World War I did a great damage to all territory of Latvia. The War of Freedom was no less damaging and true peace only came to Latvia at August 11 1920 after peace agreement with Soviet Russia. Now Latvians had the chance of rebuilding what was lost and make whole new sovereign economy for the benefit of the Latvian people.
One of the first issues was the lack of the national currency. German Marks, Ostmarks (German currency for occupied Eastern regions during WWI), Ostrubles, Czar Rubles, Kerensky Rubles were used in same time sparking currency chaos. On March 27 1919, the Provisional Government issued directions in exchange rates. One Latvian Ruble equals 1 Ostruble, 2 German Marks, 1,5 Czar Rubles. The main source of income for the government was money emission that helped to cover the war costs and administration fees. From 18 November 1918 to 1 April 1920 37,9 millions of paper money were emitted. On 18 March 1920 the Latvian Ruble was declared single official currency in Latvia.
However, inflation was on the rise, the price of rye bread rose from 2,25-2,40 rubles 10,8-12,0 rubles. Government issued more directions to stabilize the ruble, also the preparations for establishment of new stable national currency Lats followed. On 3 August 1922 1 Latvian Lats equaled 50 Latvian Rubles, and Lats was fixed according Swiss Frank rate. On 1 November the Bank of Latvia was established. It also had commercial service rights. At 1929 there were three state banks (Bank of Latvia, State Land Bank and Latvian Mortgage Bank) and 19 private commercial banks.
Latvian governmental budget during the first years of independence had debts, until 1922/1923 for the first time had surplus that was kept until 1929/1930. The main source of income was taxes, state monopolies and gain from state enterprises. The main priorities were state security, education and capital investments. Two main state monopolies were flax and ethanol. Largest state enterprises were the bank, postal service and railroad service.
The Agricultural reform drastically changed the economic situation in the country. Before the war 53% of land belonged to 2% of landowners mostly Baltic Germans. Latvian government decided to change that by making special State Land Fund that gathered 61% of land, 45% of it agricultural. Previous landowners were stripped of their large possessions. This radical move changed the Latvian countryside in small farm economies. 54, 243 new farms were made.
Latvians put large efforts in agriculture. During the first years after the war Latvians had to import crops, because of low harvest and the fact that most new farms were more effective in cattle production. Also the crop prices in global market fell down as the butter prices rose up. Because of this exports of butter, beckon and eggs reached great heights. The butter industry was one of the most progressive and until 1932 one-third of all export. Latvia also exported flax and timber to whole Europe.
Before the war, Latvia was one of the main industrial centers of the Russian Empire. After German invasion, large part of equipment, even workers was evacuated to Russia and the new Bolshevik government was not wiling to give it back. After the war Latvian industry worked mostly for inland needs. Latvian government had to subsidize the struggling industry for many years. However, the foreign capital from Germany, Great Britain, Soviet Union and others helped to get back on the track.
On 1929 Latvian export rose up by 10 times, however import was still larger than export. The main importer was Germany; the main source of export was Great Britain. After trade agreement with Soviet Union in 1927 export with that country started to rise up. With other neighbors – Estonia, Lithuania and Poland the import was greater than export.
The Great Depression reached Latvia on 1930. Crisis begun with drop of wholesale prices, the drop of prices for Latvian export goods and the breakdown of Latvian state gold reserves and foreign currency reserves. On 1931 the Bank of Latvia stopped issuing credits. Many companies went bankrupt. Banks took the first hit. Latvian banks suffered from German bank troubles making them impossible to settle with their depositors. After Great Britain devaluated their currency and canceled the golden standard the Bank of Latvia lost 2,1 million Lats. Latvia unlike Estonia kept the golden standard and issued many regulations to cancel unrestricted exchange to gold or foreign currency.
Latvia had to sign clearing agreements with France, Great Britain and Germany to ease export costs during the crisis. The Nazi rise in power on 1933 caused economic disruption between Germany and Latvia as social democrats and Jews issued a boycott of German goods. Germany answered by halting butter exports causing great financial losses. Latvian government had to back down and make the boycotting stop. Also the export with the Soviet Union weakened as the export orders from the Soviet state ended. Almost all transit now went to Germany.
