1. Introduction

1.1 Context of the Cold War

The Cold War (12 March 1947 to 3 December 1989) between the USA (United States of America) and the USSR (Union of Soviet Socialist Republics) was more than just a battle between ideologies. It marked the start of a new world order that would dramatically change financial markets, globalization, and international trade. During this time, just after the Second World War, the USA and the USSR began to fight for international power and influence. This did not only shift the political landscape but also affected the global economy and financial markets. [Britannica (n.d.)]

Before continuing, it is important to distinguish between the “economy” and “financial markets.” These two sectors are often treated as the same thing, but there is a clear and important difference.

The economy refers to the overall production, consumption, and distribution of resources within a country or globally. This includes aspects such as employment, industry, the value of a nation’s production (GDP), and the wellbeing of society.

Financial markets refer specifically to the systems where people and organizations exchange money, make investments, and gain access to capital. This includes stock markets, bond markets, banks, and other financial institutions. Although financial markets play a key role in the economy by providing capital, they are just one part of a broader economic landscape. [Dobson (2008)]

1.2 Research: Economic Impact of the Arms Race

In this essay, I explore the following research topic: “The Cold War’s impact on the global economy and financial markets.”

By looking at this, I aim to answer and provide insight into the question: “How did the Cold War influence the global economy and financial markets?”

Since the Cold War was a long struggle with a rich history, I have limited my investigation to a few main areas: government spending and budgeting for the war, the role of the state and private sector in military production, technological investments made across different economic sectors, the impact and dynamics of international trade, and the condition of financial markets during the war.

Finally, I look at the long-term effects of the Cold War, specifically post-USSR globalization and economic shifts.

By looking at all of this, a clear picture is formed of the impact the Cold War had on these volatile sectors.

2. Subtopics

2.1 Government Spending and Budgets

When looking at the Cold War’s impact on the global economy and financial markets, you cannot ignore the role of government spending and budgeting. It was not just a battle of ideologies, it was also an economic contest where billions were spent on military services and weapons. Between 1950 and 1953, the US increased its military budget from just 5 percent of its GDP (Gross Domestic Product) to a staggering 14.2 percent.

This was not a coincidence but a strategic decision that followed the NSC-68 policy, which became the foundation of America’s international policy during that period. This was a classified policy document written in 1950 by the US National Security Council. It focused on how to deal with the Soviet Union and the communist threat, which was a major source of tension in capitalist politics at the time. [Office of the Historian (n.d.)]

2.2 Public and Private Sectors in Military Production

During the Cold War, collaboration between the government and the private sector in military production played a big role in the development of weapons, technology, and infrastructure. This cooperation not only boosted the military capabilities of the superpowers but also influenced the economies of the countries involved.

In the US, the relationship between the government and private sector in military production led to the creation of what became known as the “military-industrial complex.” This network of people and institutions involved in producing military technology shared a vested interest in strengthening national defense. [Encyclopedia Britannica (n.d.)]

2.3 Technological Investments

The space race, which began with the Soviet Union’s launch of Sputnik 1 in 1957, acted as a catalyst for technological innovation. Both the US and the Soviet Union poured enormous resources into developing space technologies, which led to breakthroughs in electronics, communication systems, and computer science. In the US, for example, the National Aeronautics and Space Administration (NASA) funded the development of the Apollo program, which ultimately led to the first human landing on the moon in 1969. These achievements not only enhanced the US military’s capabilities but also laid the foundation for commercial satellite communication and the internet, which have had a massive impact on global economic markets.

Many of the technological inventions from the Cold War period later found practical uses. For example, the development of satellite communication improved military communication and also laid the groundwork for modern telecommunications. Research in computer science and electronics led to the creation of early computers and the internet, which marked the start of a new era in technology and economic development. [Smith, J. (2024)]

2.4 International Trade Dynamics

The Cold War was a period of intense geopolitical tension, which affected not only military and political relationships but also international trade. The US and the USSR each formed separate economic spheres, resulting in limited trade between the two and a redistribution of trade partners around the world.

In the early years of the Cold War, the United States followed a policy of international economic cooperation, which led to the establishment of institutions like the International Monetary Fund (IMF) and the World Bank. These institutions not only supported Europe’s economic recovery after World War II but also promoted global trade by encouraging stability and cooperation. [Campos, R. G., Heid, B., & Timini, J. (2024)]

In contrast, the USSR maintained a centralized economy with limited participation in global markets. The Soviet Union focused on self-sufficiency and mostly traded with countries within its own economic sphere, such as Eastern Europe and Cuba. This approach resulted in a lack of competition, which ultimately contributed to the Soviet Union’s economic stagnation.

