounts to reveal popu-
lation growth, increased levels of consumption, rising savings and investment ratios
along with major sector shifts in production, with both the manufacturing and ser-
vices sectors expanding relative to the agricultural sector.
2
Adoption of this framework
permits a quantitative appraisal of the characteristics of European economic growth
and a relative assessment of economic performance.
One distinguished economic growth accountant, and arguably the most
prominent in the field, is Angus Maddison and, if we seek a consistent view of
European performance between 1900 and 1945, it is to Maddison’s data that we
turn in order to examine national economic performance.
3
His national income
estimates, which are calculated in constant prices, allow a number of comparative
points to be made.
First, the US economy was much larger than that of any single European nation;
this is shown in figure 7.1, which illustrates the growth path of national income in
the largest economies of western Europe (the United Kingdom, Germany, and
France) and the US between 1890 and 1945. The overall pattern is unsurprising:
slow but steady growth was achieved in northwest Europe – although the two world
wars interrupted this progress while the Great Depression caused a pause in growth
Figure 7.1 Western European and US national income, 1890–1945 (1990 Geary-Khamis
international dollars, millions). From Maddison, The World Economy.
France Germany United Kingdom United States
the economy 101
from which Germany and Britain slowly recovered. During the interwar years French
national income barely grew and it diminished significantly in the years of German
occupation. In stark contrast stands the American experience of sustained and rela-
tively stable growth until 1929, when a sharp fall marked the Great Depression, after
which there was recovery which, after a brief pause in 1938, became rapid expansion
as the American economy was mobilized for World War II. Maddison’s data also
indicates that it was only during World War II that the national income of the United
States exceeded aggregate European income.
Second, as figure 7.2 shows, per capita incomes in Europe, estimated as national
income, defined as above in constant income terms, divided by total population,
varied considerably. Before World War I British per capita income ran in step with
that of America, with both economies demonstrating a steady increase. American per
capita income level surged ahead in the “Roaring Twenties,” while those in Britain
sagged in the postwar doldrums, recovering slowly before 1931. Thereafter, freed
from the gold standard, British per capita income rose steadily until World War II,
matching the American level through the 1930s. Although this was a diminished
standard, because per capita income in the USA was reduced by the impact of the
Depression, only recovering the 1929 level under the stimulus of World War II, for
Britain this represented a significant increase in average income per head over the
interwar period. Per capita incomes in France and Germany also ran neck-and-neck,
and significantly lower than those achieved in Britain, until the Great War, which
depressed incomes. In the 1920s France recovered sooner than did Germany, and
appears to have maintained a small lead until the mid-1930s, when stagnation set in.
France Germany UK USA Spain
Figure 7.2 European and US per capita income, 1890–1945 (1990 Geary-Khamis interna-
tional dollars per head of population). From Maddison, The World Economy.
102 peter wardley
The impact of German occupation on France’s national income is clearly visible in
the fall of per capita income after 1939. Germany, by contrast, after a slow and halting
recovery in the 1920s, appears to have experienced rising per capita income until the
final stages of World War II. After forty years of slow per capita income growth, civil
war in Spain produced a clear fall which was barely restored by 1945, and throughout
this period Spanish per capita incomes were significantly lower than those achieved
during peacetime in the economies of northwestern Europe.
With Maddison’s data we can also compare the per capita income achieved in
different economies to examine the disparities between nations within Europe. Figure
7.3 shows income per capita represented as two transverse views of Europe to dem-
onstrate variations from west to east and from north to south in 1912 (American per
capita income provides a useful comparator and it is presented as the base index of
100). This figure shows a relatively small gap of about 10 percent between American
Relative GDP per capita in 1912 – transverse West to East
0 20 40 60 80
100
120
Ireland
Great Britain
Belgium
France
Germany
Austria-Hungary
Romania
Russia
Relative GDP per capita in 1912 – transverse North to South
0 20
40
60 80
100
120
Norway
Sweden
Denmark
Germany
Switzerland
NW ltaly
N & C ltaly
S ltaly
Figure 7.3 European relative per capita income in 1912 (US = 100). From Maddison, The
World Economy; Zamagni, Economic History of Italy.
the economy 103
per capita income and that achieved in Great Britain which, in turn, held a similar
lead over Switzerland and Belgium. Germany and France, despite their different
economic structures, had per capita incomes which were almost identical. In 1912
Ireland, Norway, Austria-Hungary, and north and central Italy all achieved similar
per capita income levels, which were approximately half of that estimated for the
United States. By contrast, as shown by the Russian, Romanian, and Italian econo-
mies, the eastern and southern margins of Europe experienced lower per capita
incomes than northwest Europe, with per capita income equivalent to about 30
percent of that of the United States.
