world trade and world economy

world trade and world economy. The Second World War was an economic as well as a military conflict. The war effort made enormous demands on the economic resources of all the combatant powers, and the Axis states were finally worn down by the sheer material strength of the Grand Alliance they faced. The war also altered the international economy, bringing to an end the period of stagnation and protectionism of the 1930s; creating the circumstances for greater economic co-operation under the guidance of the USA; and, after 1945, launching the world economy on a great economic boom.

The world economy in the decade before war was dominated by the Great Depression, the slump of 1929–32 which brought a collapse of world trade, prices, and employment from which most economies failed to recover before the coming of war. The slump destroyed international economic co-operation as states struggled to look after their own economic interests. The pre-war years were the high-water mark of economic nationalism, of tariffs and trade discrimination, of managed currencies and barter trade. The old imperial states, France, the Netherlands, and the UK, fell back more and more on their empires as a source of cheap food and materials, and safe markets for their exports. Other states, most significantly Japan, Italy, and Germany, saw the solution to their relatively weak position in the world economy in pursuing ‘autarky’, or self-sufficiency, cutting off dependence on the world economy. They also sought a solution to their shortages of raw materials and other economic resources in imperialism. Japan saw China and the western Pacific as a natural area of political and economic expansion; Italy sought new resources in Africa; Germany looked to eastern Europe and the Soviet Union as an area for potential economic exploitation. By the late 1930s all three states had begun to create closed economic areas or blocs which would provide economic security and an economic base for military strength. War was seen as a natural part of this process of economic empire-building.

The rise of protectionism and imperialism in the 1930s was partly a response to the obvious weaknesses of the world economy. The gold standard broke down after the slump and it proved impossible to stabilize the currency system in the 1930s; international investment declined to negligible levels in the 1930s, making it difficult to increase trade and reducing the transfer of skills and technology; the migration of labour also came to a halt. For the poorer primary-producing states, low prices for food and materials meant greater poverty and a sharp slow-down in efforts to modernize. The greatest problem of all, however, was the with drawal of the two major international economies, the UK and the USA, from any active leadership of the world economy. America was the largest and potentially most powerful of the developed industrial economies; it was also one of the major protectionist states, withholding loans from other countries and using high tariffs to block their exports. Without American or British willingness to play the role their economic strength justified, the world economy continued to stagnate and the pursuit of political or military solutions could not be restrained.

Economic insecurity and imperial conflict led to a rapid increase in rearmament from the mid-1930s onwards. This had the paradoxical effect of boosting the world economy by increasing industrial output and the demand for raw materials. By 1938 the scale of rearmament had begun to distort patterns of trade and output. The increases in military spending were substantial for all the great powers except the USA. In the 1930s most states expected a future war to make very great demands on economic resources and capability. Rearmament was seen not just in terms of finished weapons but in terms of industrial capacity, trained labour, and access to raw material and energy resources, nowhere more so than in Germany where the idea of ‘total war’ was developed most fully. From 1936 the German economy was transformed to meet the strategic demands of future warfare. By 1939 almost one-quarter of the national product was devoted to military spending, and two-thirds of industrial investment went to war-related industries, particularly iron and steel, aluminium, chemicals, and synthetic fuel. Germany was not alone in this. By 1939 France was spending three and a half times as much on the military as in 1913, and British rearmament rose from £185 million in 1936 to £719 million in 1939. The UK, like Germany, was preparing for a war of attrition, stockpiling scarce resources, retraining labour, expanding industrial capacity in key engineering sectors. By 1939 the major European states were all heavily committed to military effort. The Soviet Union had the world's largest armed forces, thanks to the military priorities of the Five Year Plans. In 1930 the USSR produced 890 aircraft; in 1939, 10,000.

Rearmament brought a great number of economic headaches. By the late 1930s military demands made it necessary to increase state intervention in the economy to balance civilian and military needs. In Germany this meant complete control over trade, investment, prices, and wages. In the UK it brought the state into a more active role in trade and industrial production. For the western states there were limits to intervention, and it proved difficult to interfere in international transactions. As a result the balance of payments deteriorated rapidly by the late 1930s and the UK suffered heavy losses of gold and foreign exchange. Heavy military spending also encouraged inflationary pressures. Preparation for war reversed the long price decline in the world economy. This made it more expensive to get the quantities of scarce resources needed for war. Oil was a particular difficulty, on which the military industries and forces of all states depended (see statistics Tables 6 and 7). Germany tried to solve the problem of high dependence on overseas sources by producing synthetic ‘oil-from-coal’; the UK sought to find overseas supplies, that it could dominate commercially, in the Middle East and Far East, in Iran, Burma, and Iraq. Fierce competition for raw material resources set in before the outbreak of war, and encouraged Hitler to move eastwards so that he could engross there the food, labour, and raw material supplies needed for the German military build-up. The war against Poland was part of this process. Against his expectations, the western states obstructed the move and Hitler found himself faced with ‘total war’ sooner than he had expected, before his grand economic and military plans were complete.

