goods such as cars. Car production in the US rose from 2 million in


1919 to more than 5 million in 1929. Similarly, there was a spurtin the purchase of refrigerators, washing machines, radios,gramophone players, all through a system of ‘hire purchase’ (i.e., on


Fig. 21 – T-Model automobiles lined up outside the


The  Making  of  a  Global  Worldcredit repaid in weekly or monthly instalments). The demand


for refrigerators, washing machines, etc. was also fuelled by a boomin house construction and home ownership, financed once again


by loans.


The housing and consumer boom of the 1920s created the basis of


prosperity in the US. Large investments in housing and household


goods seemed to create a cycle of higher employment


and incomes, rising consumption demand, more investment, andyet more employment and incomes.


In 1923, the US resumed exporting capital to the rest of the world


and became the largest overseas lender. US imports and capitalexports also boosted European recovery and world trade and


income growth over the next six years.


All this, however, proved  too good to last. By 1929 the world


would be plunged into a depression such as it had never


experienced before.


3.4 The Great Depression


The Great Depression began around 1929 and lasted till the mid-1930s. During this period most parts of the world experienced


catastrophic declines in production, employment, incomes andtrade. The exact timing and impact of the depression varied


across countries. But in general, agricultural regions and communities


were the worst affected. This was because the fallin agricultural prices was greater and more prolonged than that


in the prices of industrial goods.


The depression was caused by a combination of several factors. We


have already seen how fragile the post-war world economy was.


First: agricultural overproduction remained a problem. This was


made worse by falling agricultural prices. As prices slumped andagricultural incomes declined, farmers tried to expand production


and bring a larger volume of produce to the market to maintain


their overall income. This worsened the glut in the market, pushingdown prices even further. Farm produce rotted for a lack of buyers.


Second: in the mid-1920s, many countries financed their investments


through loans from the US. While it was often extremely easy toraise loans in the US when the going was good, US overseas lenders


panicked at the first sign of trouble. In the first half of 1928, USMany years later, Dorothea Lange, the


photographer who shot this picture, recollectedthe moment of her encounter with thehungry mother:


‘I saw and approached the hungry and desperate


mother, as if drawn by a magnet … I did not askher name or her history. She told me her age,that she was thirty-two. She said that they(i.e., she and her seven children) had been livingon frozen vegetables from the surrounding fields,and birds that the children killed … There shesat … with her children huddled around her,and seemed to know that my pictures mighthelp her, and so she helped me …’


From:


Popular Photography , February 1960.Box 3


Fig. 22  – Migrant agricultural worker’s family,


homeless and hungry, during the Great


Depression, 1936.  Courtesy: Library of Congress,


Prints and Photographs Division.


India and the Contemporary World


96overseas loans amounted to over $ 1 billion. A year later it was one


quarter of that amount. Countries that depended crucially on USloans now faced an acute crisis.


The withdrawal of US loans affected much of the rest of the world,


though in different ways. In Europe it led to the failure of somemajor banks and the collapse of currencies such as the British pound


sterling. In Latin America and elsewhere it intensified the slump


in agricultural and raw material prices. The US attempt to protectits economy in the depression by doubling import duties also dealt


another severe blow to world trade.


The US was also the industrial country most severely affected by


the depression. With the fall in prices and the prospect of a


depression, US banks had also slashed domestic lending and


called back loans. Farms could not sell their harvests, householdswere ruined, and businesses collapsed. Faced with falling


incomes, many households in the US could not repay what they had


borrowed, and were forced to give up their homes, cars and otherconsumer durables. The consumerist prosperity of the 1920s now


disappeared in a puff of dust. As unemployment soared, people


trudged long distances looking for any work they could find.Ultimately, the US banking system itself collapsed. Unable to


recover investments, collect loans and repay depositors, thousands


of banks went bankrupt and were forced to close. The numbersare phenomenal: by 1933 over 4,000 banks had closed and


between 1929 and 1932 about 110, 000 companies had collapsed.


By 1935, a modest economic recovery was under way in most


industrial countries. But the Great Depression’s wider effects on


society, politics and international relations, and on peoples’ minds,


proved more enduring.


3.5 India and the Great Depression


If we look at the impact of the depression on India we realisehow integrated the global economy had become by the earlytwentieth century. The tremors of a crisis in one part of the world


were quickly relayed to other parts, affecting lives, economies and


societies worldwide.


In the nineteenth century, as you have seen, colonial India had become


an exporter of agricultural goods and importer of manufactures.


The depression immediately affected Indian trade. India’s exportsFig. 23 – People lining up for unemployment


benefits,  US, photograph by Dorothea  Lange,


1938. Courtesy: Library of Congress, Prints and


Photographs Division.When an unemployment census showed10 million people out of work, the localgovernment in many US states began makingsmall allowances to the unemployed. These longqueues came to symbolise the poverty andunemployment of the depression years .


The  Making  of  a  Global  Worldgrow more jute, brothers, with the hope of greater cash.


