Chapter 4
The Making of a Global World
Fig. 1 — 6 April 1919. Mass processions on the streets became a common feature during the national movement.
The first When we talk of ‘globalisation’ we often refer to an economic system that has emerged since the last 50 years or so. But as you will see in this chapter, the making of the global world has a long history – of trade, of migration, of people in search of work, the movement of capital, and much else. As we think about the dramatic and visible signs of global interconnectedness in our lives today, we need to understand the phases through which this world in which we live has emerged.
All through history, human societies have become steadily more interlinked. From ancient times, travellers, traders, priests and pilgrims travelled vast distances for knowledge, opportunity and spiritual fulfilment, or to escape persecution. They carried goods, money, values, skills, ideas, inventions, and even germs and diseases. As early as 3000 BCE an active coastal trade linked the Indus valley civilisations with present-day West Asia. For more than a millennia, cowries (the Hindi cowdi or seashells, used as a form of currency) from the Maldives found their way to China and East Africa. The long-distance spread of disease-carrying germs may be traced as far back as the seventh century. By the thirteenth century it had become an unmistakable link.
The silk routes are a good example of vibrant pre-modern trade and cultural links between distant parts of the world. The name ‘silk routes’ points to the importance of West-bound Chinese silk cargoes along this route. Historians have identified several silk routes, over land and by sea, knitting together vast regions of Asia, and linking Asia with Europe and northern Africa. They are known to have existed since before the Christian Era and thrived almost till the fifteenth century. But Chinese pottery also travelled the same route, as did textiles and spices from India and Southeast Asia. In return, precious metals – gold and silver – flowed from Europe to Asia.
Trade and cultural exchange always went hand in hand. Early Christian missionaries almost certainly travelled this route to Asia, as did early Muslim preachers a few centuries later. Much before all this, Buddhism emerged from eastern India and spread in several directions through intersecting points on the silk routes.
Food offers many examples of long-distance cultural exchange. Traders and travellers introduced new crops to the lands they travelled. Even ‘ready’ foodstuff in distant parts of the world might share common origins. Take spaghetti and noodles. It is believed that noodles travelled west from China to become spaghetti. Or, perhaps Arab traders took pasta to fifth-century Sicily, an island now in Italy. Similar foods were also known in India and Japan, so the truth about their origins may never be known. Yet such guesswork suggests the possibilities of long-distance cultural contact even in the pre-modern world.
Many of our common foods such as potatoes, soya, groundnuts, maize, tomatoes, chillies, sweet potatoes, and so on were not known to our ancestors until about five centuries ago. These foods were only introduced in Europe and Asia after Christopher Columbus accidentally discovered the vast continent that would later become known as the Americas. (Here we will use ‘America’ to describe North America, South America and the Caribbean.) In fact, many of our common foods came from America’s original inhabitants – the American Indians.
On 13 April the infamous Jallianwalla Bagh incident took place. On that day a crowd of villagers who had come to Amritsar to attend a fair gathered in the enclosed ground of Jallianwalla Bagh. Being from outside the city, they were unaware of the martial law that had been imposed. Dyer entered the area, blocked the exit points, and opened fire on the crowd, killing hundreds. His object, as he declared later, was to ‘produce a moral effect’, to create in the minds of satyagrahis a feeling of terror and awe.
Sometimes the new crops could make the difference between life and death. Europe’s poor began to eat better and live longer with the introduction of the humble potato. Ireland’s poorest peasants became so dependent on potatoes that when disease destroyed the potato crop in the mid-1840s, hundreds of thousands died of starvation.
The pre-modern world shrank greatly in the sixteenth century after European sailors found a sea route to Asia and also successfully crossed the western ocean to America. For centuries before, the Indian Ocean had known a bustling trade, with goods, people, knowledge, customs, etc. criss-crossing its waters. The Indian subcontinent was central to these flows and a crucial point in their networks. The entry of the Europeans helped expand or redirect some of these flows towards Europe.
Before its ‘discovery’, America had been cut off from regular contact with the rest of the world for millions of years. But from the sixteenth century, its vast lands and abundant crops and minerals began to transform trade and lives everywhere.
Precious metals, particularly silver, from mines located in presentday Peru and Mexico also enhanced Europe’s wealth and financed its trade with Asia. Legends spread in seventeenth-century Europe about South America’s fabled wealth. Many expeditions set off in search of El Dorado, the fabled city of gold.