The war had an immediate and far-reaching effect both on the domestic economy of the combatant powers and on the world economy as a whole. Military demands distorted the patterns of consumption and trade; military spending increased government debt and raised taxes. All the major states faced severe financial pressure, but were anxious to avoid the mistakes of the First World War when prices rocketed and state debt escalated. While there were very great increases in military spending (see Table 1), much more of it was covered by tax revenue. Tax receipts more than doubled in Germany; they more than trebled in the UK. In the USA, where tax was low before the war, federal expenditure rose from $12 billion in 1941 to $100 billion in 1945, of which 43% was financed by taxation. To prevent these high levels of spending from producing inflation, all governments controlled prices and reduced consumption. Rationing of food and household goods not only reduced domestic consumer spending, but also ensured a fairer distribution of what goods were available. By the end of the war Germans consumed almost a third less than at the start; in the UK consumption fell by about one-fifth by 1943 but then began to revive again. Only in the USA was the war effort accompanied by an increase in consumption, thanks to the vast resources at its disposal and the large-scale re-employment of previously idle capacity and labour.

World trade, Table 1: Military expenditure of the major powers, 1938–44 (in billions of national currency)

	1938	1939	1940	1941	1942	1943	1944
Source: Contributor.
Germany (RM)	17.2	38.0	55.9	72.3	86.2	99.4	n.a.
UK (£)	0.4	0.7	2.6	3.6	3.9	4.5	4.5
USSR (rbls)	27.0	40.8	56.8	82.0	108.0	124.0	138.0
USA ($)	0.1	0.1	1.9	14.2	52.4	85.2	90.9
Japan (yen)	6.0	6.4	7.2	8.8	12.4	17.9	27.3
Italy (lire)	15.0	27.7	58.8	64.2	83.8	—	—

The great increases in military spending and cuts in consumption made possible very large increases in the output of weapons and equipment (seestatistics Table 2). This was achieved by converting much civilian production to military contracts and by expanding investment in new plant and machinery. In the UK and Germany much of the new capacity for armaments was found in idle car factories, furniture workshops, locomotive plants, and a host of other civilian firms. By 1941 almost 50% of the output of German consumer industries went to the armed forces. In the USA, where there existed only a very small military industry before 1941, huge investment programmes were set up to provide new factory capacity. By 1945 there was 50% more productive plant in the USA than there had been in 1940.

The demands of war industry made it necessary to control the distribution of raw materials and of labour. This was not done in Germany until 1942 when a new Central Planning agency to rationalize the whole raw materials situation was set up (see Speer Plan). In the UK this was done from the outset of the war, and with American entry the two western states co-ordinated their raw material needs and distribution. Labour supply was a problem because of the demands of the armed forces for manpower. In Germany 12 million men were taken out of the German workforce and were replaced with women or forced labour taken from occupied Europe. By 1945 over 50% of the native German workforce was female. Though this level of female employment was never reached in the UK or USA, women did take up many of the jobs previously done by men (see statistics Table 4). The only other way of coping with high demands for labour was the rationalization of factory methods and labour use. In most industrial states great gains were made in efficiency over the war period by increasing automation in factories, reorganizing the work processes, and making better use of existing equipment. Labour productivity in Germany increased by 60% in war industries between 1939 and 1944. In the USA the most spectacular example of this change was the output of cargo ships—nicknamed Liberty ships—by mass production. The time taken to make one ship was cut from 260 days to 40 over the course of the war.