Costs and debts of jute will make your hopes get dashed.


When you have spent all your money and got the crop off the ground,… traders, sitting at home, will pay only Rs 5 a maund.and imports nearly halved between 1928 and 1934. As international


prices crashed, prices in India also plunged. Between 1928 and 1934,wheat prices in India fell by 50 per cent.


Peasants and farmers suffered more than urban dwellers. Though


agricultural prices fell sharply, the colonial government refused toreduce revenue demands. Peasants producing for the world market


were the worst hit.


Consider the jute producers of Bengal. They grew raw jute that was


processed in factories for export in the form of gunny bags. But


as gunny exports collapsed, the price of raw jute crashed more than


60 per cent. Peasants who borrowed in the hope of better times orto increase output in the hope of higher incomes faced ever lower


prices, and fell deeper and deeper into debt. Thus the Bengal jute


growers’ lament:


Across India, peasants’ indebtedness increased. They used up their


savings, mortgaged lands, and sold whatever jewellery and preciousmetals they had to meet their expenses. In these depression years,


India became an exporter of precious metals, notably gold.


The famous economist John Maynard Keynes thought that Indiangold exports promoted global economic recovery. They certainly


helped speed up Britain’s recovery, but did little for the Indian peasant.


Rural India was thus seething with unrest when Mahatma Gandhilaunched the civil disobedience movement at the height of the


depression in 1931.


The depression proved less grim for urban India. Because of falling


prices, those with fixed incomes – say town-dwelling landowners


who received rents and middle-class salaried employees – now found


themselves better off. Everything cost less. Industrial investment alsogrew as the government extended tariff protection to industries,


under the pressure of nationalist opinion.Who profits from jute cultivation according to the


jute growers’ lament? Explain.DiscussIndia and the Contemporary World


984  Rebuilding a World Economy: The Post-war Era


The Second World War broke out a mere two decades after the


end of the First World War. It was fought between the Axis powers(mainly Nazi Germany, Japan and Italy)  and the Allies (Britain,France, the Soviet Union and the US). It was a war waged for sixyears on many fronts, in many places, over land, on sea, in the air.


Once again death and destruction was enormous. At least 60 million


people, or about 3 per cent of the world’s 1939 population, arebelieved to have been killed, directly or indirectly, as a result of thewar. Millions more were injured.


Unlike in earlier wars, most of these deaths took place outside the


battlefields. Many more civilians than soldiers died from war-relatedcauses. Vast parts of Europe and Asia were devastated, and severalcities were destroyed by aerial bombardment or relentlessartillery attacks. The war caused an immense amount of economicdevastation and social disruption. Reconstruction promised tobe long and difficult.


Two crucial influences shaped post-war


reconstruction. The first was the US’semergence as the dominant economic, politicaland military power in the Western world. Thesecond was the dominance of the SovietUnion. It had made huge sacrifices to defeatNazi Germany, and transformed itself froma backward agricultural country into a worldpower during the very years when the capitalistworld was trapped in the Great Depression.


4.1 Post-war Settlement and the


Bretton Woods Institutions


Economists and politicians drew two key lessons from inter-war


economic experiences. First, an industrial society based on massproduction cannot be sustained without mass consumption. But toensure mass consumption, there was a need for high and stableincomes. Incomes could not be stable if employment was unstable.Thus stable incomes also required steady, full employment.


But markets alone could not guarantee full employment.


Therefore governments would have to step in to minimise


Fig. 24 – German forces attack Russia, July 1941.


Hitler’s attempt to invade Russia was a turningpoint in the war.


Fig. 25 – Stalingrad in Soviet Russia devastated by the war.


The  Making  of  a  Global  WorldBriefly summarise the two lessons learnt by


economists and politicians from the inter-war


economic experience?Discussfluctuations of price, output and employment. Economic stability


could be ensured only through the intervention of the government.


The second lesson related to a country’s economic links with


the outside world. The goal of full employment could only beachieved if governments had power to control flows of goods,capital and labour.


Thus in brief, the main aim of the post-war international economic


system was to preserve economic stability and full employment inthe industrial world. Its framework was agreed upon at the UnitedNations Monetary and Financial Conference held in July 1944 atBretton Woods in New Hampshire, USA.


The Bretton Woods conference established the International Monetary


Fund (IMF) to deal with external surpluses and deficits of its membernations. The International Bank for Reconstruction and Development(popularly known as the World Bank) was set up to finance post-war reconstruction. The IMF and the World Bank are referred toas the Bretton Woods institutions or sometimes the Bretton Woodstwins. The post-war international economic system is also oftendescribed as the Bretton Woods system.


The IMF and the World Bank commenced financial operations


in 1947. Decision-making in these institutions is controlled bythe Western industrial powers. The US has an effective right ofveto over key IMF and World Bank decisions.


The international monetary system is the system linking national


currencies and monetary system. The Bretton Woods system wasbased on fixed exchange rates. In this system, national currencies,for example the Indian rupee, were pegged to the dollar at a fixedexchange rate. The dollar itself was anchored to gold at a fixedprice of $35 per ounce of gold.