The Portuguese and Spanish conquest and colonisation of America was decisively under way by the mid-sixteenth century. European conquest was not just a result of superior firepower. In fact, the most powerful weapon of the Spanish conquerors was not a conventional military weapon at all. It was the germs such as those of smallpox that they carried on their person. Because of their long isolation, America’s original inhabitants had no immunity against these diseases that came from Europe. Smallpox in particular proved a deadly killer. Once introduced, it spread deep into the continent, ahead even of any Europeans reaching there. It killed and decimated whole communities, paving the way for conquest.
Guns could be bought or captured and turned against the invaders.
But not diseases such as smallpox to which the conquerors were
mostly immune.
Until the nineteenth century, poverty and hunger were common in
Europe. Cities were crowded and deadly diseases were widespread.
Religious conflicts were common, and religious dissenters were
persecuted. Thousands therefore fled Europe for America. Here,
by the eighteenth century, plantations worked by slaves captured
in Africa were growing cotton and sugar for European markets.
Until well into the eighteenth century, China and India were among
the world’s richest countries. They were also pre-eminent in Asian
trade. However, from the fifteenth century, China is said to have
restricted overseas contacts and retreated into isolation. China’s
reduced role and the rising importance of the Americas gradually
moved the centre of world trade westwards. Europe now emerged
as the centre of world trade.
The world changed profoundly in the nineteenth century. Economic,
political, social, cultural and technological factors interacted in
complex ways to transform societies and reshape external relations.
Economists identify three types of movement or ‘flows’ within
international economic exchanges. The first is the flow of trade which
in the nineteenth century referred largely to trade in goods (e.g.,
cloth or wheat). The second is the flow of labour – the migration
of people in search of employment. The third is the movement of
capital for short-term or long-term investments over long distances.
All three flows were closely interwoven and affected peoples’ lives
more deeply now than ever before. The interconnections could
sometimes be broken – for example, labour migration was often
more restricted than goods or capital flows. Yet it helps us understand
the nineteenth-century world economy better if we look at the
three flows together.
A good place to start is the changing pattern of food production
and consumption in industrial Europe. Traditionally, countries liked
to be self-sufficient in food. But in nineteenth-century Britain,
self-sufficiency in food meant lower living standards and social
conflict. Why was this so?
Population growth from the late eighteenth century had increased
the demand for food grains in Britain. As urban centres expanded
and industry grew, the demand for agricultural products went
up, pushing up food grain prices. Under pressure from landed
groups, the government also restricted the import of corn. The
laws allowing the government to do this were commonly known as
the ‘Corn Laws’. Unhappy with high food prices, industrialists and
urban dwellers forced the abolition of the Corn Laws.
After the Corn Laws were scrapped, food could be imported into
Britain more cheaply than it could be produced within the country.
British agriculture was unable to compete with imports. Vast areas
of land were now left uncultivated, and thousands of men and
women were thrown out of work. They flocked to the cities or
migrated overseas.
As food prices fell, consumption in Britain rose. From the midnineteenth
century, faster industrial growth in Britain also led to higher
incomes, and therefore more food imports. Around the world – in
Eastern Europe, Russia, America and Australia – lands were cleared
and food production expanded to meet the British demand.
It was not enough merely to clear lands for agriculture. Railways
were needed to link the agricultural regions to the ports. New
harbours had to be built and old ones expanded to ship the new
cargoes. People had to settle on the lands to bring them under
cultivation. This meant building homes and settlements. All these
activities in turn required capital and labour. Capital flowed from
financial centres such as London. The demand for labour in places
where labour was in short supply – as in America and Australia –
led to more migration.
Nearly 50 million people emigrated from Europe to America and
Australia in the nineteenth century. All over the world some 150
million are estimated to have left their homes, crossed oceans and
vast distances over land in search of a better future.
Thus by 1890, a global agricultural economy had taken shape, Activity
accompanied by complex changes in labour movement patterns,
capital flows, ecologies and technology. Food no longer came from
a nearby village or town, but from thousands of miles away. It was
not grown by a peasant tilling his own land, but by an agricultural
worker, perhaps recently arrived, who was now working on a large
farm that only a generation ago had most likely been a forest. It was
transported by railway, built for that very purpose, and by ships
which were increasingly manned in these decades by low-paid
workers from southern Europe, Asia, Africa and the Caribbean.