As the grocery product prices since 1927 begun to drop, the traditional Latvian exports brought smaller revenues. Government tried to lower import and raise export. Grocery import was halted, as foreign crops could be replaced with homegrown ones. With exception in 1937 because of dry summer, crop import was halted along with sugar import. Latvia could fully sustain itself with its own grocery production.
Industry suffered great losses, foreign capital went away and purchasing capacity dropped. As the trade agreement with the Soviet Union ended in 1932 many large industrial companies suffered losses. However, the worst of the crisis ended in 1933 and on 1934 during last months before the coup Latvian economy was again in the upswing. The government debt had dropped from its highest point 24, 2 million Ls 1931/1932 to 7,8 million Ls in 1933/1935.
The coup in 15 May 1934 was not caused by economic reasons rather political. However, Kārlis Ulmanis made significant changes in economic system making it more centralized. He issued a corporate chamber system forming four chambers: Trade and industry chamber, Agricultural chamber, Craftsman chamber and the Chamber of Labor. Such model of economical control was popular among many European authoritarian countries. The example for all was Fascist controlled Italy.
Authoritarian government made a great deal by fixing the crucial farmers debt problem. Agricultural auctions were canceled, debt rates for farmers were lowered and payback period was extended. New law allowed state corporative revision commission to change of fire members of the corporate boards. With that the state granted itself more power to control largest enterprises.
The new economy by Kārlis Ulmanis was based on protectionism and state enterprises. A new state owned Latvian Credit Bank was formed to make credit reorganization. State took over many private companies like vehicle factory “Vairogs”. Until March 1939 there were 38 state enterprises. Latvian industry started to recover. Textile, food, metal and machine industry begun to flourish. State owned industrial company VEF produced radios, telephones, MINOX cameras and even airplanes. “Vairogs” released first private cars based on Ford models.
The presence of foreign capital significantly dropped, however the construction of the first hydroelectric station at Ķegumi involved large investments from Sweden.
On 1936 Lats was fixed to British Pounds causing partial devaluation of Lats. Devaluation caused inflation and other troubles; however at 1936 the Latvian export gross total rose up fast and import went down. The export balance was positive and things were looking up good in the late thirties. However, an influx of agricultural foreign workers in later years started to become a problem. Because of the lack of native workers, people from Lithuania and Poland came to work in Latvia. It caused social and political problems and fully emerged after Nazi-Soviet invasion in Poland.
The great advancement of the Latvian economy was stopped in 1939. As WWII started Latvia declared full neutrality. Government issued regulations in trading Latvian recourses and prohibited Latvian ships from sailing under foreign flag. Lats was removed from the British Pound rate.
As Germany blocked the access to the Baltic Sea, Latvian traders were unable to send their productions elsewhere but Germany. All major ties with Great Britain were cut. On 5 October 1939 Latvia was forced to sign Mutual Assistance agreement with Soviet Union. Few days later both sides signed trade agreement allowing Latvia to export more to the east. The secret protocols of the Molotov – Ribbentrop pact included Latvia into Soviet sphere of interest. Similar agreement was later signed with Germany then a Soviet ally.
On 17 June 1940 Latvia was occupied by the Soviet Union and annexed in 5 August 1940. The sovereignty of Latvian finance and economy was canceled. Germany viewed this with anger, because they needed Latvian exports. Germany and Soviet Union both had different understanding over meaning of the “sphere of interest”, and Germans did not expect the occupation and annexation of their trade partner. That was one of the reasons that lead to German –Soviet conflict.
Latvia managed to recover from WWI damage and reached growth in trade and industry. For many years Latvian state budget was balanced with surplus. However, the Great Depression did a great strain on Latvian economy. But, Latvia managed to recover from the crisis and again reached growth at 1934 just before the coup. The coup by Karlis Ulmanis did not end the crisis as it was mostly ended before him. His policy only changed the economical system not the positive course of Latvian economy. Kārlis Ulmanis semi-centralized economy was successful for some time until the hardships of WWII brought end to it. Soviet occupation, German invasion and war ultimately destroyed many achievements of independent Latvia. The complicated story of Latvian soviet economy is to be told in future.