Great Wave

by Fischer, David Hackett;

  Figure 4.03 surveys wholesale prices in nine nations from 1890 to 1914. Most show similar trends: stasis or decline in the last years of the Victorian equilibrium, a turning point circa 1896, and sustained increase (circa 1896–1914). These common trends marked the beginning of the price revolution of the twentieth century. The data are from B. R. Mitchell, European Historical Statistics (2d rev. ed., New York, 1981), 772–75. All are converted to a common base (1890=100).

  Figure 4.04 compares wholesale prices (1910–14=100) with the supply of currency held by the public (in billions of dollars) in the United States. It shows strong similarities in the timing of short-term fluctuations: prices and currency all rose in the boom of the 1880s and declined in the panic and depression of 1893. But differences appeared in the direction of secular trends. Patterns of growth in the money supply were similar before and after the depression of 1893, while price movements were fundamentally transformed from a deflationary to an inflationary trend. The source is Historical Statistics of the United States (1976), E40, E52, E410, X417.

  Monetary factors would play a major role in the price-revolution of the twentieth century, but the great wave itself grew mainly from a different root. It was primarily (not exclusively) the result of excess demand, generated by accelerating growth of the world’s population, by rising standards of living, and by limits on the supply of resources, all within an increasingly integrated global economy.

  The accelerating growth of world population was a driving force in the price-revolution of the twentieth century. After 1890, death rates began to decline rapidly, with the conquest of major epidemic diseases such as tuberculosis, typhoid, typhus, diphtheria and malaria. These events derived from the discoveries of German bacteriologist Robert Koch between 1876 and 1890, and from a “public health revolution,” that spread swiftly throughout the world.

  Fertility declined in western Europe and North America, but rose higher in most other parts of the world. As a result, the growth of global population began to accelerate. Its annual rate of increase in the early twentieth century (1900–1950) was nearly double what it had been in the late nineteenth century (1850–1900).7

  Economic production and productivity also rose after 1896, but so did living standards and cultural expectations. The major European nations were rapidly becoming industrial democracies. Men of all classes received the right to vote in unprecedented numbers. Women began to be enfranchised, first on the national level in New Zealand (1893), then in other nations. These new electors demanded that governments serve the interest of the many, not merely the few. National legislatures enacted far-reaching systems of social welfare, health care, old age security, mass education, and unemployment insurance. The effect of these innovations was to increase aggregate demand.

  Through the twentieth century, there was also a continuing revolution in material expectations among people of every social class—a cultural event that added to the growing pressure of demand on limited resources. The Canadian economist John Kenneth Galbraith wrote, “Even in the United States there is now a persistent feeling . . . that the poor should have access to a doctor. . . . The economic effect of this release of consumption from occupational and class restraint is to put a strong, even relentless, pressure on the supply of both private and public goods and services.”8

  Figure 4.05 compares consumer prices in the United States with the growth of world population. Sources include McEvedy and Jones, Atlas of World Population History, 343; Statistical Abstract of the U.S. (1993), table 1372; United Nations Demographic Yearbook (1993); A. M. Carr-Saunders, World Population (Oxford, 1936); consumer prices (1967=100) are from Historical Statistics of the United States (1976) ser. E135; Statistical Abstract of the U.S. (1993), table 756.

  At the same time that demographic and social pressures of that sort were building throughout the world, the supply of what Frederick Jackson Turner called “free land” was beginning to be exhausted. In 1890, after a survey of population was completed in the United States, the superintendent of the census reported that the American frontier was closed.

  In the 1890s, frontiers were closing in many parts of the world. The expansion of Europe was beginning to meet its natural limits. Russia had largely completed the conquest of its built-in Asian empire. India and its border states to the north and east had been brought under the British Raj. The island-spoils of Oceania had been divided among the great powers. The European “scramble” for Africa was largely completed by 1896. The Australian outback, New Zealand sheep runs, Argentine pampas and North American prairies all had been converted to the production of meat and grain for the world market. The continuing incorporation of these areas into the Western economy had been the dynamic basis of the Victorian equilibrium. By the late 1890s, that great process was largely completed, and world population was multiplying more rapidly than ever.