Some of this dramatic change, though on a smaller scale, occurred
closer home in west Punjab. Here the British Indian government
built a network of irrigation canals to transform semi-desert wastes
into fertile agricultural lands that could grow wheat and cotton for
export. The Canal Colonies, as the areas irrigated by the new canals
were called, were settled by peasants from other parts of Punjab.
Of course, food is merely an example. A similar story can be told
for cotton, the cultivation of which expanded worldwide to feed
British textile mills. Or rubber. Indeed, so rapidly did regional
specialisation in the production of commodities develop, that
between 1820 and 1914 world trade is estimated to have multiplied
25 to 40 times. Nearly 60 per cent of this trade comprised ‘primary
products’ – that is, agricultural products such as wheat and cotton,
and minerals such as coal.
What was the role of technology in all this? The railways, steamships,
the telegraph, for example, were important inventions without
which we cannot imagine the transformed nineteenth-century world.
But technological advances were often the result of larger social,
political and economic factors. For example, colonisation stimulated
new investments and improvements in transport: faster railways,
lighter wagons and larger ships helped move food more cheaply
and quickly from faraway farms to final markets.
The trade in meat offers a good example of this connected process.
Till the 1870s, animals were shipped live from America to Europe
and then slaughtered when they arrived there. But live animals took
up a lot of ship space. Many also died in voyage, fell ill, lost weight,
or became unfit to eat. Meat was hence an expensive luxury beyond
the reach of the European poor. High prices in turn kept demand
and production down until the development of a new technology,
namely, refrigerated ships, which enabled the transport of perishable
foods over long distances.
Now animals were slaughtered for food at the starting point – in
America, Australia or New Zealand – and then transported to
Europe as frozen meat. This reduced shipping costs and lowered
meat prices in Europe. The poor in Europe could now consume
a more varied diet. To the earlier monotony of bread and potatoes
many, though not all, could now add meat (and butter and eggs)
to their diet. Better living conditions promoted social peace within
the country and support for imperialism abroad.
Trade flourished and markets expanded in the late nineteenth
century. But this was not only a period of expanding trade and
increased prosperity. It is important to realise that there was a
darker side to this process. In many parts of the world, the
expansion of trade and a closer relationship with the world
economy also meant a loss of freedoms and livelihoods. Latenineteenth-
century European conquests produced many painful
economic, social and ecological changes through which the
colonised societies were brought into the world economy.
Look at a map of Africa (Fig. 10). You
will see some countries’ borders run
straight, as if they were drawn using a
ruler. Well, in fact this was almost how
rival European powers in Africa drew up
the borders demarcating their respective
territories. In 1885 the big European
powers met in Berlin to complete the
carving up of Africa between them.
Britain and France made vast additions to
their overseas territories in the late nineteenth
century. Belgium and Germany became new
colonial powers. The US also became a
colonial power in the late 1890s by taking
over some colonies earlier held by Spain.
Let us look at one example of the destructive
impact of colonialism on the economy and
livelihoods of colonised people.
In Africa, in the 1890s, a fast-spreading disease of cattle plague
or rinderpest had a terrifying impact on people’s livelihoods
and the local economy. This is a good example of the
widespread European imperial impact on colonised societies.
It shows how in this era of conquest even a disease affecting
cattle reshaped the lives and fortunes of thousands of people
and their relations with the rest of the world.
Historically, Africa had abundant land and a relatively small
population. For centuries, land and livestock sustained African
livelihoods and people rarely worked for a wage. In latenineteenth-
century Africa there were few consumer goods that
wages could buy. If you had been an African possessing land
and livestock – and there was plenty of both – you too would
have seen little reason to work for a wage.
In the late nineteenth century, Europeans were attracted to
Africa due to its vast resources of land and minerals. Europeans
came to Africa hoping to establish plantations and mines to
produce crops and minerals for export to Europe. But there
was an unexpected problem – a shortage of labour willing to
work for wages.
Employers used many methods to recruit and retain labour. Heavy
taxes were imposed which could be paid only by working for wages
on plantations and mines. Inheritance laws were changed so that peasants were displaced from land: only one member of a family
was allowed to inherit land, as a result of which the others were
pushed into the labour market. Mineworkers were also confined in
compounds and not allowed to move about freely.