How did the European geographical pattern of per capita income change between
1912 and 1938? Figure 7.4 allows us to adopt the same metric and consider the same
geographical traverses across Europe to answer this question. Here the most striking
feature is the improved relative performance of both Great Britain and Switzerland,
Relative GDP per capita in 1938 – transverse North to South
0
20
40
60
80
100
120
Relative GDP per capita in 1938 – transverse West to East
0 20
40
60 80
100
120
Ireland
Belgium
France
Germany
Hungary
Romania
USSR
Great Britain
Norway
Sweden
Denmark
Germany
Switzerland
NW ltaly
N & C ltaly
S ltaly
Figure 7.4 European relative per capita income in 1938 (US = 100). From Maddison, The
World Economy; Zamagni, Economic History of Italy.
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as both had at least achieved parity with US per capita income. However, with the
American economy still recovering from the Great Depression, and controversy over
Franklin Delano Roosevelt’s New Deal unabated, the diminished status of the
American standard has to be recognized. Great Britain still led its closer neighbors,
Belgium, France and Germany, and its relative lead had altered by little over the
quarter century, during which all had experienced economic growth and higher per
capita incomes. In the 1930s the Scandinavian economies, closely associated with
Great Britain and members of the sterling area, and benefiting from the recovery of
the now protectionist British economy, recovered quickly from relatively mild reces-
sion. In Sweden this was assisted by a counter-cyclical fiscal policy introduced by the
Social Democrats in response to unemployment that anticipated Keynesian prescrip-
tions. Taken as a group these northwestern European economies resemble a “con-
vergence club” as their growing per capita incomes rose together. This was not the
case for Ireland or for Hungary; economic independence and the opportunity to
introduce economic policies demanded by nationalists had yielded little in the way
of economic benefits to either economy. By this measure of relative economic per-
formance little change is indicated for southern or northern and central Italy as a
consequence of policies introduced by Mussolini’s fascist regime, though the north-
west of Italy saw expansion of the industrial sector and an enhanced level of per capita
income. Finally, by this measure, the USSR had made some small progress relative
to its tsarist past, though as a broadly based indicator of economic activity, per capita
income does not reflect the enormous expansion of industry which had taken place
in the 1930s.
Taking a long-run view of European economic growth, the important issues for
economists (who are more surprised that history is important than historians) relate
to economic growth, convergence, and divergence. Where historians assume that
historical differences will be caused by different conditions arising from the past and
then explain, at least in part, developments in the ensuing period, economists worry
about why these differences exist and persist. In the economist’s world, as envisioned
in the neoclassical model defined by mobile factors of production, free and full trans-
fers of information, especially technology, and open economies, differences in income
should be removed as economic convergence occurs.
As a consequence, a crucial question for economists, looking at the period
before World War I, especially as economic conditions in this period of history most
closely reflected the assumptions employed in the economists’ model, is the extent to
which convergence occurred – or did not. Although not optimal, the pre-1914 inter-
national economy was remarkably unfettered. There were frictions. For example, the
US experienced extensive industrialization while its markets for manufactured goods
derived benefits from high tariffs and import duties, which were probably unnecessary
and even unjustifiable, even in terms of protection for “infant industries,” but these
were far from burdensome. Generally, tariffs were low, trade was unhindered, capital
moved freely, and postal, telegram, and telephone communications fostered relatively
inexpensive rapid exchanges of information. These factors encouraged mobility and
millions of people, especially from Italy, the UK, and Germany, left Europe to migrate
to the “New Worlds,” with the US the major beneficiary of this flow of workers and
consumers. This was the world which died in the summer of 1914 – thereby bringing
to an end the international economy’s first experience of globalization.