The limited trade between the two powers did not only affect their own economies but also reshaped global trade patterns. Countries not aligned with either bloc often struggled to form trade partnerships due to pressure to pick a side. This situation gave rise to the “non-aligned movement,” a group of countries that aimed to maintain a neutral position in global politics. [Campos, R. G., Heid, B., & Timini, J. (2024)]

2.5 Financial Markets

During the Cold War, financial markets did not just reflect the economies of the superpowers. They also played an active role in shaping global power structures and spreading economic ideologies. The interaction between geopolitical tension, military spending, and financial markets created a dynamic and often unpredictable environment that forced investors, governments, and international institutions to think strategically and respond quickly to volatility. [Markets in War Time (2022)]

In 1944, the Bretton Woods system established a new international monetary framework that confirmed the US dollar as the world’s reserve currency. This system fixed the exchange rate between the dollar and gold, which promoted stability in international financial markets. However, by the late 1960s, growing US budget deficits, particularly due to the cost of the Vietnam War, put pressure on the dollar. In 1971, President Richard Nixon announced the “Nixon Shock,” which removed the dollar from the gold standard and marked the beginning of the end of the Bretton Woods system.

Massive US military spending not only affected the national budget but also had a direct impact on financial markets. The increased demand for resources caused inflation, which forced investors to adjust to a new economic reality. The 1970s were marked by a period of “stagflation”, a mix of economic stagnation and high inflation, which weakened the stability of financial markets. [Markets in War Time (2022)]

3.1 Post-USSR Globalisation

After the collapse of the Soviet Union in 1991, the world entered a new era of globalisation, marked by the rapid integration of formerly socialist countries into the global economy. The end of the Cold War paved the way for market-oriented and democratic reforms.

The Soviet Union struggled to transition quickly into the global economic system. Some countries adopted “shock therapy” approaches, which involved a drastic shift to market economies, while others chose a more gradual, conservative path. The fall of the USSR also led to the emergence of new independent states, which reshaped not only the political landscape but also influenced the global economy. Countries like Poland implemented rapid reforms, whereas others proceeded more cautiously. [Forbes, 2022]

3.2 Reforming Financial Markets

Following the collapse of the Soviet Union, Russia and other former Soviet republics introduced their own national currencies. In Russia, the ruble experienced significant devaluation, leading to an inflation rate of 84% in 1998.

Shock therapy in Russia, however, led to a concentration of wealth among a small elite often referred to as “oligarchs.” The lack of proper regulatory frameworks made the transition challenging, resulting in economic instability and the rise of corruption.

The financial sector went through major changes. Many Russian banks struggled to survive, and some collapsed during the 1998 financial crisis. However, international banks like Deutsche Bank took advantage of the situation and acquired others such as Bankers Trust. This increased Russia’s integration into the global financial system.

Despite early challenges, some former Soviet states like Poland experienced successful economic reforms. Poland’s shock therapy approach led to lower inflation and reduced budget deficits, laying the groundwork for rapid economic growth. In contrast, Russia pushed for fast private-sector reform without sufficient regulation, resulting in an economy with less inclusive growth.

Over the past decade, former Soviet countries have increasingly focused on strengthening financial regulation and integrating their markets into the global economy. The European Union, for example, introduced reforms aimed at deepening markets and encouraging long-term investment. These efforts have helped improve financial stability in the region. [Economics Observatory, 2022]

4. Reflection

The USA and USSR did not initially intend to enter into a full-scale economic war, but due to their conflicting ideologies and the balance of power after World War II, they found themselves in an unavoidable rivalry. The West prioritized free markets and capitalism, while many were surprised when the USSR, despite its socialist principles, developed a massive military-industrial complex.

The economic pressure of the Cold War contributed significantly to the ethical dilemmas of the era. At first, both superpowers justified their military spending as necessary for national security, but as the real cost of arms production and the space race became evident, it raised serious questions about priorities. The USA eventually saw how its own financial system was disrupted by war spending, while the USSR realized that its centralized economy could not keep up.

Ultimately, the economic struggle forced both sides to act against their original principles: the USA by accepting state intervention in the market, and the USSR by allowing limited market reforms. In the end, both had to acknowledge that their actions, while sometimes contradictory to their ideologies, were seen as necessary in the context of the broader conflict.

5. Conclusion

The Cold War (1947–1989) had a profound impact on the global economy and financial markets. Massive military spending led to technological innovation in the USA, such as the development of the internet and satellite communication, while in the USSR, a centrally planned economy worsened economic stagnation. The conflict split international trade into two distinct spheres, with the USA promoting globalisation through institutions like the IMF, and the USSR maintaining its own trade network.

Financial markets became more volatile, especially after the collapse of the Bretton Woods system in 1971, which triggered stagflation and new approaches to monetary policy. After the fall of the USSR in 1991, rapid globalisation accelerated, but also led to economic inequality and corruption in several post-Soviet states. The legacy of the Cold War shows how political competition can shape economic systems, with long-term effects still visible today in areas like technology, trade, and financial stability.