Then came rinderpest, a devastating cattle disease.
Rinderpest arrived in Africa in the late 1880s. It was carried by
infected cattle imported from British Asia to feed the Italian soldiers
invading Eritrea in East Africa. Entering Africa in the east, rinderpest
moved west ‘like forest fire’, reaching Africa’s Atlantic coast in 1892.
It reached the Cape (Africa’s southernmost tip) five years later. Along
the way rinderpest killed 90 per cent of the cattle.
The loss of cattle destroyed African livelihoods. Planters, mine owners
and colonial governments now successfully monopolised what scarce
cattle resources remained, to strengthen their power and to force
Africans into the labour market. Control over the scarce resource
of cattle enabled European colonisers to conquer and subdue Africa.
Similar stories can be told about the impact of Western conquest on
other parts of the nineteenth-century world.
Growing food and other crops for the world market required
capital. Large plantations could borrow it from banks and markets.
But what about the humble peasant?
Enter the Indian banker. Do you know of the Shikaripuri shroffs
and Nattukottai Chettiars? They were amongst the many groups
of bankers and traders who financed export agriculture in Central
and Southeast Asia, using either their own funds or those borrowed
from European banks. They had a sophisticated system to transfer
money over large distances, and even developed indigenous forms
of corporate organisation.
Indian traders and moneylenders also followed European colonisers
into Africa. Hyderabadi Sindhi traders, however, ventured beyond
European colonies. From the 1860s they established flourishing
emporia at busy ports worldwide, selling local and imported curios
to tourists whose numbers were beginning to swell, thanks to the
development of safe and comfortable passenger vessels.
GHistorically, fine cottons produced in India were exported to Europe.
With industrialisation, British cotton manufacture began to expand,
and industrialists pressurised the government to restrict cotton
imports and protect local industries. Tariffs were imposed on cloth
imports into Britain. Consequently, the inflow of fine Indian cotton
began to decline.
From the early nineteenth century, British manufacturers also began
to seek overseas markets for their cloth. Excluded from the British
market by tariff barriers, Indian textiles now faced stiff competition
in other international markets. If we look at the figures of exports
from India, we see a steady decline of the share of cotton textiles:
from some 30 per cent around 1800 to 15 per cent by 1815. By the
1870s this proportion had dropped to below 3 per cent.
What, then, did India export? The figures again tell a dramatic
story. While exports of manufactures declined rapidly, export of
raw materials increased equally fast. Between 1812 and 1871, the
share of raw cotton exports rose from 5 per cent to 35 per cent.
Indigo used for dyeing cloth was another important export for
many decades. And, as you have read last year, opium shipments to
China grew rapidly from the 1820s to become for a while India’s
single largest export. Britain grew opium in India and exported it to
China and, with the money earned through this sale, it financed its
tea and other imports from China.
Over the nineteenth century, British manufactures flooded the Indian
market. Food grain and raw material exports from India to Britain
and the rest of the world increased. But the value of British exports
to India was much higher than the value of British imports from
India. Thus Britain had a ‘trade surplus’ with India. Britain used this
surplus to balance its trade deficits with other countries – that is,
with countries from which Britain was importing more than it was
selling to. This is how a multilateral settlement system works –
it allows one country’s deficit with another country to be settled
by its surplus with a third country. By helping Britain balance its
deficits, India played a crucial role in the late-nineteenth-century
world economy.
Britain’s trade surplus in India also helped pay the so-called ‘home
charges’ that included private remittances home by British officials
and traders, interest payments on India’s external debt, and pensions
of British officials in India.
The First World War (1914-18) was mainly fought in Europe. But its impact was felt around the world. Notably for our concerns in this chapter, it plunged the first half of the twentieth century into a crisis that took over three decades to overcome. During this period the world experienced widespread economic and political instability, and another catastrophic war.
The First World War, as you know, was fought between two power
blocs. On the one side were the Allies – Britain, France and Russia
(later joined by the US); and on the opposite side were the Central
Powers – Germany, Austria-Hungary and Ottoman Turkey. When
the war began in August 1914, many governments thought it would
be over by Christmas. It lasted more than four years.