  Late in the nineteenth century, the nations of the world were also becoming integrated in a single economy at a rapid and accelerating rate. That process had begun as early as the fifteenth century, but a quantum leap occurred in the late nineteenth century, when, as Geoffrey Barraclough has demonstrated, the flow of goods from one nation to another suddenly and greatly expanded. The first effect of this integration had been to stimulate supply; the second was to increase aggregate demand.9

  The price-revolution of the twentieth century was not peculiar to any national economy or monetary system. It was a global event. Like every great wave that preceded it, this great movement began primarily because the acceleration of demand outstripped the increase of supply.

  In other ways, however, the price-revolution of the twentieth century was different from its predecessors. In its early and middle stages real wages increased, and kept on increasing until the late 1960s. This pattern was differed from other price-revolutions. In the twentieth century, the role of trade unions, democratic politics, and welfare states had a major impact on returns to labor.

  At the same time, the distribution of income and wealth tended in general to become a little more equal, especially in the period from the 1920s to the 1950s. This equalizing tendency had also appeared in the first stages of other price-revolutions. In the twentieth century, however, it continued for a longer period than before.

  Figure 4.06 summarizes nine studies of the distribution of wealth and income in the United States. Most show mixed trends from 1890 to 1929, then growing equality from 1929 to 1968, and growing inequality thereafter (see figure 4.23). Sources: Lee Soltow, Men and Wealth in the United States, 1850–1870 (New Haven, 1975); Robert E. Lipsey and Helen Stone Tice, eds., The Measurement of Saving, Investment, and Wealth (Chicago, 1989), 765–844; Lee Soltow, “Distribution of Income and Wealth,” in Glenn Porter, ed., Encyclopedia of American Economic History (3 vols., New York, 1980) I, 1116; Historical Statistics of the United States (1976), series G319–36; Statistical Abstract of the United States (1976–1993); Jeffrey G. Williamson and Peter H. Lindert, American Inequality (New York, 1980).

  Figure 4.07 follows the upward movement of money wages and real wages from 1900 to 1960. In this respect, the price revolution of the twentieth century differed from its predecessors–for a time. These estimates by Stanley Lebergott include mean annual earnings of all employees in the United States except members of the armed forces. To correct for unemployment Lebergott added another series which reduced money wages and real wages by 11 percent in 1900 and by 7 percent in 1960. The source is Stanley Lebergott, Manpower in Economic Growth: The American Record since 1800 (New York, 1964).

  Price Surges and Declines, 1914–45

  From 1896 to 1914, prices continued their slow, steady rise. Then suddenly a new trend appeared. The outbreak of war in 1914 shattered not only the peace of Europe but also its economic stability. A symptom and cause of that disruption was a massive surge of inflation in every western nation. From 1914 to 1919, wholesale prices doubled in the United States, trebled in Britain, quadrupled in Germany, and sextupled in Italy.

&n
bsp; The great powers were unprepared to bear the heavy cost of war, or to manage its economic consequences. Each nation responded in its own way. The British government dealt at first with rising prices and shortages in a traditional Anglo-Saxon way. It asked the clergy to read proclamations from church pulpits, urging voluntary limits on consumption. Slowly and reluctantly, Prime Minister David Lloyd George improvised a system of piecemeal price controls and rationing. He added fiscal and monetary measures that restrained inflation more effectively than in any other combatant nation.10

  In Germany, things were done differently. Effective control of the war economy passed to military officers under the old Prussian Law of Siege. The entire nation was divided into “army corps districts.” In each district Deputy Commanding Generals imposed rationing, allocated goods, and controlled prices. They did so with a heavy hand, and ultimately with disastrous consequences for their nation. Low farm prices discouraged production. Germany’s inability to feed itself became a fundamental cause of its defeat. Further, the war was paid for by huge loans and taxes on the middle and lower classes. The rich were protected from income and profits taxes.11

  In Russia, the economy collapsed totally under the strain of the war. The distribution of food was so disrupted by 1917 that the army was forced to live off the land, even within its own country. Major shortages developed in the cities. Prices of food soared. On March 8, 1917, when hungry mobs attacked bakeries throughout the capital and were fired on by police, the Russian Revolution began. Like the French Revolution in 1789, the immediate cause was a combination of high prices and extreme scarcity, which also occurred in many parts of Europe during World War I.

