Читать книгу Islamic Finance and the New Financial System - Alrifai Tariq - Страница 14

On June 28, 1914, Austrian Archduke Franz Ferdinand was assassinated while on a visit to the Bosnian capital, Sarajevo. This event led to Austria's invasion of Serbia one month later. Germany sided with its Austro-Hungarian ally, and Russia sided with its allies in the Balkans. Soon, Belgium, Luxembourg, and France were invaded by Germany, and the United Kingdom declared war, sparking the first world war of the century.34

Over the next four years, there would be 16 million deaths and 20 million wounded, making it among the deadliest conflicts in human history.35 Economically speaking, Europe was in shambles, with the exception of four allies – Britain, Canada, Italy, and the United States, which saw their gross domestic product (GDP) increase during the war. The decline in the GDP in Austria, France, Russia, and the Ottoman Empire reached 30 to 40 percent. In Germany, the GDP declined by 27 percent.36

In addition to the cost of war, high inflation and food shortages can be blamed for sparking the Russian Revolution in 1917. The tsar was overthrown, and a civil war began, bringing the Communist Party to power. The Union of Soviet Socialist Republics (U.S.S.R.) was established in 1922.

The war officially ended in November 1918, but the Treaty of Versailles was not signed until six months later, in June 1919. The treaty forced Germany to disarm and imposed harsh reparations to pay for war damages. Notable economist of the time John Maynard Keynes voiced his concerns about excessive reparations, saying it was too hard a punishment and counterproductive.37 Most of Germany's reparations payments were funded by loans from U.S. banks. Between 1919 and 1932, Germany paid out 19 billion gold marks in reparations and received 27 billion gold marks in loans from New York bankers and others. These loans were later paid back by West Germany after World War II.38

During the war, countries enacted trade embargoes on gold exports, leading many countries to abandon gold redemptions, thus dropping the gold standard altogether. This allowed their currency exchange rates to float freely. After the war, some countries deliberately weakened their currencies, hoping to boost exports and help their economies. In the 1920s, Austria, Hungary, Germany, Russia, and Poland began experiencing hyperinflation. Seeing the negative effects of this, the United States tried to persuade countries to go back to the gold standard and was fairly successful. By 1927, many countries had returned to the gold standard,39 but this wouldn't last long, as the world was again headed toward protectionist policies, which eventually made their way to the United States.

The Stock Market Crash of 1929 and the onset of the Great Depression raised protectionist fears in the United States, leading President Herbert Hoover to sign the Smoot–Hawley Tariff Act in 1930. The act raised import tariffs on thousands of goods. U.S. trading partners responded by introducing tariffs on U.S. goods.40 Exports from the United States dropped 60 percent from 1930 to 1933.41 Worldwide international trade virtually ground to a halt. The international ramifications of the Smoot–Hawley Act – the spread of trade policies and the rise of economic nationalism – are credited by economists with prolonging the Great Depression.42

The Great Depression brought about bank runs in Austria, Germany, and the United States, which put pressure on gold reserves in the United Kingdom to such a degree that the gold standard became unsustainable. Germany became the first country to formally abandon the post–World War I gold standard in July 1931. In September 1931, the United Kingdom allowed the pound to float freely. By the end of 1931, several other countries, including Austria, Canada, Japan, and Sweden, abandoned gold.43

Some historians believe that the effects of the Great Depression, which lasted nearly a decade, were also the result of high interest rates and a contraction of the money supply.44 The Fed could not increase the money supply without more gold, putting pressure on the ability of the United States to maintain its gold standard. In 1934, Congress passed the Gold Reserve Act, nationalizing all gold by ordering the Fed to turn over its supply to the U.S. Treasury. In return, the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the dollar gold redemption rate from $20.67 per ounce to $35 per ounce, effectively devaluing the dollar by more than 40 percent.

The Allied Powers thought to avoid history repeating itself and saw financial cooperation as a way to encourage mutual cooperation among the countries affected by the war. In 1930, during the early days of the Great Depression, the Bank for International Settlements (BIS) was established. The main purposes of the BIS were to manage Germany's reparations payments imposed by the Treaty of Versailles as well as to function as a bank for central banks around the world. Countries can hold a portion of their reserves as deposits with the BIS. The BIS also operates as a trustee and facilitator of financial settlements between countries.45

These efforts, however, did not stop the rise of nationalism, which was further fueled by the economic depression and protectionist trade policies. The crippling effects of the Treaty of Versailles on the German economy gave way to the rise of Hitler in the 1930s. In 1939, another world war was started, which would last six years and claim 61 million lives.46