The First World War was a war like no other before. The fighting
involved the world’s leading industrial nations which now
harnessed the vast powers of modern industry to inflict the greatest
possible destruction on their enemies.
This war was thus the first modern industrial war. It saw the use
of machine guns, tanks, aircraft, chemical weapons, etc. on a
massive scale. These were all increasingly products of modern largescale
industry. To fight the war, millions of soldiers
had to be recruited from around the world and
moved to the frontlines on large ships and trains.
The scale of death and destruction – 9 million dead
and 20 million injured – was unthinkable before the
industrial age, without the use of industrial arms.
Most of the killed and maimed were men of
working age. These deaths and injuries reduced the
able-bodied workforce in Europe. With fewer
numbers within the family, household incomes
declined after the war.
During the war, industries were restructured to
produce war-related goods. Entire societies were
also reorganised for war – as men went to battle,
women stepped in to undertake jobs that earlier only
men were expected to do.
The war led to the snapping of economic links between some of
the world’s largest economic powers which were now fighting
each other to pay for them. So Britain borrowed large sums
of money from US banks as well as the US public. Thus the war
transformed the US from being an international debtor to an
international creditor. In other words, at the war’s end, the US and
its citizens owned more overseas assets than foreign governments
and citizens owned in the US.
Post-war economic recovery proved difficult. Britain, which was
the world’s leading economy in the pre-war period, in particular
faced a prolonged crisis. While Britain was preoccupied with war,
industries had developed in India and Japan. After the war Britain
found it difficult to recapture its earlier position of dominance in
the Indian market, and to compete with Japan internationally.
Moreover, to finance war expenditures Britain had borrowed liberally
from the US. This meant that at the end of the war Britain was
burdened with huge external debts.
The war had led to an economic boom, that is, to a large increase in
demand, production and employment. When the war boom ended,
production contracted and unemployment increased. At the
same time the government reduced bloated war expenditures to
bring them into line with peacetime revenues. These developments
led to huge job losses – in 1921 one in every five British workers
was out of work. Indeed, anxiety and uncertainty about work
became an enduring part of the post-war scenario.
Many agricultural economies were also in crisis. Consider the case
of wheat producers. Before the war, eastern Europe was a major
supplier of wheat in the world market. When this supply was
disrupted during the war, wheat production in Canada, America
and Australia expanded dramatically. But once the war was over,
production in eastern Europe revived and created a glut in wheat
output. Grain prices fell, rural incomes declined, and farmers fell
deeper into debt.
In the US, recovery was quicker. We have already seen how the war
helped boost the US economy. After a short period of economic
India and the Contemporary World
94
trouble in the years after the war, the US economy resumed
its strong growth in the early 1920s.
One important feature of the US economy of the 1920s
was mass production. The move towards mass production
had begun in the late nineteenth century, but in the 1920s it
became a characteristic feature of industrial production in
the US. A well-known pioneer of mass production was the
car manufacturer Henry Ford. He adapted the assembly line
of a Chicago slaughterhouse (in which slaughtered animals
were picked apart by butchers as they came down a conveyor
belt) to his new car plant in Detroit. He realised that the
‘assembly line’ method would allow a faster and cheaper way
of producing vehicles. The assembly line forced workers to
repeat a single task mechanically and continuously – such as
fitting a particular part to the car – at a pace dictated by the
conveyor belt. This was a way of increasing the output per worker
by speeding up the pace of work. Standing in front of a conveyor
belt no worker could afford to delay the motions, take a break, or
even have a friendly word with a workmate. As a result, Henry
Ford’s cars came off the assembly line at three-minute intervals, a
speed much faster than that achieved by previous methods. The TModel
Ford was the world’s first mass-produced car.
At first workers at the Ford factory were unable to cope with the
stress of working on assembly lines in which they could not control
the pace of work. So they quit in large numbers. In desperation
Ford doubled the daily wage to $5 in January 1914. At the same
time he banned trade unions from operating in his plants.
Henry Ford recovered the high wage by repeatedly speeding up
the production line and forcing workers to work ever harder. So
much so, he would soon describe his decision to double the daily
wage as the ‘best cost-cutting decision’ he had ever made.
Fordist industrial practices soon spread in the US. They were also
widely copied in Europe in the 1920s. Mass production lowered
costs and prices of engineered goods. Thanks to higher wages,
more workers could now afford to purchase durable consumer
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 spurt
in 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
factory.
