Relationship between History and Economics
This unit enlightens the reader on the state of economies of the dominant economies in the twentieth century, i.e., United States, United Kingdom, Germany, France and Japan. And in doing this, it would be incomplete to leave out the historical trajectory of this period. And as such, it talks about the fusion of the domestic policies, external relations and economic developments of the highlighted nations. The twentieth century witnessed the outbreak and end of the two world wars, which evidently shook the economies of major participants to its foundations but how did these economies take these events?
At the end of the unit the reader should be familiar with:
- The interconnectedness between history and economics
- The characteristics of the twentieth century economies
- The strategies employed by these nations
It is nearly impossible to trace the history of monetary regimes without considering its political aspect. The economic status of a nation is, among other things, greatly determined by the political condition it is faced with. However each individual country has a different story during the period (twentieth century), the broad trends are similar. One important question that faced macroeconomists in the twentieth century was the stability of the market system. They started to come up with strategies to address this, which led them to questions such as; could the economy safely be left to stabilize itself? Or did the monetary authorities need to intervene, occasionally or all the time? Though they arrived at these theories but how practical are they and are they capable of restoring equilibrium?
The evidence of the turbulent interwar years (the period from the end of WW1 to the outbreak of WW2) was that the system was fragile, or sluggish, or unreliable. How relevant was the experience of that period to others? If we are to gain a deeper understanding we must look at institutional change, at the framework of law and at the common beliefs which underlie the choices of individuals. This historical approach to macroeconomics may not result in many straightforward testable predictions, but it is nevertheless indispensable.
At the beginning of the twentieth century inflation was low everywhere but during the two wars, and immediately after them, it was high, and higher in some cases. By the end of the century it was again generally low.
Growth rates varied greatly from year to year in the first half of the century. In the interwar period, output fell continuously for four years in America. There were recessions in the latter half of the century as well, but they were not so long, or so deep. The peak rate of unemployment in the 1930s was much higher in America (and in Germany) than it was in Britain. Full employment was maintained in Europe for a generation after the Second World War. In the last two decades of the century, however, the rate was persistently higher in Europe than in the USA. Interest rates remained low throughout the first half of the century, showing far less variation than there was in rates of inflation.
In the second half, on the other hand, they rose almost continuously for about thirty years, reaching double figures, before turning sharply down again.
Evidence has shown that dictatorial powers may be needed in times of war or other national emergency. This was certainly the case during the world wars of the twentieth century and it has been argued that the power given to governments to control the economy in wartime had a profound effect on the development of peacetime regimes as well.
From the above, it is evident that although there existed instability in the relationship between states and as such had adverse effects on their economies, individual nations were able to manage their economies in accordance with what they deem fit. And this contributed to the uniqueness of each economy.