4.2 The Early Post-war Years


The Bretton Woods system inaugurated an era of unprecedentedgrowth of trade and incomes for the Western industrial nations andJapan. World trade grew annually at over 8 per cent between 1950and 1970 and incomes at nearly 5 per cent. The growth was alsomostly stable, without large fluctuations. For much of this period


the unemployment rate, for example, averaged less than 5 per cent


in most industrial countries.Fig. 26 – Mount Washington Hotel situated in


Bretton Woods, US.This is the place where the famous conferencewas held.


India and the Contemporary World


100These decades also saw the worldwide spread of technology and


enterprise. Developing countries were in a hurry to catch up withthe advanced industrial countries. Therefore, they invested vastamounts of capital, importing industrial plant and equipmentfeaturing modern technology.


4.3 Decolonisation and Independence


When the Second World War ended, large parts of the world werestill under European colonial rule. Over the next two decades mostcolonies in Asia and Africa emerged as free, independent nations.They were, however, overburdened by poverty and a lack of


resources, and their economies and societies were handicapped by


long periods of colonial rule.


The IMF and the World Bank were designed to meet the financial


needs of the industrial countries. They were not equipped to copewith the challenge of poverty and lack of development in the formercolonies. But as Europe and Japan rapidly rebuilt their economies,they grew less dependent on the IMF and the World Bank. Thusfrom the late 1950s the Bretton Woods institutions began to shifttheir attention more towards developing countries.


As colonies, many of the less developed regions of the world had


been part of Western empires. Now, ironically, as newly independent


countries facing urgent pressures to lift their populations out of


poverty, they came under the guidance of international agenciesdominated by the former colonial powers. Even after many yearsof decolonisation, the former colonial powers still controlled vitalresources such as minerals and land in many of their former colonies.


Large corporations of other powerful countries, for example the


US, also often managed to secure rights to exploit developingcountries’ natural resources very cheaply.


At the same time, most developing countries did not benefit from


the fast growth the Western economies experienced in the 1950sand 1960s. Therefore they organised themselves as a group – theGroup of 77 (or G-77) – to demand a new international economic


order (NIEO). By the NIEO they meant a system that would give


them real control over their natural resources, more developmentassistance, fairer prices for raw materials, and better access for theirmanufactured goods in developed countries’ markets.New words


Tariff – Tax imposed on a country’s imports


from the rest of the world. Tariffs arelevied at the point of entry, i.e., at the border


or the airport.What are MNCs?


Multinational corporations (MNCs) are large


companies that operate in several countries atthe same time. The first MNCs were establishedin the 1920s. Many more came up in the 1950sand 1960s as US businesses expanded worldwideand Western Europe and Japan also recoveredto become powerful industrial economies. Theworldwide spread of MNCs was a notable featureof the 1950s and 1960s. This was partly becausehigh import tariffs  imposed by different


governments forced MNCs to locate theirmanufacturing operations and become ‘domesticproducers’ in as many countries as possible.Box 4101


The  Making  of  a  Global  World4.4 End of Bretton Woods and the Beginning of


‘Globalisation’


Despite years of stable and rapid growth, not all was well in


this post-war world. From the 1960s the rising costs of its


overseas involvements weakened the US’s finances and competitivestrength. The US dollar now no longer commanded confidence


as the world’s principal currency. It could not maintain its value


in relation to gold. This eventually led to the collapse of the


system of fixed exchange rates  and the introduction of a system


of floating exchange rates .


From the mid-1970s the international financial system also changed


in important ways. Earlier, developing countries could turn tointernational institutions for loans and development assistance. But


now they were forced to borrow from Western commercial banks


and private lending institutions. This led to periodic debt crises in


the developing world, and lower incomes and increased poverty,


especially in Africa and Latin America.


The industrial world was also hit by unemployment that began


rising from the mid-1970s and remained high until the early 1990s.


From the late 1970s MNCs also began to shift production operations


to low-wage Asian countries.


China had been cut off from the post-war world economy since


its revolution in 1949. But new economic policies in China and


the collapse of the Soviet Union and Soviet-style communism inEastern Europe brought many countries back into the fold of the


world economy.


Wages were relatively low in countries like China. Thus they became


attractive destinations for investment by foreign MNCs competing


to capture world markets. Have you noticed that most of the TVs,mobile phones, and toys we see in the shops seem to be made in


China? This is because of the low-cost structure of the Chinese


economy, most importantly its low wages.


The relocation of industry to low-wage countries stimulated world


trade and capital flows. In the last two decades the world’s economic


geography has been transformed as countries such as India, China


and Brazil have undergone rapid economic transformation.New words


Exchange rates  –  They link national currencies


for purposes of international trade. There are


broadly two kinds of exchange rates: fixed


exchange rate and floating exchange rateFixed exchange rates – When  exchange rates