What comes to your mind when you think of the Second World War? Death and destruction? Hitler and Nazism? Holocaust? Hiroshima and Nagasaki? The list goes on but certainly does not include high growth, stability, prosperity, nor economic expansion. Interestingly, however, the end of the Second World War marked the beginning of what came to be known as ‘The Golden Age of Capitalism’. A momentous period characterized by accelerated growth and expansion of the global economy.
Although by the end of the war many countries were left in ruins, the strength of the economic recovery was quite robust. For instance, by 1950s, West Germany had doubled its production from its pre-war levels, Italy was marked by stability and high growth, and France rebounded quickly and enjoyed rapid economic growth and modernization. Between 1950 and 1975, income per person in developing countries, increased by 3 percent p.a. on average. Labor productivity grew twice as fast as ever before along with attaining full employment; the GDP of developed countries too grew twice as fast; there was an increase in the rate of growth of capital stock, indicating an investment boom.
So what were some of the factors behind this unprecedented prosperity following the most devastating conflict in the history of mankind?
The economic revival was made possible through the provision of foreign aid such as the United Nations Relief and Rehabilitation Administration and the Marshall Plan. Marshall Plan was an economic initiative undertaken by the US to assist the Western European economies at restoring productive capacity, fostering commerce and resolving poverty and hunger. It helped in the socio-economic transformation of the countries in line with their own development strategies. By 1952, growth in these countries had surpassed the pre-war levels, indicating the program’s positive impact economically. International solidarity played a crucial role and the Plan became an example of successful implementation of transfers of resources to countries in need.
This was combined with the establishment of the Bretton Woods monetary system in 1944, designed to promote financial stability. Two financial international institutions were formed, namely the International Monetary Fund (IMF) and the World Bank. Initially called the International Bank for Reconstruction and Development (IBRD), the World Bank was responsible for providing loans to support post-war economic reconstruction. The IMF’s goal was to reconstruct the international payments system and mandate each country to adopt a monetary policy that sustained its fixed exchange rate to gold. It aided in correcting temporary payment imbalances and contributed to a freer flow of currencies between member countries. During the 1950s, world trade and international payments became more stable due to an increase in the production capacities of countries.
Ironically, the Great Depression of 1929 too paved the way for the post-war recovery, especially in the US. In fact, Michael Perelman, an American economist, and economic historian wrote, “The striking dichotomy between the Depression and prosperity was not at all paradoxical.” He explained that the Great Depression led to an increase in competition and forced firms to invest in modernization rather than increasing capacity. The war, in turn, sparked innovations that gave it the lead in modern technology, like the development of computers and jet aircraft.
The state of consumer demand then also provided an exceptional opportunity to businesses. The Depression deterred consumers from buying expensive consumer goods, and the War diverted investment towards military expansion from the production of consumer goods such as automobiles. Thus, consumers had accumulated savings, had the desire to buy expensive consumer goods, and the businesses had more than ample productive capacity to fulfill their demands – making way for the post-war boom.
All these factors led to record periods of economic growth across countries. The ‘Japanese economic miracle’ resulted in Japan becoming the world’s second-largest economy by the 1960s, mainly due to the successful adoption of the economic reform of focussing on the production of raw material. It emerged as a powerful player in the spheres of steel working, car manufacturing, and electronics industry. France refers to the period 1945-75 as ‘The Glorious Thirty’. Its economy grew rapidly within the framework of the Marshall Plan, witnessing high productivity gains and increasing internationalization. It became Europe’s largest agricultural producer and exporter.
Similarly, the Marshall Plan aided other countries. For instance, Italy (through opening up of new industries upon discovery of hydrocarbons), Greece (development of chemical industry, tourism, and services sector), South Korea – ‘Miracle of the Han River’ (phase of industrialization, modernization, economic growth), etc.
For some twenty years after the Second World War, countries of the capitalist West were successful in generating rapid growth with high employment. However, this ‘golden age of capitalism’ could not survive the economic traumas of the 1970s; the collapse of the Bretton Woods monetary system in 1971, the 1973 oil crisis, stock market crash that was followed by a recession (1974-75).