Every war economy had its own strategic priorities and its own peculiar problems. The British war economy was faced with the difficulty of importing much of its raw materials and food; hence great efforts were made from early on to use resources as rationally as possible. The Japanese economy was always short of sufficient raw materials and factory capacity, and had to restrict consumption as much as possible. The Soviet Union, following the German attack on its prime industrial region, had to reorganize war production in new areas in eastern and central Russia (seeUSSR, 2). The Soviet priority was output at all costs, with low living standards and poor working conditions. In Germany the problem was not so much resources as poor administration and organization of the war effort. Not until the middle of the war was the economy thoroughly reorganized to achieve what it was capable of producing. By then the strategic air offensives against both Germany and Italy, and later Japan, began to place a real ceiling on the further development of productive resources. For the USA the only real difficulty lay in the very low level of military preparedness in 1941 and the sheer speed with which the war economy had to be developed. Though this brought its share of friction and crisis, the vast material resources of the USA and its position as the leading industrial power gave it the human and material capacity necessary to produce an extraordinary transformation in two years.

The effect of the war on the international economy was just as far-reaching. By the time the USA entered the war in December 1941 a ‘world market’ no longer existed. Germany and Japan dominated large enclosed blocs in Europe and Asia which fuelled their war efforts. The British Empire world-wide was organized economically for the war effort. Normal flows of trade and investment were interrupted or distorted. economic warfare was carried on all over the world. The usual methods of buying and selling goods no longer applied, for most of the major combatants could not pay for their imports by exporting goods. The export industries in the UK, Germany, and Japan were busy producing weapons. International lending also came to halt. Memories of the unpaid war debts of the First World War made neutral investors rightly shy of making loans to the warring states. The only ‘normal’ trade that survived was British and American trade with the suppliers of raw materials, oil, and food in the Third World.

The economic blocs dominated by Germany and Japan were essentially siege economies. Under the title of Greater East Asia Co-prosperity Sphere, Japan sought to integrate the economies of the areas captured by its forces in Manchukuo, eastern China, French Indo-China, Malaya, and the Netherlands East Indies (NEI) with the Japanese economy, primarily to feed the war effort but ultimately with the object of creating a large autarkic economic bloc which would be self-sufficient in food and materials. Other Asian states would be invited or pressured to join the Co-prosperity Sphere, but Japanese interests would remain paramount. There is no doubt that without the additional resources, particularly oil, seized in South-East Asia the Japanese could not have sustained their war effort for as long as they did. A flow of materials and food came from the conquered areas: by 1943 the NEI supplied 80% of Japan's crude oil and almost all its coal came from Manchukuo and northern China.

The German ‘New Order’ in Europe (see Germany, 4) was run on very similar lines. The process of controlling the resources of eastern Europe began before September 1939 with the incorporation of Austria, the Sudetenland, and the rump of Czechoslovakia, and trade treaties with Romania and Yugoslavia. When war came Germany was immediately subjected to blockade and had to rely on what it could get from continental Europe, but the victories of 1939–41 gave access to the resources of almost the entire continent, and largely freed it from the effects of sanctions. Europe under the New Order economy was divided into areas directly incorporated into Greater Germany (including the coal and iron ore regions of Silesia and Alsace-Lorraine); states that were occupied and run by military governors or puppet regimes (Norway, Belgium, Netherlands, Yugoslavia, Bohemia, and others) which had to supply Germany with goods and labour on very unequal terms; and finally neutrals which were compelled by circumstances to trade with Germany.

Like Japan, Germany used the new economic bloc to supply the resources for war, but also planned to exploit the area after the war in the German interest. The New Order was to have a rich industrial Germany at its core with the European economy, linked to the Reichsmark, centred on Berlin, Vienna, and new industrial capitals to be built up in central Europe and the captured areas of the western USSR. German planners sought a single, unitary European market, though nothing like the modern European Union. The new Europe was to be run on imperial lines, primarily to meet German needs. But while the war continued the top priority was using Europe to win the war. By 1944 seven million workers had been brought into the Reich to solve its labour problems, mostly Soviet citizens or Poles. European states funded one-quarter of the German war effort through forced levies, occupation costs, and blocked trading accounts. Vital raw materials—oil from Romania, bauxite from Yugoslavia, coal from Poland, and so on—were supplied at low cost and the money earned by other states was held in Berlin for the duration. Germany continued to trade with states such as Spain, Sweden, or Switzerland because they refused to supply Germany without getting German exports or foreign exchange in return. Almost all Germany's trade outside Europe was cut off by the blockade except for limited supplies from the Far East which, until 22 June 1941, entered Germany via the USSR or arrived in blockade runners.

