WWI vs WWII on consequent economic depression/growth

World War I

Economic Impact of World War I

When the United States entered the conflict in 1914, the economy was already at full employment. The United States sent 4 million men across the ocean which was a small amount of the current workforce. While the amount of men fighting was not significant the cost to the economy was still about $.2 billion. Coupled with other expenses, including transfer payments to other nations that would never be repaid, the total cost of World War I in was $32 billion dollars[2000 base year] (%52 of GDP). . After World War I, the U.S. chose to de-mobilize, resulting in a small recession. The number of people employed by the military quickly declined. Along with the decline in manpower, there was a decline in wage hours since wartime production was no longer necessary. During this time, the U.S. added 3.5 million workers in the federal sector alone which allowed the economy to come close to full employment.

Economic Legacies of World War I

The most important economic legacy of World War I was the breakthrough of the United States as a major industrial nation in the world. Prior to the war, the nation was considered a debtor nation on international capital markets, but this status changed soon afterwards. Much of this is attributed to the damage sustained by England. After the war, England had trouble returning to the Gold standard, and the physical infrastructure of the country had suffered major war damages. The United States, on the strength of its geographic location was able to succeed England as a new economic giant. New York City came to rival London as the Global finance center. The other lasting legacy of the War was the creation of liberal economists. Prior to the 1920’s, very few people were advocates of central Government being involved in economic decisions.

The Roaring Twenties

Prosperity in America

Following World War I, there was a slight recession until 1922. There had never been so much wealth in so many hands. The amount of millionaires grew from 75 to 283 in the middle of the decade. Starting in 1922, the amount of savings was 17,579(million) 1922 dollars. By the year 1930, as the Depression was just starting to begin, the amount of savings had grown to 28,479(million) 1930 dollars. This reflects the amount of money Americans had started to make in the 1920s. There were eight straight years in which saving deposits at American banks increased. Another example of the prosperity was the numerous industries that grew that had not existed prior to the outbreak of World War I. These included the radio industry, the mass production of passenger automobiles, the growth of new fabrics, and chain stores.

Contributors to Success

As mentioned before, the growth in the savings rate and of new industry were key contributors. Also, Harry Ford's original vision of high standard of living for manufacturing workers began to take hold. The average wage of manufacturing workers in 1922 was $90.70/month (1922). By the time the “Bull Market” of 1929 rose to prominence the average wage of the manufacturing worker was $106/month (1929). The technological increases made it much easier for workers to increase output and push for higher wages. While there was an increase in wages, prices held fairly steady until they began to decline in 1930. This helped to improve the purchasing power of the dollar.

The Bull Market

The primary reason for this growth was due to the acceptance of the corporate culture in America. Towns were increasingly ceding local control of establishments and in doing so, allowing big business an opportunity to profit. Investors would borrow money from banks in order to buy securities from large companies which in turn would build movie theaters, department stores and other such retail outlets. This was a major way in which speculation drove the consumption and investment sectors of the economy in the 1920s. As most people know, the economy of the 1920s was bolstered by the existence of a “Bull-Market.” People would speculate on the price of stocks, borrowing thousands of dollars in order to purchase stock. The money would then be repaid back to the broker and the investor would keep the profit. There were several reasons that margin spending was able to happen. A primary reason for the growth of margin spending was the growth of holding companies. Holding companies were a front for corporations i.e. one railroad company would form a holding company which would use the reputation of the original corporation to gain credit towards buying another company. After an acquisition of a new company, the rise in stock prices would cause people to speculate with regard these holding companies. Utilities, railroads, steel: almost every industry had some sort of holding company associated with it. The stock market was intertwined with the banking system as well. The loans from the banks went to brokers who forwarded the loan to investors. The stock market was essentially liquid making it easy for a person to recoup their money in the event they needed it. People were increasing the cost of stock despite the fact that the parent company may not have done anything to put faith in the stock The amount of money loaned grew to 6 billion dollars (1928) from about 1.5 billion in 1922. This was all money that became a liability of the fractious banking system that existed at this time in the United States. During this time period, there was only a limited amount of ownership available in a given company. As companies grew they became more popular, and people desired to have a piece of the success. For this reason, the price of common stocks such as U.S. Steel were pushed levels above $200.00. It was essentially a supply-demand issue. Demand was much higher than the supply available and as a consequence of this shortage, stock prices rose to coincide with demand.

Data from http://www.measuringworth.com/DJA/result.php. It is a yearly average of the DJA. it was never true it is all a lie vitcong people are smarter than u think

Depression Strikes

Causes of the Depression

Monetary policy was also integral in the development of the depression due to various events of 1929. While there was an increase in demand for money, there was no increase in supply in order to negate the impact excess demand would have. As a result, interest rates decreased. Following the interest rate decrease, there was a negative shift in the demand for borrowed reserves which caused the money multiplier to constantly fall during the first years of the Great depression.

