Business cycles and economic policy, 1914-1945

The Great War of 1914–18 constituted a major rupture for the economies of Europe in several respects. It marked the end of almost a century of uninterrupted economic growth. It ended a long period of near-universal currency stability, and set in motion a painful process of deglobalization. It brought about an age of highly politicized labor relations. And it ushered in an era in which sharp fluctuations in economic activity and persistent mass unemployment became the dominant experience of everyday life. While the beginning of this dramatic period can clearly be identified with the First World War, its effects lasted beyond the end of the Second. Throughout the interwar period, the economies of Europe remained far below their historical growth paths. Full recovery from this long-lasting depression occurred only during the golden age of the 1960s. But not all of the displacement from historical trends that took place after the First World War was ultimately corrected, and some of the changes became permanent. In the more developed economies of Europe, a marked upward shift in labor's income shares occurred after 1918. To this must be added compression of wages and of the personal income distribution in general. Both favored low incomes and reduced the shares taken by top earners. Most of these distributional shocks of the early interwar period have proved permanent and are still visible in the economies of Europe today. Monetary conditions were also fundamentally altered after the First World War. Some of the changes were temporary