4
the economy 105
By contrast, the interwar period is seen by economists in a most unpromising
light. It began with the creation of national states that reflected neither markets, nor
established trading patterns, nor areas of product specialization and interrelatedness.
To this depleted recipe for economic prosperity was added the collapse of Middle
Europe’s transport systems as mistrust even prevented trains from crossing new
international borders – lest they never return. Although the restoration of peace saw
the reestablishment of economic activity, production, investment, trade, and inter-
national capital flows looked all too often like pale impressions of those which had
been achieved before the war.
5
The protracted establishment of international exchange
parities between 1924 and 1928 effectively resulted in competitive devaluations,
while long-term monetary stability was also compromised by large stocks of poten-
tially volatile funds and the contentious question of reparation payments.
6
Furthermore,
as a result of a shift in the balance of world financial power, effective international
economic leadership in a crisis had also become problematic. Britain, previously
regarded as the world’s undisputed banker, faced potentially serious liquidity prob-
lems as a consequence of wartime expenditure and inter-Allied lending, whereas the
contender for the role of financial world leader was a reluctant, and perhaps naive,
United States, which had emerged from the war as the world’s major international
creditor.
7
Further difficulties accumulated as the prices of primary goods, agricultural prod-
ucts, and industrial raw materials fell significantly and, as Kindleberger graphically
demonstrates, between 1929 and 1933 world trade collapsed into a black hole.
8
If
the economic problems which prompted recession were international and structural,
these difficulties were significantly exacerbated by the introduction of deflationary
government policies. Although the blame for the depression is often laid at the
door of the New York Stock Exchange, which suffered a stock market price fall in
1929, a partial recovery in 1930, but then the long slide to collapse in 1931, it was
the sharp downturn in economic activity caused by government induced deflation
rather than excessive speculation which generated the unique conditions of the early
1930s. In the United States the introduction of the Hawley-Smoot tariff in 1930
provoked retaliation and further contraction of world trade, and the failure of the
US Federal Reserve Board to confront the collapse of the American banking system
with an increase in the money supply resulted in external and internal shockwaves
that reverberated around the world economy. The international monetary system
failed to provide effective cooperation in 1931 as a banking crisis unfolded across
central Europe, sweeping away the Austrian Creditanstalt and then the German Danat
Bank before threatening London.
The protracted but ultimately futile struggle engaged in by British monetary
authorities in the autumn of 1931, as they attempted to keep the pound sterling on
the gold standard, was symbolic of the disruption of economic progress which was
seen nostalgically by many to have characterized the world before 1914. By contrast,
the 1930s saw the United States withdraw from the world economy as it increased
tariffs, reduced trade, devalued the dollar, raised interest rates, and reduced interna-
tional private investment. European governments responded with national economic
programs designed to achieve fiscal “retrenchment” that reduced income, introduced
“beggar-thy-neighbor” tariffs that distorted trade patterns, and created protectionist
trading blocs. As the threat of war grew, autarchic systems were crafted by statesmen
106 peter wardley
that prioritized strategic and military objectives rather than expansion of the inter-
national economy.
9
If one extreme case was provided by the Soviet economy, with
its centralized planning system directed according to priorities of the Soviet
Communist Party, another was Nazi Germany, where the will of the Fuhrer was
implemented by state agencies that had been transformed into adjuncts of the
National Socialist German Workers Party (NSDAP), but which developed into unco-
ordinated fiefdoms dominated by high ranking Nazis. Even the British retreated from
the international economy to some extent after the British Commonwealth of Nations
agreed a system of preferential tariffs at the 1932 Ottawa Imperial Conference. The
World Economic Conference held in London the following year failed to provide
any impetus towards a reduction in protectionist attitudes. In this environment,
international economic prospects were less than propitious. And, when they met at
the Bretton Woods Conference in 1944, it was this state of affairs that the policy
makers of the United Nations countries were so desperate to avoid as they deliberated
upon the establishment of the postwar international economic order.
10
Between 1900 and 1945 Europe was twice stricken by previously unimagined
international conflict. Nevertheless, evidence suggests that significant economic prog-
ress was achieved during this period. To some contemporaries it appeared that, with
appropriate national and international policies, the possibility of growth and prosper-
ity was not far fetched. A number of material and social indicators suggested that
World War II could be followed by better times and the plans made for the return
of peace explicitly considered how these might be achieved. This prospect inspired
those who were given the task, by their respective governments, of drawing up pro-
grams for the new postwar economic order. However, the destructive impact of the
two world wars, the bitter experience of the Great Depression, the poisonous legacy
which haunted all the many countries which had suffered civil war or invasion, and
the ubiquitous dread of unemployment all color our view of the period to the extent
that much that was positive is easily lost from view.