Economic impact of the depression

This was a result of reduced wages, and increased unemployment. It is especially noteworthy that one of Roosevelt’s first policies upon entering office was to pressure for an expansion in the money supply. This allowed the dollar to depreciate in value. The nominal value of gold then went up, and the Treasury issued gold certificates in the amount of the increase, followed by depositing them in the Federal Reserve. This led to an increase in the monetary base. Some argue the ensuing rise in monetary supply began the reversal of depression by leading to capital investment. This was another barrier to recovery in the post-depression market. This delay in recovery in businesses is related to the lack of investment in the Depression economy. Large amounts of unemployment prevented people from investing their salary in the economy. Those industries which were able to recover did not employ the jobless of other industries that had failed, thus resulting in large amounts of structural unemployment. This greatly reduced the amount of people who were able to invest based on income. . The lower cost of goods, coupled with the relatively low interest rates did not spur investment. On the contrary, the deflation that resulted meant the real interest rate was actually much higher than the rate set by the Federal Reserve. The National Income was another area in which the United States lagged for much of the Depression. Pre-depression income was not reached again until 1941. The United States had been at war with Germany for a full year at this point. 12 years after the depression, income was finally showing signs of recovery. A contributor to National income is by definition a function of employment. It is a measure of the accrual of all goods by the given residents of a nation. In this case, United States residents did not begin positive accrual of goods until 1933. Another key feature of the income data series is that corporate savings were negative through the year 1939. After that point, businesses finally began to recover.

Data from http://www.nber.org/databases/macrohistory/rectdata/08/m08084a.dat. Bureau of labor statistics was original source data.

A New War

Economic Help is on the Way

In 1940, the country experienced its greatest growth in military force since World war I. The total forces increased by 100,000. This increase in the armed forces was also coupled with an increase in manufacturing as well as wage hours worked. Eventually, the United States would reach full employment during the war which was something that had not been done since before the Great Depression. After 1940, in which there was a peak in the business cycle , the United States economy began to match war demands. Planes, metals, shoes. If you can think of it, the United States needed it. Unemployment fell far below its depression era levels and the United States began to move along as an economic juggernaut. In 1941 alone, auto producers contributed $11 billion towards the war effort. This money went to airplane suppliers, tanks, jeeps, and any other engine products that the United States would need. One aspect which can be deceiving is the price level of the economy at this time. Towards the end of the war, the consumer price level began to sky rocket. While this might seem like an economic indicator of poor performance, it was a demand shortage. The Government had taken control of what they considered prominent industries, and imposed controls. People could only buy certain levels of goods like oil, and thus a supply shortage caused the price to rise. An impact of these commodity shortages was that people’s personal income grew to higher and higher levels as their consumption declined in line with the shortages. This led to a rise in disposable income and savings deposits. People were beginning to save money again which helped the United States move away from Depression era income levels. The increase in savings allowed banks to make loans as necessary to increase their own income.

Data from Louis D. Johnston and Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1790 - Present." Economic History Services, October 2005, URL : http://www.eh.net/hmit/gdp/

The end of war

By the end of World War II, the government was paying for college for millions of men coming back from Europe. By the end of the 1940s veterans would account for almost half of all enrollments in institutions of higher learning. This led to a rapid growth in the education sector as well as the enlightening of American society. The G.I. bill had a long-run economic and social impact. A consequence of the war ending was an increase in consumption by civilians. People had gone from spending 67,000(millions of 1939 dollars) towards the end of the depression to spending 179,000(millions of 1949 dollars) several years after the war. This was because during the war, people had gone without luxury goods such as televisions and new automobiles. As a result of pent up demand, people began consuming again at pre-depression levels. The difference was that this time the saving rate was much higher. People used the extra disposable income in order to purchase those goods that had been rationed during the war or had not been released yet since most of the technological developments focused on the military at this time. Technology shocks once again were the norm. Atomic energy had been produced successfully allowing the growth of nuclear energy. Additionally, manufacturing advances led to mass-production of synthetic materials which was a very important first. This allowed production to occur despite a lack of raw resources. The war produced an economy-wide change as well. Following the war, there was more income equality as there had been before. In vast contrast to the situation of the interwar economy when the top of society held %75 of the money, there was much more balance. The war allowed lower income brackets to gain some ground on the higher echelons of income earners. The lowest %25 of income earners were able to gain %16 more income, while the top quarter lost %6 of the income they had held before the war.

Post War Economy and the reasons for Success

Major United States foreign aid came in the form of The Marshall Plan, NATO formation, and Point Four. These were all intended to return the European economy to normalcy while stimulating development in the third world. Net exports rose as the United States began sending finished goods to Europe’s various battered economies. Net exports grew to a record high of almost 8 billion 1945 dollars. One advantage not spoken about to this point has been the follow-on military budget requirements after World War II. After World War I, the United States was able to enter into an isolationist shell due to the belief that they had dispersed the most serious threat the world had seen. This was not so after World War II. In fact, the period in which the military usually demobilizes was instead spent preparing for Korea. This war required modern airplanes and boats as well which helped to keep people employed. After 1947 the United States began to re-mobilize some assets as seen by the rise in production of both ships and airplanes.

Conclusion

The business cycles which followed World War I were much more extreme than those that followed World War II. The 1920s began in a recession, had the largest economic boom in history in the middle, and then resulted in the Great Depression. The depression which followed the 1920s should be characterized as an independent event of World War I. The main reason that World War II did not end in a recession was that they had become the World’s market. Saving rates continued to grow for many years. American economic history following World War II can best be characterized as steady growth.