Although Germany had a continental economy under its military control by 1942, the level of exploitation was less than it had hoped for. The Soviet Union provided only a fraction of the output expected from the captured areas because of widespread destruction (see scorched earth policy). Food from the Soviet Union was largely consumed by German forces fighting there, rather than being sent back to Germany. Food supplies remained low throughout the war, and although rationing provided a steady and monotonous diet of black bread and potatoes, the German diet remained well below the calorie level of the western states, and even lower than in some of the German-occupied areas. Moreover, Germany found it necessary to send food and materials to some of the captured areas, so that the flow was by no means all one-way. The problems of exploiting European resources stemmed partly from the difficulties of working with a hostile population, but also from the shortages of equipment, skilled labour, and raw materials in the occupation zones. As the war effort failed, the borders of the economic bloc contracted and Germany faced growing resource difficulties. When strategic bombing was added to blockade as a means of economic warfare, the siege economy gradually collapsed.

The situation facing the Allies was very different. The UK could not hope to provide the resources for a prolonged war from within the British Isles and depended on acquiring resources overseas. This posed a very serious difficulty because the demands of war production made it impossible to export to acquire these resources, or to invest heavily overseas to build up British assets. Instead, the UK was compelled to run very large balance-of-payments deficits and to sell off most of its overseas assets. In 1939 the balance was £400 million in the red; by 1944 the figure was £2,500 million. Over the whole war British exports were only one-quarter of the value of its imports. Access to the world market was only an advantage if it could acquire the needed resources without facing bankruptcy. The problem was solved in a number of ways. First, the UK had to liquidate most of its foreign assets, including over $4 billions-worth in North America. Second, the other empire states and friendly neutrals were induced to accept postponement of payment until the end of hostilities. Third, and most significant, the UK came to rely on direct economic aid from the USA and Canada.

Economic assistance from the USA became essential after the fall of France in June 1940. By December 1940 the UK was no longer able to buy supplies in the dollar areas and had to throw itself on the mercy of the USA. Roosevelt faced strong resistance to making commitments to the UK from isolationist opinion, but was able to persuade Congress to approve aid on the basis that it was the best form of defence for the USA. He promised to make America the ‘arsenal of democracy’. In March 1941 an aid package was approved under the name of Lend-Lease. Under this scheme America undertook to supply military equipment, food, and materials to the British Empire without a corresponding commitment to repay, and the scheme was eventually extended to a further eight countries. Over the whole course of the war the USA gave aid totalling $50 billion ($27 billion for the UK, $10 billion for the Soviet Union), and received $7.5 billion in reciprocal aid, mainly from the UK. About half the aid to the UK was in the form of weapons and military equipment. For the Soviet Union most of the goods were food or industrial capital equipment. Over $4 billion of aid was supplied by Canada to the UK on the same basis (see Canadian Mutual Aid).

The American contribution was essential to the Allied war effort. Lend-Lease supplied one-quarter of all the weapons of the British Empire. The 427,000 trucks and 13,000 combat vehicles sent to the Soviet Union provided Soviet forces with essential mobility during the German–Soviet war. The USA also made a vital contribution to the Allied war effort in producing the ships to deliver the supplies and in fighting to keep world sea lanes open. Trade everywhere was threatened by submarine attack. At the height of the battle of the Atlantic in 1942–3 the UK was losing more ships than it could replace. Instead of the planned import of 42 million tons of supplies a year, only 22 million got through. The crisis was averted by American shipbuilding. In 1942 American shipyards produced 3 million tons of shipping; in 1943, 9 million. By the end of the war the USA had replaced the UK as the foremost shipping power. Much of the new shipping was to carry oil, the supply of which was vital for the western war effort. Despite the loss of over 5 million tons of oil tankers, the western states had 75% more tanker capacity in 1945 than in 1942. During this period the UK became very largely dependent on American supplies of oil. Even the oil-rich USSR needed imports of American high-grade oil for aviation fuel.

Not only was the US economy capable of large quantities of weapons and shipping output, but it proved able to expand the level of its exports where most of the other combatant powers had to reduce them (see Table 2). The pace of US trade expansion had slackened in the 1930s; but during the war the USA took the opportunities created by the crisis to replace Europe or Japan as supplier to the rest of the world and the value of its exports rose from nearly $4 billion in 1940 to $14.2 billion in 1944. Imports rose over the same period from $2.6 to 3.9 billion, and by the end of the war the USA was conducting most of the world's trade in manufactured goods. Its economy supplied half the world's manufactures, and half of its shipping. All the other warring states were debtors by 1945; the USA was a net creditor. The success of the American economy owed a great deal to simple geographical good fortune. The USA was not directly attacked in the war, and the continental economy possessed ample raw materials, agricultural resources, and modern industrial capacity. American businessmen and engineers were given a great deal of the responsibility for running the war economy, and the American administration took a very ‘economic’ view of the war. Gross corporate profits rose almost threefold between 1940 and 1944, and record levels of investment and labour input were reached. When the American production record was added to that of the UK and the USSR, the gulf between the productive performance of the Allies and the Axis became unbridgeable. In 1943 the Allies produced 147,000 aircraft, the Axis only 44,000; in the same year the figures for tank production were 61,000 and 18,000 respectively. Though the mere possession of material resources is not a full explanation of Allied victory, it goes a long way towards explaining Axis defeat.

