Question

What is the international monetary system before 1944 and what causes its breakdown? What is its impact on cross-border trade and investment at that time?

Question to be answered. What is its impact on cross-border trade and investment at that time?

Answer 1

Great War of 1914-1918 and the Great Depression, when economic exchange started to follow political boundaries much more closely than ever before. This was essentially driven by two separate sets of factors, namely border changes and a massive rise in tariffs and non-tariff barriers to trade along those borders. First, the new borders after the treaties of Versailles, St. Germain and Trianon did not change randomly but largely followed the patterns of cultural heterogeneity, which continued to affect trade flows as they did already prior to the war. Put differently, the “treatment effect” of the new borders across Central Europe was quite limited, simply because they changed to better reflect pre-existing lines of fragmentation. By losing the weakly integrated parts of the economy, the Weimar Republic was better integrated than the German Empire had ever been.
second, the trade barriers along these new borders were rising during and after the war, mainly in the wake of the Great Depression. When worldwide deflation pushed up real factor costs from 1929 onwards, most governments attempted to isolate their national economies from external shocks. Tariffs reached previously unseen levels, and many non-tariff barriers, like quotas or foreign exchange controls, choked off cross-border trade. It was then, at the end of the Great Depression in 1933, that Germany was finally “united” from Bavaria to Hamburg and the Ruhr to Brandenburg.

large and very detailed sample of trade flows between German regions and the regions of neighbouring states allows us to trace the geography of trade costs across all parts of Central Europe over the period 1885 – 1933. The data clearly indicate that regions within Germany were not much better integrated with each other than regions on two sides of the German state border prior to 1914: coal and iron ores, steel, chemical products or grain were shipped in large amounts along the Rhine from and towards Rotterdam, northern Germany remained closer to England than to Bavaria, and the Polish speaking parts of Prussia were integrating with the Kingdom of Prussia in the Russian Empire.
The European division of labour is a stubborn beast. As shown by the case of Germany after the formation of a nation state in 1871, it took a generation of political effort, a war, and the Great Depression to tear apart what had long been growing together (Wehler 1973). German regions remained deeply embedded in a European division of labour while there was no “unified” German economy before 1914. Seen from this perspective, the process of European integration after the Second World War looks less like a spectacular political undertaking and much more like a return to economic reason.