Enterprises and Economic Performance
The story so far has looked more closely at one side of economic activity: an investi-
gation of the growth of national income and of per capita income in the European
countries between 1914 and 1945 not only explores economic performance at a
highly aggregated level – that of the nation-state – but also focuses on income rather
than production. While the close relationship between income and production ensures
that in most cases the aggregate picture will be very similar, if not identical, the
attainment and organization of production is, in itself, important. To present a bal-
anced picture, we must augment an investigation of national income with an exami-
nation of the productive enterprise. Here we look to business history.
Business history investigates the activities of firms or enterprises. Enterprises orga-
nize the activities which result in the production of goods and services. Enterprises
come in all sizes: they range from the independent cobbler or lawyer, who works
alone as an owner-manager, to the giant multinational which employs hundreds of
managers and overseers (foremen) who, respectively, plan and supervise the daily toil
of thousands of workers employed in a number of different countries. It is within
the enterprise that production is organized. And it is the effectiveness, or efficiency,
the economy 107
with which the owners and managers of enterprises combine the factors of production
– land, labor, and capital – that determines productivity and, ultimately, incomes and
living standards.
In the context of this essay, this begs two questions: first, how did Europeans
organize production at the beginning of the twentieth century? And, secondly, how
effective were the people who took the decisions about what to produce and how to
produce goods and services? These are very important questions because they allow
us to test many of the judgments which have been offered by historians about the
nature and effectiveness of national economic performance in this period. Here
perhaps the most obvious example is the not uncommon insistence in the literature
that the British economy “failed.” Within the field of business history the assertion
has been made that this was because there was a “failure of British entrepreneurship.”
However, similar gloomy stories have been told about French businessmen, who are
alleged to have been too traditional in their approach to business and innovation,
and Russian capitalists, who are charged with timidity and deference because of their
failure to challenge the traditional anti-capitalist mentalities of the Russian governing
class. And as the German bourgeoisie is often accused of accepting an inferior role
in the Kaiserreich, and Italian businessmen are suspected of being adverse to competi-
tion, if not incompetent, the emerging pattern would suggest either that enterprises
across Europe were run, for the most part, by a rather unenterprising bunch or,
perhaps, that some historians have rushed to offer convenient but overdrawn conclu-
sions. The obvious comparator here is the performance of American enterprise;
however, as the standard offered to arrive at this verdict is not uncommonly unspoken,
this gauge is not always explicit. Nonetheless, this comparative perspective permits
an assessment of European enterprise.
In terms of employment, the majority of enterprises, on both sides of the Atlantic,
were small ones, and these provided income for the majority of the occupied labor
force. The most frequently occurring enterprise in Europe was the family farm. In
this, Europe was not unusual, as this was true of most of the world’s richer economies
in 1900. In the United States, for example, the “typical” or “representative” enter-
prise, the most commonly occurring firm, was the family-owned farm which employed
permanently few, if any, additional workers; and this remained the case until well
into the twentieth century. At the turn of the century only in Britain, Europe’s most
advanced economy, had the primary sector, consisting of farming, fishing, and for-
estry, become the smallest of the three major economic sectors, though even here
agriculture was to remain a significant employer of labor until after World War II. In
1939 the primary sector was still the predominant one in the Balkans, Iberia, Italy,
and eastern Europe and nearly three-quarters of Europe’s agrarian workforce were
employed in these areas – where labor productivity was relatively low. By contrast,
in the high income per capita economies (see figure 7.3) the industrial and services
sectors employed three-quarters of the labor force and produced an even larger share
of national income.
Europe consisted of a large number of agricultural regions and a great variety of
agrarian practices; history collaborated with geography to determine regional and
local specializations so that there was considerable variation in the nature of agricul-
ture practices. Reluctance to leave the land was also an almost universal sentiment,
which was most often broken by economic necessity, persecution, or ambition. Not