World trade, Table 2: American trade during the Second World War (1939–45) (million $)

	1939	1940	1941	1942	1943	1944	1945
aBritish Empire only
Source: Contributor.
Imports	2,361	2,599	3,269	2,821	3,418	3,911	4,125
Exports	3,138	3,938	5,026	8,005	12,872	14,288	9,676
Lend-Leasea	—	—	999	4,525	8,659	9,967	3,781

Mobilization for war affected a wide circle of states outside the combat zones. The poorer primary producers suddenly found their products in high demand. In Latin America economies weakened by the slump found themselves with large export surpluses. Price deflation was replaced with a sustained inflation of commodity prices. In a great many states industrial output expanded to meet war needs or to replace goods which could no longer be imported from Europe. The supply of equipment and expertize from the UK or USA speeded up the diffusion of technology. This process of renewed economic expansion ended ten years of decline and stagnation, and paved the way for the sustained post-war boom. But there were costs to be borne. Inflation was higher in the poorer and less-developed states and eroded incomes there. Many workers in Third World countries ended the war poorer. In many countries the presence of Allied troops led to very large increases in money supply, with a much slower expansion of output. The developed world, even at war, produced higher increases in output, lower rates of inflation, and gains in real income.

In any balance sheet of the impact of war on the world economy some account must be taken of the sheer level of destruction wrought by the conflict. Industrial expansion during the war was not felt in terms of improved living standards and consumer goods in the shops. Ordinary consumers had much less available to buy, and put their surplus income into savings, much of which was then taken by the government as loans to pay for the war. A very great deal of the industrial output of the world between 1939 and 1945 was blown up, shot down, or sunk. In Europe physical destruction extended much further than this, for much of the Continent was a combat zone. In the USSR 17,000 towns and 70,000 villages were destroyed by the fighting. In Germany almost every major city was bombed, and 90% of the housing stock was destroyed or damaged. In the occupied zones industrial and transport facilities were looted or destroyed. The French government calculated that France lost 45% of its national wealth during the war; in Italy the figure was estimated at one-third. In Japan the situation was the same: the destruction of the major cities through fire-bombing and the atomic bombs, the loss of its merchant marine, the destruction of much of its industrial fabric. Prospects for economic revival in 1945 looked bleak.

Nor were the problems confined only to physical damage. All the major warring states, save the USA, lost export markets during the war and built up substantial internal and external debts. The UK, a major foreign creditor in the 1930s, lost over £4 billion of assets and overseas investment and ended the war with debts of £16 billion. In weaker, war-damaged economies high government debt and shortages of goods and food led to growing inflation. In Italy and Greece serious food shortages almost produced famine in 1943–4. In Bengal in 1944 harvest failures and the disruption of transport to meet British war needs led to a famine that killed three million Indians. When the war ended, dislocation of international shipping and the abrupt ending of Lend-Lease aid in August 1945 produced further food shortages. Most of the food surplus was produced in the dollar areas; at the end of the war it was difficult for states outside that area to produce sufficient exports to buy what they needed. In Europe industrial production was 33% of the 1938 level; agricultural production was 50%. The so-called ‘dollar gap’ facing the post-war world could in the end only be made good by further help from the USA in terms of food and industrial aid and generous loans.

Yet despite the extensive destruction and economic dislocation, the war did contribute in many ways to shaping the post-war economy and the great boom after 1945. Historians have now demonstrated that a great deal of industrial capacity and capital equipment survived the destruction, even in the bombed areas. In Germany there was more industrial capacity available in 1945 than there had been in 1938. In the Soviet Union and the USA a great deal of additional capacity was built during the war years. In occupied Europe the German administration had set up new industrial plant, and transport facilities to meet their needs. In Czechoslovakia and Austria, relatively undamaged by bombing, new chemical, machinery, and iron and steel capacity existed. In Norway improvements had been made to the hydroelectric system. Japanese economic imperialism in China left extensive industrial facilities for the post-war regime.