  Even after the fighting ended in 1918, the economic troubles continued. Britain, for example, imposed milk rationing for the first time in 1919—a step that it had been able to avoid during the war. In France and many other nations the most rapid inflation occurred not during the war itself, but in the first years of peace. Germany was reduced to economic chaos after the armistice. Russia moved from revolution to a bloody civil war. Major outbreaks of epidemic disease, notably the so-called influenza epidemic of 1918 (probably a polydemic of several diseases), caused heavy mortality in Europe, America, and especially Asia. High prices and scarcities persisted.

  In 1920, these trend lines broke. A severe economic depression occurred throughout the world. Prices plummeted in a great deflation that was as disruptive as the previous rise had been. Commodity markets were glutted. In Britain, wholesale prices fell by half in two years from 1920 to 1922. Wages also came down, and unemployment rose rapidly. Broadly similar tendencies appeared in the United States and western Europe. Price and wage deflation were reinforced by the economic policies of conservative governments, and by rigid adherence to the gold standard. This was a period of deep suffering among the poor, but business conditions slowly improved, and stock markets began to boom.12

  Figure 4.08 shows the impact of World War I on prices. Rates of inflation were highest in the Central Powers (400–600 percent), and lower in most Allied powers and neutral nations (200–350 percent). Data are from B. R. Mitchell, European Historical Statistics (2d rev. ed., New York, 1981) pp. 774–75. All are wholesale prices, except Austria and Greece which are consumer prices. Each is converted to a common base (1914=100).

  In central Europe, more dangerous trends developed. Germany’s new and very shaky Weimar Republic inherited a vast burden of debt and the crushing weight of heavy war reparations to France. When a heroic attempt at tax reform by Matthias Erzberger failed, public credit was exhausted. The German government felt compelled to pay its debts by printing money. It did so at first with some restraint in 1921–22, but soon lost control of its currency. The result was one of the most extreme hyperinflations in history. An American dollar was worth 40 marks in July 1920, 493 marks in July 1922, 4 million marks in the summer of 1923, 4.2 trillion on November 15, 1923. This became the classic monetary hyperinflation, caused by a vast expansion in the quantity of currency in circulation. By late 1923, the German government required 1,783 printing presses, running round the clock, to print money.

  Germany was not alone in its travail. Monetary hyperinflation also occurred in Austria (1921–22), Russia (1921–22), Poland (1923–24), and Hungary (1923–24). Similar causes operated through much of central and eastern Europe.

  These monetary crises were severe, but very short-lived. German inflation was brought to a sudden end in 1924, and prices were generally stable thereafter. But the experience of hyperinflation had a shattering effect on an entire German generation. The Weimar Republic received much of the blame for problems it had inherited, and none of the credit for solving them. Confidence in open, democratic institutions was weakened fatally in central Europe.

  These economic events in the postwar era created profound instabilities. Concentration of wealth remained very high. In Britain, two-thirds of the national wealth in the 1920s was owned by 1 percent of the population. One-third was owned by 0.1 per cent. The twenties were a decade of high prosperity for the rich, and an Indian summer of the old regime. They were also a time of desperate poverty in Scotland, Appalachia, rural Europe, and urban slums throughout the world.

  Inequality put narrow limits on consumption. In the United States during the late 1920s, major industries began to suffer from excess capacity and insufficient demand. By 1927, purchases of houses, cars, and consumer durables were in decline. Commodity prices turned downward. Industrial production began to fall. In October 1929, the American stock market crashed, and the world slipped into the Great Depression.