95
The Making of a Global World
credit repaid in weekly or monthly instalments). The demand
for refrigerators, washing machines, etc. was also fuelled by a boom
in 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, and
yet 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 capital
exports 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.
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 and
trade. 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 fall
in 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 and
agricultural 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, pushing
down 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 to
raise 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, US
overseas loans amounted to over $ 1 billion. A year later it was one
quarter of that amount. Countries that depended crucially on US
loans 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 some
major 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 protect
its 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, households
were 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 other
consumer 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 numbers
are 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.
If we look at the impact of the depression on India we realise
how integrated the global economy had become by the early
twentieth 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 exports
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.
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 or
to 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 precious
metals 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 Indian
gold 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 Gandhi
launched 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 also
grew as the government extended tariff protection to industries,
under the pressure of nationalist opinion.
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 six
years 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, are
believed to have been killed, directly or indirectly, as a result of the
war. 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-related
causes. Vast parts of Europe and Asia were devastated, and several
cities were destroyed by aerial bombardment or relentless
artillery attacks. The war caused an immense amount of economic
devastation and social disruption. Reconstruction promised to
be long and difficult.
Two crucial influences shaped post-war
reconstruction. The first was the US’s
emergence as the dominant economic, political
and military power in the Western world. The
second was the dominance of the Soviet
Union. It had made huge sacrifices to defeat
Nazi Germany, and transformed itself from
a backward agricultural country into a world
power during the very years when the capitalist
world was trapped in the Great Depression.
Economists and politicians drew two key lessons from inter-war
economic experiences. First, an industrial society based on mass
production cannot be sustained without mass consumption. But to
ensure mass consumption, there was a need for high and stable
incomes. 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
fluctuations 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 be
achieved 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 in
the industrial world. Its framework was agreed upon at the United
Nations Monetary and Financial Conference held in July 1944 at
Bretton Woods in New Hampshire, USA.
The Bretton Woods conference established the International Monetary
Fund (IMF) to deal with external surpluses and deficits of its member
nations. The International Bank for Reconstruction and Development
(popularly known as the World Bank) was set up to finance postwar
reconstruction. The IMF and the World Bank are referred to
as the Bretton Woods institutions or sometimes the Bretton Woods
twins. The post-war international economic system is also often
described as the Bretton Woods system.
The IMF and the World Bank commenced financial operations
in 1947. Decision-making in these institutions is controlled by
the Western industrial powers. The US has an effective right of
veto over key IMF and World Bank decisions.
The international monetary system is the system linking national
currencies and monetary system. The Bretton Woods system was
based on fixed exchange rates. In this system, national currencies,
for example the Indian rupee, were pegged to the dollar at a fixed
exchange rate. The dollar itself was anchored to gold at a fixed
price of $35 per ounce of gold.
The Bretton Woods system inaugurated an era of unprecedented
growth of trade and incomes for the Western industrial nations and
Japan. World trade grew annually at over 8 per cent between 1950
and 1970 and incomes at nearly 5 per cent. The growth was also
mostly stable, without large fluctuations. For much of this period
the unemployment rate, for example, averaged less than 5 per cent
in most industrial countries.
These decades also saw the worldwide spread of technology and
enterprise. Developing countries were in a hurry to catch up with
the advanced industrial countries. Therefore, they invested vast
amounts of capital, importing industrial plant and equipment
featuring modern technology.
When the Second World War ended, large parts of the world were
still under European colonial rule. Over the next two decades most
colonies 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 cope
with the challenge of poverty and lack of development in the former
colonies. But as Europe and Japan rapidly rebuilt their economies,
they grew less dependent on the IMF and the World Bank. Thus
from the late 1950s the Bretton Woods institutions began to shift
their 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 agencies
dominated by the former colonial powers. Even after many years
of decolonisation, the former colonial powers still controlled vital
resources 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 developing
countries’ natural resources very cheaply.
At the same time, most developing countries did not benefit from
the fast growth the Western economies experienced in the 1950s
and 1960s. Therefore they organised themselves as a group – the
Group 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 development
assistance, fairer prices for raw materials, and better access for their
manufactured goods in developed countries’ markets.
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 competitive
strength. 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 to
international 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 in
Eastern 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.