The war also witnessed the extensive exchange and diffusion of scientific discoveries and technology (see also scientists at war). The most obvious example was the flow of advanced machine-tools and equipment sent from the USA to Canada, the Soviet Union, and the UK. In the Soviet case this transfer included whole factories and hydroelectric plants. The machinery sent to the UK helped to speed up the modernization of British factory methods and increase industrial efficiency. The stream of scientific discoveries during the conflict provided a range of important developments, particularly in chemical and electronic goods, which could be exploited after the war as was German rocket development (see V-weapons) on which the USA founded its space age programme. Improvements in aviation—large multi-engined aircraft, pressurized cabins, jet engines—transformed post-war air travel. Finally, the war witnessed a great increase in the power and variety of weapons themselves, whether through the development of rocket technology and atomic bombs or steady improvements in bombing accuracy, artillery range, and radar-controlled firing; and so on. The Second World War produced the weapons which characterized all post-war conflicts, and diffused this technology world-wide. The ships, aircraft, and guns of the war were sold to smaller states after 1945 and saw service long after the major states had shifted to more sophisticated technology.

Above all, the war created circumstances which led to the USA to assume a dominant role in the world economy. The German and Japanese view of ‘New Orders’, self-contained protectionist blocs sustaining a military empire, was replaced by a new liberal trading order, regulated by institutions backed by American economic power. It was the bankruptcy of the UK in 1941 that finally brought home to a suspicious business establishment in the USA that the British were no longer able to play the role in the international economy that they had played since the 19th century. American leaders sought an international economy with as much free trade as possible, backed up with credit and assistance from the USA where necessary. Maintaining stability in the world economy was seen as the surest way to guarantee American economic interests; by 1945 it was clear that no other state posed a serious short-term economic threat. It was also evident that without American assistance the revival and reconstruction of the world economy would not be possible. From Lend-Lease to post-war Marshall Aid, American actions were governed by a mixture of political responsibility and economic self-interest.

The Lend-Lease programme symbolized America's new role. Although Roosevelt did not expect very much to be repaid, the Lend-Lease Master Agreement made it clear that in return for the economic assistance, the USA expected the western states which received it to co-operate in reducing tariffs and other trade restrictions after the war. This commitment was honoured after 1945 with the signing in 1947 of the General Agreement on Tariffs and Trade (GATT). Trade in the western world expanded rapidly after 1945 on the basis of greater openness and a genuine political willingness to avoid the beggar-my-neighbour strategies of the 1930s, which had led to economic stagnation and war. Americans also recognized that they would have to assume the responsibility for oiling the wheels of world commerce, since the American economy was the only one with sufficient funds to do so. Lend-Lease began the process. In 1944 the American administration insisted on planning the reconstruction of the world economy before the war was over. At Bretton Woods agreement was reached for the establishment of an International Monetary Fund to provide credit for states facing payments difficulties. At the same meeting plans were drawn up for an International Bank for Reconstruction and Development to provide a channel for investment in the post-war economy. Under the aegis of the proposed United Nations Organization (see San Francisco conference) the USA and its allies agreed to set up other reconstruction agencies, the most important of which, UNRRA, provided generous assistance for European recovery.

The net effect of all these initiatives was to pave the way for greater international economic co-operation and to place at the centre of the economic stage a state whose economic strength was sufficient to make the system work. But the reconstruction did not include the USSR. The advance of the Red Army into eastern Europe produced a different outcome there. The states brought under Soviet political domination became part of a single economic bloc, dominated at first by the interests of the USSR which extracted extensive reparations from the region and set up centralized, state-run economies in each of the satellite states. The world economy, like world politics, was divided on the lines of the Cold War. One factor the two sides shared: a commitment to greater planning in economic affairs. The war saw very great increases in state planning for the economy and governments everywhere assumed responsibility for a greater share of the national product. In the west the Allies co-operated through Combined Boards for food, raw materials, and shipping which planned output and allocation. State planning in Germany and the UK turned both countries into temporary command economies. Though much of the wartime planning was scaled down after the war, the experience of demand management and state regulation provided important lessons for post-war economic development. The free market was in practice replaced by what came to be called ‘mixed economies’, with a good degree of state regulation, advice, and control to maximize economic growth. The post-war growth record, achieved by limited planning and the managed liberalization of trade, demonstrated that there were much more successful means of solving the world's economic problems than war.

See also domestic life, economy, and war effort sections of the major powers.

Richard Overy

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