  Once again, as in the early 1920s, suffering was deepened by fiscal and monetary policies of conservative governments. After the Crash, American secretary of the treasury Andrew Mellon proposed to “liquidate labor, liquidate stock, liquidate the farmers.” Congress gave relief to the rich by cutting income taxes, but offered little assistance to the poor. The Federal Reserve Board pursued a policy of tight money that made things worse. The ultimate folly was President Herbert Hoover’s proposal for a large increase in taxes in 1932. As wages fell and unemployment surged, wholesale prices fell by a quarter in Britain, by a third in the United States and Germany, and by half in France.

  Figure 4.09 represents on a logarithmic scale the hyperinflations that followed the First World War in central Europe. Sources include B. R. Mitchell, ed., International Historical Statistics; Europe, 1750–1988 3rd ed. (New York, 1992), 837–51; Thomas J. Sargent, “The Ends of Four Big Inflations,” in Robert E. Hall, ed., Inflation: Causes and Effects (Chicago, 1982), 99–110; Gerald D. Feldman, The Great Disorder (New York, 1993). Prices are in German marks, Polish zlotys, Hungarian krone, Russian rubles, and Austrian krone.

  The Western nations responded to the Great Depression in very different ways. The international gold standard was abandoned by Britain in 1931 and by the United States in 1934. Protectionist walls were raised around national and imperial economies by the American Smoot-Hawley tariff (1930) and the British Ottawa Agreements (1932).

  In the United States, President Franklin Roosevelt’s New Deal launched the American republic on a sea of economic experiments, which included “pump priming” of the private economy by public spending, tighter regulation of business, and an attempt to diminish material inequalities. The results were mixed. Production, wages, and prices began to rise after 1933, only to be driven down again by another sharp recession in 1937–38.

  Britain followed a more conservative course with no better success—retrenchment, a balanced budget, subsidies to business, and economic nationalism. These policies were pursued by Prime Minister Ramsay MacDonald (1931–35), who carried retrenchment to the point of reducing the dole in the depth of the Depression, and was expelled from his own Labour party. They were adopted also by Conservative Prime Ministers Stanley Baldwin (1935–37) and Neville Chamberlain (1937–40). By 1937, British prices and wages had nearly returned to 1929 levels, but then they fell again in the second recession of 1938.
Throughout the Western world, recovery came very slowly, and at a terrible price.

  In France, forty governments held office between 1918 and 1939, five in 1933 alone. Politics were reduced to a chaos of competing factions. In the mid-1930s, French industrial production fell to its lowest level since 1913. Unemployment surged to painfully high levels. The money supply was expanded and prices surged, doubling in merely four years from 1935 to 1939.

  Italy and Germany took the dark road to fascism, which in economic terms was an unstable combination of private ownership and public control, feudal fiefdoms and bureaucratic regulation, national autarchy and international conquest. Fascist economies were stimulated by public works and military spending, but German prices remained depressed throughout the 1930s. Old economic problems persisted and new ones were added. The economics of European fascism and Japanese militarism, as well as their ideologies, drove their leaders to embark upon ever more desperate adventures.

  In 1937, Japan went to war against China, mainly to secure markets and resources on the Asian mainland. Historian R. A. C. Parker observes that “Japanese civilian authorities in Tokyo were more belligerent than the army.” This was a war of economic ambition; it continued in Asia for eighteen years. In 1939, Germany attacked Poland, mostly in search of Lebensraum, living space, which meant land for German farmers and raw materials for German factories.13

  From 1939 to 1941, military victory went to armed forces of Germany and Japan, but the balance of economic power moved in another direction. The beginning of the Second World War at last brought the great depression to an end. Prices, wages, employment and production surged throughout the world. The economies of Germany and Japan experienced growth without development—a vast expansion of resources by conquest and of workers by enslavement. Their swollen economies became in some ways more primitive than before.